UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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

FORM 10-Q

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

For the quarterly period ended June 29, 2002

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 1 - 3506

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

GEORGIA-PACIFIC CORPORATION
(Exact Name of Registrant as Specified in its Charter)

GEORGIA

93-0432081

(State of Incorporation)

(IRS Employer Id. Number)

133 PEACHTREE STREET, N.E., ATLANTA, GEORGIA 30303

(Address of Principal Executive Offices)

(404) 652 - 4000

(Telephone Number of Registrant)

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

Item 1.

Financial Statements

Second Quarter
--------------------------------

First Six Months
--------------------------------

(In millions, except per share amounts)

2002

2001

2002

2001

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

Net sales

$   6,222 

$   6,603 

$  12,018 

$  12,920 

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

Costs and expenses:
  Cost of sales, excluding depreciation and amortization
  Selling and distribution
  Depreciation and amortization
  General and administrative
  Interest
  Asset impairments
  Other loss (income), net

4,831 
500 
260 
267 
221 
208 
7 

5,067 
514 
351 
268 
289 
58 
(23)

9,282 
994 
519 
532 
454 
208 
10 

10,054 
1,026 
706 
549 
599 
115 
(27)

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

Total costs and expenses

6,294 

6,524 

11,999 

13,022 

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

(Loss) income from continuing operations before income taxes
Provision for income taxes

(72)
11 

79 
50 

19 
41 

(102)
5 

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

(Loss) income from continuing operations
Income from discontinued operation, net of taxes

(83)
- 

29 
36 

(22)
- 

(107)
58 

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

(Loss) income before extraordinary loss and accounting change
Extraordinary loss from early retirement of debt, net of taxes
Cumulative effect of accounting change, net of taxes

(83)
- 
- 

65 
- 
- 

(22)
- 
(545)

(49)
(12)
11 

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

Net (loss) income

$   (83)

$      65 

$    (567)

$     (50)

===========================================================================================

Continuing Operations:
(Loss) income from continuing operations
Extraordinary loss, net of taxes
Cumulative effect of accounting change, net of taxes

$      (83)
- 
- 

$      29 
- 
- 

$    (22)
- 
(545)

$    (107)
(12)
11 

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

Net (loss) income

$      (83)

$      29 

$    (567)

$    (108)

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

Basic and diluted per share:
(Loss) income from continuing operations
Extraordinary loss, net of taxes
Cumulative effect of accounting change, net of taxes

$    (0.36)
- 
- 

$    0.13 
- 
- 

$   (0.10)
- 
(2.37)

$   (0.47)
(0.05)
0.04 

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

Net (loss) income

$    (0.36)

$    0.13 

$   (2.47)

$    (0.48)

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

Second Quarter
--------------------------------

First Six Months
--------------------------------

(In millions, except per share amounts)

2002

2001

2002

2001

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

Shares (denominator):
  Weighted average shares outstanding
Dilutive securities:
   Options
   Employee stock purchase plans

230.0 

- 
- 

226.4 

2.3 
0.3 

229.9 

- 
- 

225.9 

- 
- 

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

Total assuming conversion

230.0 

229.0 

229.9 

225.9 

===========================================================================================

Discontinued Operation:
Net income
Basic net income per common share
Diluted net income per common share

$    - 
$    - 
$    - 

$    36 
$  0.45 
$  0.44 

$    - 
$    - 
$    - 

$    58 
$  0.72 
$  0.71 

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

Shares (denominator):
  Weighted average shares outstanding
Dilutive securities:
   Options

- 

- 

80.7 

0.8 

- 

- 

80.6 

0.7 

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

Total assuming conversion

- 

81.5 

- 

81.3 

===========================================================================================

       First Six Months
----------------------------------------

(In millions)

2002

2001

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

Cash flows from operating activities
Net loss
Adjustments to reconcile net income to cash provided by operations:
  Cumulative effect of accounting change, net of taxes
  Asset impairment
  Other loss (income)
  Depreciation and amortization
  Deferred income taxes
  Change in working capital
  Tax benefit on stock options
  Other

$     (567)

545 
208 
10 
519 
(62)
(237)
- 
3 

$      (50)

(11)
115 
(27)
719 
9 
(57)
12 
(39)

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

Cash provided by operations

419 

671 

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

Cash flows from investing activities
Property, plant and equipment investments
Timber and timberland purchases
Acquisitions
Net proceeds from sales of assets
Other

(268)
- 
- 
22 
(4)

(382)
(22)
(68)
694 
(2)

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

Cash (used for) provided by investing activities

(250)

220 

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

Cash flows from financing activities
Repayments of long-term debt
Additions to long-term debt
Net decrease in short-term debt
Net increase (decrease) in bank overdrafts
Cash dividends paid
Proceeds from option plan exercises
Fees paid to issue debt

(1,889)
1,797 
(76)
70 
(58)
3 
(3)

(1,174)
1,339 
(857)
(134)
(97)
72 
(30)

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

Cash used for financing activities

(156)

(881)

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

Increase in cash
    Balance at beginning of period

13 
31 

10 
40 

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

    Balance at end of period

$           44 

$         50 

==========================================================================================

(In millions, except shares and per share amounts)

June 29,
2002

December 29,
2001

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

ASSETS
Current assets
  Cash
  Receivables, less allowances of $45 and $39, respectively
  Inventories
  Deferred income tax assets
  Other current assets

$      44 
2,588 
2,506 
98 
492 

$      31 
2,352 
2,512 
101 
464 

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

Total current assets

5,728 

5,460 

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

Property, plant and equipment
   Land, buildings, machinery and equipment, at cost
   Accumulated depreciation

19,002 
(9,477)

18,843 
(9,051)

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

Property, plant and equipment, net

9,525 

9,792 

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

Goodwill, net

7,609 

8,265 

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

Intangible assets, net

702 

713 

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

Other assets

2,031 

2,134 

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

Total assets

$   25,595 

$   26,364 

===========================================================================================

(In millions, except shares and per share amounts)

June 29,
2002

December 29,
2001

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

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
  Commercial paper and other short-term notes
  Current portion of long-term debt
  Accounts payable
  Accrued compensation
  Other current liabilities

$    2,208 
189 
1,716 
269 
920 

$    2,284 
572 
1,630 
300 
1,024 

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

Total current liabilities

5,302 

5,810 

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

Long-term debt, excluding current portion

9,689 

9,358 

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

Senior deferrable notes

863 

863 

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

Other long-term liabilities

3,621 

3,582 

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

Deferred income tax liabilities

1,763 

1,846 

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

Commitments and contingencies (Note 13)

Shareholders' equity
  Common stock
   par value $.80; 400,000,000 shares authorized; 230,277,000 and 230,095,000
     shares issued
  Additional paid-in capital
  Retained earnings
  Long-term incentive plan deferred compensation
  Accumulated other comprehensive loss

184 


2,528 
1,696 
(3)
(48)

184 


2,521 
2,321 
(3)
(118)

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

Total shareholders' equity

4,357 

4,905 

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

Total liabilities and shareholders' equity

$   25,595 

$   26,364 

===========================================================================================

Second Quarter
----------------------------------

First Six Months
----------------------------------

(In millions)

2002

2001

2002

2001

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

Net (loss) income
 Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustments
  Derivative instruments
  Minimum pension liability adjustment

$      (83)

129 
10 
1 

$      65 

(9)
(4)
- 

$     (567)

120 
21 
(71)

$      (50)

(35)
(22)
1 

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

Comprehensive income (loss)

$     57 

$      52 

$     (497)

$     (106)

===========================================================================================

1.

PRINCIPLES OF PRESENTATION AND ACCOUNTING POLICIES. The consolidated financial statements include the accounts of Georgia-Pacific Corporation and subsidiaries (the "Corporation" or "Georgia-Pacific"). All significant intercompany balances and transactions are eliminated in consolidation. The interim financial information included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the Corporation's financial position, results of operations, and cash flows for the interim periods. All such adjustments are of a normal, recurring nature. Certain 2001 amounts have been reclassified to conform to the 2002 presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation's annual report on Form 10-K for the fiscal year ended December 29, 2001.

On December 16, 1997, shareholders of the Corporation approved the creation of two classes of common stock intended to reflect separately the performance of the Corporation's manufacturing and timber businesses. The Corporation's manufacturing and timber businesses are referred to hereinafter as the "Georgia-Pacific Group" and "The Timber Company", respectively. On October 6, 2001, the Corporation completed the spin off of The Timber Company and its merger with and into Plum Creek Timber Company, Inc. ("Plum Creek") (see Note 7). The results of The Timber Company through October 6, 2001 are reported as discontinued operations in the accompanying consolidated financial statements.

The Corporation classifies certain shipping and handling costs as selling and distribution expenses. Shipping and handling costs included in selling and distribution expenses were $143 million and $285 million for the second quarter and first six months of 2002, respectively, and $155 million and $316 for the second quarter and first six months of 2001.

Accounting Changes

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

Effective December 31, 2000, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and, accordingly, all derivatives are recognized on the balance sheet at their fair value. As a result of adopting SFAS 133, the Corporation recorded an after-tax cumulative effect of accounting change credit of $11 million (net of taxes of $6 million) and a $2 million transition adjustment (net of taxes of $1 million) in other comprehensive loss.

Business Separation

On May 7, 2002, the Board of Directors approved separating the Corporation into two public companies. The separation will align the Corporation's businesses into a consumer products and packaging company and a building products and distribution company, each of which will have a distinct strategic focus and competitive strengths and the potential for creation of additional value. The separation is expected to produce a number of other important benefits as well, such as creating both a value-added consumer products and packaging company with strong brands and stable cash flows, and one of the strongest domestic building products companies; providing more focused employee performance incentives; eliminating cross-subsidies, with each business free to use its cash flow to reinvest or distribute to

8

shareholders as appropriate; and allowing each business to adopt its own capital structure. The new consumer products and packaging company will consist of the Corporation's consumer products business, packaging business and pulp and paper business. After the separation, Georgia-Pacific will consist of the Corporation's building products manufacturing and distribution businesses and the Unisource paper distribution business. The Corporation intends to effect the separation through an initial public offering of approximately 15% to 20% of the outstanding shares of the new consumer products and packaging company. The initial public offering is expected to occur in the third quarter of 2002. The Corporation's bondholders will be offered the opportunity to exchange their current Georgia-Pacific Corporation bonds for bonds of the new consumer products and packaging company in a manner that preserves bondholder value. In connection with the separation, new credit facilities will be raised and new long-term bonds will be issued by Georgia-Pacific to repay existing indebtedness. The full separation of the new consumer products and packaging company from Georgia-Pacific is expected to be completed in the first half of 2003 through a tax-free distribution of shares to existing Georgia-Pacific shareholders. The structure and timing of the transactions outlined above are subject to a number of factors, including industry conditions and capital markets.

2.

GOODWILL AND INTANGIBLE ASSETS. Effective December 30, 2001, the Corporation adopted SFAS No. 141, Business Combinations ("SFAS No. 141"), and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that entities assess the fair value of the net assets underlying all acquisition related goodwill on a reporting unit basis effective beginning in 2002. When the fair value is less than the related carrying value, entities are required to reduce the amount of goodwill. The Corporation has determined its reporting units to be the following: structural panels, lumber, industrial wood products, gypsum, chemical, building products distribution, packaging, bleached pulp and paper, paper distribution, North American towel and tissue, Dixie and European consumer products.

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

The $545 million goodwill impairment related only to the Corporation's Unisource paper distribution reporting unit. The principal facts and circumstances leading to the impairment of the paper distribution reporting unit's goodwill included a diminution of synergies originally expected to be received from the white paper mills sold to Domtar, Inc. in 2001, and changes in the marketplace for coated and uncoated free sheet paper subsequent to the acquisition of Unisource.

On August 13, 2002, the Corporation entered into a letter of intent to sell 60% of its Unisource paper distribution business for approximately $850 million in after-tax proceeds and $170 million of notes receivable. The Corporation will retain a 40% interest in the business. Based on the terms of the letter of intent, the Corporation has concluded that the fair value of this business was further diminished. Accordingly, in the second quarter of 2002, the Corporation recorded an after-tax charge of $170 million which is comprised of an additional goodwill impairment charge of $106 million and a pretax fixed asset impairment charge of $102 million ($64 million after tax) in its bleached pulp and paper segment. Following these impairment charges, the related goodwill has been completely eliminated and fixed assets remaining were approximately $137 million. Once the sale is completed, the Corporation expects to recognize an additional tax benefit of approximately $180 million, which is included in the total after-tax proceeds. The sale is expected to be completed in the fourth quarter of 2002.

In addition, during the second quarter of 2002, the Corporation reclassified goodwill for certain tax liabilities recorded in connection with the Unisource acquisition.

9

The changes in the carrying amount of goodwill for the first six months of 2002 are as follows:

In millions

Consumer
products

Packaging

Bleached
pulp and paper

Building
products

All
other

Consolidated

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

Balance as of
December 29, 2001

$  6,627 

$    621 

$    975 

$     42 

$    - 

$  8,265 

Cumulative effect of change in
accounting principle - adoption of
SFAS No. 142

- 

- 

(545)

- 

- 

(545)

Goodwill impairment

- 

- 

(106)

- 

- 

(106)

Foreign currency translation

45 

- 

- 

(2)

- 

43 

Balance sheet reclassifications

- 

- 

(48)

- 

- 

(48)

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

Balance as of June 29, 2002

$  6,672 

$    621 

$    276 

$     40 

$    - 

$  7,609 

================================================================================================

SFAS No. 142 also requires that entities discontinue amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations. Accordingly, the Corporation no longer amortized goodwill beginning in 2002. In the first six months of 2001, goodwill amortization expense aggregated $123 million, which included $87 million in the consumer products segment, $11 million in the packaging segment, $24 million in the bleached pulp and paper segment and $1 million in the building products segment. Had the Corporation discontinued amortization of goodwill in the prior year, operating results for the second quarter and first six months of 2001 would have been as follows:

Intangible Assets

The following table sets forth information for intangible assets subject to amortization:

5.

SUPPLEMENTAL DISCLOSURES -- CONSOLIDATED STATEMENTS OF CASH FLOWS. The cash impact of interest and income taxes is reflected in the table below. The effect of foreign currency exchange rate changes on cash was not material in either period.

Six Months Ended
-----------------------------------------

(In millions)

2002

2001

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

Total interest costs
Interest capitalized

$      458 
(4)

$     603 
(4)

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

Interest expense

$      454 

$     599 

====================================================================================

Interest paid

$      439 

$     628 

====================================================================================

Income tax paid (refunds received), net

$       62 

$     (31)

====================================================================================

6.

INVENTORY VALUATION. Inventories include costs of materials, labor, and plant overhead. The Corporation uses the dollar value method for computing LIFO inventories. The major components of inventories were as follows:

(In millions)

June 29,
2002

December 29,
2001

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

Raw materials
Finished goods
Supplies
LIFO reserve

$            570 
1,530 
507 
(101)

$           628 
1,537 
504 
(157)

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

Total inventories

$          2,506 

$         2,512 

====================================================================================

7.

ACQUISITIONS AND DIVESTITURES. During the first six months of 2002, the Corporation disposed of various assets including a wallboard paper mill for a total of $22 million in cash and recognized a pretax loss of $10 million which was reflected in "Other (income) loss, net" in the accompanying consolidated statements of income. During the first six months of 2001, the Corporation sold various assets including an industrial wood products property, a lumber mill, a paper distribution business and timberlands for a total of $113 million in cash and recognized a pretax gain of $54 million, $27 million of which was reflected in "Other (income) loss, net" and $27 million of which was reflected in "Income from discontinued operation, net of taxes" in the accompanying consolidated statements of income.

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

12

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

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

The transaction was originally conditioned on the receipt of a private letter ruling from the Internal Revenue Service (the "Service") that the transaction would be tax-free to the Corporation and to the shareholders of The Timber Company. In June 2001, the Corporation and Plum Creek amended the original merger agreement and determined to effect the merger upon receipt of opinions from tax counsel that the spin off of The Timber Company from the Corporation and the subsequent merger with Plum Creek would be tax-free to the Corporation and to the shareholders of The Timber Company. The Service notified the companies on June 12, 2001, that it had decided not to issue the private letter ruling based on its belief that the companies had failed to carry the high burden of proof of business purpose necessary for the transaction to receive such an advance ruling. This high burden of proof, which is more stringent than the legal standards applicable to the audit process or any judicial proceeding, pertains only to advance rulings. Based on discussion with the Service and the advice of legal counsel, the companies believe the transaction will not be taxable to the Corporation or the shareholders of The Timber Company. As an added measure to reduce the uncertainty concerning any possible tax risks associated with the transaction, the Corporation obtained up to $500 million in tax liability insurance.

The Timber Company has been treated as a discontinued operation in the accompanying consolidated financial statements. Operating results of the discontinued operation were as follows:

8.

RESTRUCTURING. In connection with the acquisition of Fort James, the Corporation recorded liabilities totaling approximately $78 million for employee termination costs relating to approximately 960 hourly and salaried employees. In addition, the Corporation determined that it would strategically reposition its communication papers business to focus on faster-growing paper segments by retiring four high-cost paper machines and associated pulping facilities at its Camas Washington mill and recorded liabilities of approximately $26 million to exit these activities. In addition, the Corporation recorded liabilities of $35 million primarily for lease and contract termination costs at administrative facilities that have been or will be closed in California, Connecticut, Illinois, Virginia and Wisconsin. During 2001, approximately 605 employees were terminated and approximately $55 million of the reserve was used to pay termination benefits. During 2002, approximately 112 employees were terminated and approximately $10 million of the reserve was used to pay termination benefits. The remaining employee terminations and Camas facility closing activities (primarily demolition activities) are expected to be completed early in 2003. The leases and contracts at the administrative facilities expire through 2012. The following table provides a rollforward of these reserves from December 29, 2001 through June 29, 2002:

9.

DEBT. The Corporation's total debt, excluding senior deferrable notes, decreased to $12,086 million at June 29, 2002 from $12,214 million at December 29, 2001. At June 29, 2002, the weighted average interest rate on the Corporation's total debt, excluding senior deferrable notes and including outstanding interest rate exchange agreements was 6.38%.

The Corporation had commitments totaling $1.3 billion and CN $95 million (approximately $63 million) under its United States and Canadian accounts receivable secured borrowing programs, respectively, of which $1.3 billion and CN $95 million was outstanding under these programs at June 29, 2002. Of the $1.3 billion in the United States program, $395 million will expire in September 2002 and the remaining $900 million expires in December 2002. The Canadian program expires in May 2004. The Corporation expects to renew these agreements prior to expiration. The receivables outstanding under these programs and the corresponding debt are included as "Receivables" and "Commercial paper and other short-term notes," respectively, on the accompanying consolidated balance sheets. All accounts receivable programs are accounted for as secured borrowings. As collections reduce previously pledged interests, new receivables may be pledged.

On April 27, 2002, the Corporation issued $73 million of its variable rate industrial revenue bonds, due February 1, 2022 to replace the maturity of $73 million of its variable rate industrial revenue bonds. On June 15, 2002, $300 million of the Corporation's 9.95% debentures matured.

At June 29, 2002, the Corporation's unsecured financing facility totaled $850 million with a maturity date of August 16, 2002 and the unsecured revolving credit facility totaled $3,750 million with a maturity date of November 3, 2005. Borrowings under the agreements bear interest at market rates. These interest rates may be adjusted according to a rate grid based on the Corporation's long-term debt ratings. Fees associated with these revolving credit facilities include a facility fee of 0.2% per annum on the aggregate commitments of the lenders as well as up-front fees. During the first six months of 2002, the Corporation paid $4 million in facility fees. Fees and margins may also be adjusted according to a pricing grid based on the Corporation's long-term debt ratings. At June 29, 2002, $3,429 million was borrowed under the credit agreements at a weighted-average interest rate of 3.1%. Amounts outstanding under the revolving credit facilities are included in "Commercial paper and other short-term notes" and "Long-term debt, excluding current portion" on the accompanying consolidated balance sheets.

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

As of June 29, 2002, the Corporation had $1.5 billion of debt and equity securities available for issuance under a shelf registration statement filed with the Securities and Exchange Commission during fiscal year 2000.

The Corporation's borrowing arrangements contain a number of financial and non-financial covenants, which restrict the activities of the Corporation. The more significant financial covenants are discussed above. In addition, certain agreements contain cross-default provisions. The Corporation is in compliance with the covenants of these agreements.

On May 8, 2002, Moody's Investor Service changed the Corporation's unsecured debt rating to "Ba1" from "Baa3", and its commercial paper rating to "Not-Prime" from "Prime-3".

On August 7, 2002, the Corporation announced that it obtained a $650 million bridge financing commitment from Bank of America, N.A. and Goldman Sachs Credit Partners, L.P. This bridge loan, along with the available cash and borrowings from existing bank credit facilities, will be used to repay $850 million in bridge financing due August 16, 2002. Under the terms of this commitment, the lenders have the right to cause the Corporation to repay or refinance this bridge loan in full on the earlier of February 16, 2003 or forty-five days after the Corporation terminates the transactions described in Note 1 -- Business Separation above. If the Corporation does not make other financing arrangements satisfactory to the lenders, they have the right to arrange and manage the financing necessary for such repayment or refinancing, which would be secured by a first lien on the receivables and inventory of the Corporation and its subsidiaries to the extent permitted by the Corporation's other financing arrangements.

10.

SENIOR DEFERRABLE NOTES. In July 1999, the Corporation issued 17,250,000 of 7.5% PEPS Units for $862.5 million. Each PEPS Unit consists of a purchase contract that obligates the holder to purchase shares of Georgia-Pacific common stock for $50 on or prior to August 16, 2002 and a senior deferrable note of the Corporation due August 16, 2004. The amount of shares purchased per PEPS Unit will be based on the average closing price of Georgia-Pacific common stock over a 20-day trading period ending August 13, 2002. Assuming an average stock price of less than $47.375 per share, the Corporation expects to issue approximately 18.2 million shares of Georgia-Pacific common stock in 2002. Each purchase contract yields interest of 0.35% per year, paid quarterly, on the $50 stated amount of the PEPS Unit. Each senior deferrable note yields interest of 7.15% per year, paid quarterly, until August 16, 2002. The terms of the PEPS offering included a remarketing of the senior deferrable notes on August 16, 2002. On August 7, 2002, the Corporation announced that the senior deferrable notes would not be remarketed. The liability related to the PEPS Units is classified as "Senior deferrable notes" on the accompanying consolidated balance sheets.

11.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Effective December 31, 2000, the Corporation adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and, accordingly, all derivatives are recognized on the balance sheet at their fair value.

The Corporation formally documents all relations between hedging instruments and the hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. The Corporation formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items.

Cash Flow Hedges: The Corporation uses interest rate agreements in the normal course of business to manage and reduce the risk inherent in interest rate fluctuations. Interest rate swap agreements are considered hedges of specific borrowings and differences paid and received under the swap arrangements are recognized as adjustments to interest expense. Such contracts had a total notional amount of $1.3 billion at June 29, 2002. The fair market value of such contracts was a liability of $15 million at June 29, 2002.

17

With each type of cash flow hedge, the settlement of the forecasted transaction will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive loss. As of June 29, 2002, approximately $18 million of deferred losses on derivative instruments included in accumulated other comprehensive loss are expected to be reclassified to earnings during the next twelve months. These losses are primarily related to the floating-to-fixed interest rate swap agreements and are due to the significant decrease in interest rates during the contract terms.

Hedge of the net investment in a foreign operation: At June 29, 2002, the Corporation had outstanding approximately $273 million (net of discount) of Euro-denominated bonds which were designated as a hedge against its net investment in Europe.

Non-designated/ineffective derivative instruments: The Corporation has two foreign currency interest rate swap agreements that were assumed in the acquisition of Fort James. These agreements do not qualify for hedge accounting. Included in the cumulative effect of accounting change is a pre-tax loss of $1 million relating to the fair value of these agreements. The fair value of these agreements at June 29, 2002 was a liability of approximately $1 million. The Corporation also has three interest rate swaps that, during the third quarter of 2001, were no longer highly effective in offsetting changes in cash flows of the borrowings hedged. The notional amount of these instruments was $127 million. At June 29, 2002, the fair market value of these three instruments was a liability of approximately $2 million.

During 2000, the Corporation entered into a derivative agreement in connection with the sale of certain packaging assets whereby the Corporation has guaranteed a certain margin on the buyer's production. This derivative agreement expires in 2005. This agreement does not qualify for hedge accounting because the buyer's production does not qualify as a hedged item in accordance with SFAS No. 133. The Corporation also entered into certain commodity swap agreements to offset the gain on the aforementioned derivative agreement. The net fair value of these derivative agreements was $17.3 million (pre-tax) at December 30, 2000 and is included in the cumulative effect of accounting change. Effective December 28, 2001, the Corporation terminated the offsetting commodity agreements. The termination was effective with the counter-party's bankruptcy filing. As of June 29, 2002, the fair market value of the original derivative agreement was an asset of $9.1 million.

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

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

18

12.

LONG-TERM APPRECIATION PLAN. In 2001 the Corporation began granting stock appreciation rights ("SAR") for issuance under the 2001 Long-Term Appreciation Plan (the "LTAP"). The LTAP provides for the granting of SAR units to key employees of the Corporation. During the first six months of both 2002 and 2001, the Corporation granted 2.4 million SAR units under the LTAP with an exercise price of $24.44 per unit in 2002 and $29.47 per unit in 2001, respectively. The SAR exercise price was based on the underlying fair value of Georgia-Pacific Group common stock at the grant date. These SAR units vest over three years. Compensation expense for the SARs is based on the difference between the current fair market value of Georgia-Pacific Group common stock and the fair market value at the date of grant. During the second quarter and first six months of 2002 the Corporation did not record compensation expense related to these SARs. During the second quarter and first six months of 2001, the Corporation recorded compensation expense of $3 million.

13.

COMMITMENTS AND CONTINGENCIES.

ENVIRONMENTAL MATTERS

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

The Corporation is involved in environmental remediation activities at approximately 169 sites, both owned by the Corporation and owned by others, where it has been notified that it is or may be a potentially responsible party ("PRP") under the United States Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or similar state "superfund" laws. Of the known sites in which it is involved, the Corporation estimates that approximately 36% are being investigated, approximately 21% are being remediated and approximately 43% are being monitored (an activity that occurs after either site investigation or remediation has been completed). The ultimate costs to the Corporation for the investigation, remediation and monitoring of many of these sites cannot be predicted with certainty, due to the often unknown nature and magnitude of the pollution or the necessary cleanup, the varying costs of alternative cleanup methods, the amount of time necessary to accomplish such cleanups, the evolving nature of cleanup technologies and governmental regulations, and the inability to determine the Corporation's share of multiparty cleanups or the extent to which contribution will be available from other parties, all of which factors are taken into account to the extent possible in estimating the Corporation's liabilities. The Corporation has established reserves for environmental remediation costs for these sites that it believes are probable and reasonably able to be estimated. To the extent that the Corporation is aware of unasserted claims, considers them probable, and can estimate their potential costs, the Corporation includes appropriate amounts in the reserves.

Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, the Corporation believes it is reasonably possible that costs associated with these sites may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $122 million. This estimate of the range of reasonably possible additional costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of such range, assumptions least favorable to the Corporation among the range of reasonably possible outcomes were used. In estimating both its current reserve for environmental remediation and the possible range of additional costs, the Corporation has not assumed it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on their financial condition and probable contribution on a per-site basis.  

19

Presented below is the activity in the Corporation's environmental liability account for the last three fiscal years and first half of 2002.

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

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

The Corporation has spent approximately $27 million on the Kalamazoo River Superfund Site through December 29, 2001 broken down as follows:

Site

(in millions)

River

$13.8

King Highway

8.7

A Site

1.7

Willow Blvd.

       2.8

     $27.0

All such amounts were charged to earnings.

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

FOX RIVER SITE

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

In October 2001, the Wisconsin Department of Natural Resources ("WDNR") and the United States EPA released for public comment a draft RI/FS and proposed remedial action plan ("PRAP") for the Fox River and Green Bay. The draft sets forth a proposed remedy with an estimated total cost of $308 million. The Corporation provided comments on this plan to the relevant agencies in January 2002. Those comments questioned the WDNR's assumed costs for dredging, because information from other remediation dredging projects indicated costs per cubic yard of material dredged were significantly higher than those used by WDNR. The Corporation and other PRPs also questioned the need to dredge the amount of sediment called for by the proposed remedy. The Corporation believes that other alternatives involving substantially less dredging would meet the risk reduction goals of WDNR. The final cleanup alternative to be selected and implemented, the costs of the alternative, and the Corporation's share of such costs, are unknown at this time.

21

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

The Corporation's reserves for the Fox River site are based on the assumptions that the volume of sediment to be dredged will be less than the amount discussed in the PRAP, that the cost per cubic yard of sediment removed will be several times higher, as well as the Corporation's estimate of its ultimate share of such liability. Based on analyses of currently available information and previous experience with respect to the cleanup of hazardous substances, the Corporation believes that its reserves are adequate; however, it is reasonably possible that costs associated with the site may exceed current reserves by amounts that may prove insignificant or that could range, in the aggregate, up to approximately $15 million.

The Corporation has spent approximately $27.9 million from 1995 to December 29, 2001 on the Fox River site, some of which was spent by Fort James prior to its acquisition by the Corporation. All such amounts were charged to earnings.

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

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

WHATCOM WATERWAY SUPERFUND SITE

The Whatcom Waterway is a Federal channel located adjacent to the Corporation's pulp and paper mill in Bellingham, Washington. The State declared the Whatcom Waterway a Superfund site due to historical contamination of sediments with woody debris, phenolics and mercury. On March 6, 1995, the Washington Department of Ecology named the Corporation as a Potentially Liable Party ("PLP") in the case. The State is presently preparing to name other PLPs in the case.

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

22

The Corporation has spent approximately $2.9 million through December 29, 2001 on the Whatcom Waterway site, all of which was charged to earnings.

OTHER

The Corporation is finalizing a settlement for alleged violations of an air permit at Ft. Bragg, California. The allegations involve the burning of demolition wood waste as a fuel source in its three boilers. The Corporation will pay $250,000 as part of the settlement.

ASBESTOS LITIGATION

The Corporation and many other companies are defendants in suits brought in various courts around the nation by plaintiffs who allege that they have suffered personal injury as a result of exposure to asbestos-containing products. These suits allege a variety of lung and other diseases based on alleged exposure to products previously manufactured by the Corporation. In many cases, the plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that any injuries they have incurred in fact resulted from exposure to the Corporation's products. The Corporation's asbestos liabilities relate primarily to joint systems products manufactured by Bestwall Gypsum Company that contained asbestos fiber. The Corporation acquired Bestwall in 1965, and discontinued using asbestos in the manufacture of these products in 1977.

The following table presents information about the approximate number of the Corporation's asbestos claims during the past three fiscal years and the most recent quarterly period:

¹

Claims Filed includes all asbestos claims for which service has been received and/or a file has been opened by the Corporation.

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

In addition, Fort James Corporation, a wholly owned subsidiary of the Corporation, currently is defending approximately 900 asbestos premises liability claims.

As of June 29, 2002, the Corporation had either settled, had dismissed or was in the process of settling a total of approximately 250,000 asbestos claims. The Corporation generally settles asbestos claims for amounts it considers reasonable given the facts and circumstances of each claim. Substantially all of the amounts it has paid to date for settled claims, and anticipates paying for pending claims, have been covered by product liability insurance. The amounts not covered by such insurance have been immaterial to date. In the future, the Corporation expects that the percentage of its asbestos liabilities to be reimbursed by its insurers will decrease as it begins to make use of layers of insurance coverage in which there are some insolvent carriers and with respect to which there are various allocation and coverage issues. The annual average settlement payment per asbestos claimant has fluctuated up and down during the three year period ended December 29, 2001, and management of the Corporation expects such fluctuations to continue in the future based upon, among other things, the number and type of claims settled in a particular period and the jurisdictions in which such claims arose.

23

In the Fall of 2001, the Corporation retained National Economic Research Associates (NERA) and Peterson Consulting, nationally-recognized consultants in asbestos liability and insurance, to work with it to project the amount, net of insurance, that it would pay for its asbestos-related liabilities and defense costs through 2011. The methodology employed by NERA to project the Corporation's asbestos-related liabilities and defense costs included: 1) an analysis of the population likely to have been exposed or to claim exposure to products manufactured by the Corporation; 2) the use of epidemiological studies to estimate the number of people who might allege exposure to the Corporation's products that would be likely to develop asbestos-related diseases in each year between 2002 and 2011; 3) an analysis of the Corporation's recent claims history to estimate likely filing rates for these diseases for the period 2002 through 2011; 4) an analysis of the Corporation's currently pending asbestos claims; and 5) an analysis of the Corporation's historical asbestos settlements and defense costs to develop average settlement values and defense costs, which varied by disease type and the nature of claim, to estimate costs likely to be associated with currently pending and projected asbestos claims through 2011. Based upon its analysis, NERA projected that the Corporation's total, undiscounted asbestos liabilities, including defense costs, over the next 10 years will be less than $1 billion (including payments related to claims pending as of December 31, 2001).

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

Using NERA's projection, Peterson Consulting and the Corporation reviewed the Corporation's existing insurance arrangements and agreements, engaged in discussions with counsel to the Corporation, analyzed publicly available information bearing on the credit worthiness of the Corporation's various insurers and employed such insurance allocation methodologies as the Corporation and Peterson Consulting believed appropriate to ascertain the probable insurance recoveries for asbestos liabilities through 2011. The analysis took into account self- insurance reserves, policy exclusions, liability caps and gaps in the Corporation's coverage, as well as insolvencies among certain of the Corporation's insurance carriers. Although the Corporation and Peterson Consulting believe these assumptions are appropriate, there are other assumptions that could have been employed that would have resulted in materially lower insurance recovery projections.

Based on the analysis of NERA and Peterson Consulting, the Corporation has established reserves for the probable and reasonably estimable liabilities and defense costs it believes it will pay through 2011, and has also established receivables for the insurance recoveries that are deemed probable. The Corporation has recorded the reserves for the asbestos liabilities as "Other current liabilities" and "Other long-term liabilities" and the related insurance recoveries as "Other current assets" and "Other assets" in the accompanying consolidated balance sheets. For the fourth quarter 2001, the Corporation recorded a pre-tax charge to earnings of $350 million to cover all of the projected asbestos liabilities and defense costs, net of expected insurance recoveries, it expects to pay through 2011. This charge principally covers the share of such costs which the Corporation expects to incur because of the insolvencies of certain insurance companies which wrote a part of the Corporation's product liability insurance in prior years, and various allocation and coverage issues. The charge is not due to exhaustion of the Corporation's total product liability insurance for asbestos liabilities, and the Corporation believes that the majority of its asbestos-related liabilities and defense costs during the next ten years will be recovered from its insurance carriers. The insurance receivable recorded by the Corporation does not assume any recovery from insolvent carriers, and assumes that those carriers which are currently solvent will continue to be solvent throughout the period of NERA's projection. However, there can be no assurances that these assumptions will be correct. Substantially all of the insurance recoveries deemed probable are from insurance companies rated

24

A- (excellent) or better by A.M. Best Company. No more than 21% of such insurance recoveries are from any one company, though several of the insurers are under common control. The Corporation also has significant additional insurance coverage which it expects to be available for asbestos liabilities and defense costs it may incur after 2011.

The analyses of NERA and Peterson Consulting are based on their best judgment and that of the Corporation. However, projecting future events, such as the number of new claims to be filed each year, the average cost of resolving each such claim, coverage issues among layers of insurers, and the continuing solvency of various insurance companies is subject to many uncertainties which could cause the actual liabilities and insurance recoveries to be higher or lower than those projected and/or recorded. Consequently, there can be no assurance these projected liabilities will be accurate, or that the projected insurance recoveries will be realized.

In light of the uncertainties inherent in making long term projections, the Corporation has determined that the ten year period through 2011 is the most reasonable time period for projecting asbestos liabilities and defense costs and probable insurance recoveries and, accordingly, the charge to earnings recorded in the fourth quarter of 2001 does not include either asbestos liabilities or insurance recoveries for any period past 2011.

Given the uncertainties associated with projecting matters into the future and numerous other factors outside the control of the Corporation, the Corporation believes that it is reasonably possible that it may incur asbestos liabilities for the period through 2011 and beyond in an amount in excess of the NERA projection. Based on currently available data and upon the analyses of NERA and Peterson Consulting, the Corporation does not believe that it is reasonably possible that any such excess asbestos liabilities will be material to the Corporation. While it is reasonably possible that such excess liabilities could be material to operating results in any given quarter or year, the Corporation does not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on the long-term results of operations, liquidity or consolidated financial position of the Corporation.

OTHER LITIGATION

On April 14, 1997, a class action lawsuit alleging claims under the Employee Retirement Income Security Act of 1974 ("ERISA") was filed against the Corporation and the Georgia-Pacific Corporation Salaried Employees Retirement Plan ("the Plan") (together, "the Defendants") in the United States District Court for the Northern District of Georgia, seeking recovery of alleged underpayments of lump-sum benefits to persons taking early retirement from the Corporation (the "Plaintiff class"), together with interest, attorney's fees, and costs. After the District Court granted the Defendants' motion for summary judgment in March 1999, the United States Court of Appeals for the Eleventh Circuit reversed the District Court's ruling in August 2000 and remanded the case for further proceedings, holding that the terms of the Plan required a calculation of lump-sum benefits that could result in additional payments to members of the class. In September 2000, the Defendants filed a petition for rehearing and rehearing en banc with the Eleventh Circuit, which was denied. The Defendants also filed a petition for certiorari to the United States Supreme Court in January 2001, which was denied. In March 2002, the District Court issued an Order granting in part and denying in part the summary judgment motions of both the Plaintiff class and the Defendants. In addition, the Order remanded some issues to the Plan administrator for interpretation and specified that the parties must file another proposed order implementing these rulings within a certain time period.

The Corporation has determined that, in all likelihood, damages will be awarded to the Plaintiff class which will require the Plan to make additional payments to members of the class, and may in turn affect the Corporation's net periodic pension cost and obligation to fund the Plan over time. The Corporation has identified a minimum amount of damages the Plan likely will be required to pay, which should not result in a material impact on the Corporation's funding obligation or results of operations. However it is impossible to determine with any certainty whether the Plan will be required to pay any additional damages and, if so, in what amount. In the event that damages above the minimum amount are awarded, it could have a material effect on the Corporation's net periodic pension cost and funding obligation. The Defendants are engaged in discussions and negotiations with the Plaintiff class for purposes of submitting a proposed Order to the Court in accordance with the mandate of the March 2002 Order.

25

In August 1995, Fort James, at the time a publicly held corporation, transferred certain assets and liabilities of its communications paper and food packaging businesses to two newly formed companies, Crown Vantage, Inc. ("CV"), (a wholly-owned subsidiary of Fort James) and CV's subsidiary Crown Paper Co. ("CP"). CP then entered into a $350 million credit facility with certain banks and issued $250 million face amount of senior subordinated notes. Approximately $483 million in proceeds from these financings were transferred to Fort James in payment for the transferred assets and other consideration. CV also issued to Fort James a pay-in-kind note with a face amount of $100 million. CV shares were then spun off to the Fort James shareholders and CV operated these businesses as a stand-alone company beginning in August 1995.

In March 2001 CP and CV filed for bankruptcy. Various creditors have indicated that the borrowings made by CP and CV, and the payments to Fort James for the assets transferred to CV and CP, caused those companies to become insolvent, and that the transfer of such assets therefore was a fraudulent conveyance. In April 2001, Fort James filed suit against CP and CV in Federal Bankruptcy Court in Oakland, California seeking a declaratory judgment that the transactions did not involve any fraudulent conveyance and that other parties and actions were the cause of the bankruptcy of CV and CP. In September 2001, CV filed suit against Fort James asserting, among other claims, that the transactions described above constituted fraudulent conveyances and seeking unspecified damages. Fort James does not believe that any of its actions in establishing CV or CP involved a fraudulent conveyance or caused the bankruptcy of those companies, and it intends to defend itself vigorously.

Although the ultimate outcome of these environmental matters and legal proceedings cannot be determined with certainty, based on presently available information management believes that adequate reserves have been established for probable losses with respect thereto. Management further believes that the ultimate outcome of such environmental matters and legal proceedings could be material to operating results in any given quarter or year but will not have a material adverse effect on the long-term results of operations, liquidity or consolidated financial position of the Corporation.

26

14.

CONDENSED CONSOLIDATING INFORMATION. Fort James is an issuer of certain securities registered under the Securities Act of 1933, thus subjecting it to reporting requirements under Section 15(d) of the Securities Exchange Act of 1934. The following condensed consolidating financial information is presented in lieu of consolidated financial statements for Fort James because the securities are fully and unconditionally guaranteed by the Corporation:

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

========================================================================================

Net sales

$   2,559 

$   2,554 

$   1,825 

$    (716)

$   6,222 

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

Costs and expenses
  Cost of sales, excluding depreciation and
    amortization
  Selling and distribution
  Depreciation and amortization
  General and administrative
  Interest
  Asset impairment
  Other (income) loss including equity
    income in affiliates

2,184 
118 
120 
123 
150 
- 

- 

2,089 
220 
64 
67 
19 
208 

(1)

1,274 
162 
76 
77 
52 
- 

- 

(716)
- 
- 
- 
- 
- 

8 

4,831 
500 
260 
267 
221 
208 

7 

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

Total costs and expenses

2,695 

2,666 

1,641 

(708)

6,294 

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

(Loss) income from continuing operations
  before income taxes
Benefit (provision) for income taxes

(136)
53 

(112)
1 

184 
(65)

(8)
- 

(72)
(11)

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

(Loss) income from continuing operations
Income from discontinued operation,
  net of taxes

(83)

- 

(111)

- 

119 

- 

(8)

- 

(83)

- 

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

Net (loss) income

$      (83) 

$     (111)

$     119 

$    (8)

$     (83)

========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort James
Corp.

Consolidating
Adjustments

Consolidated
Amounts

========================================================================================

Net sales

$   3,357 

$   2,908 

$   1,735 

$    (1,397)

$   6,603 

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

Costs and expenses
  Cost of sales, excluding depreciation and
    amortization
  Selling and distribution
  Depreciation and amortization
  General and administrative
  Interest
  Asset impairment
  Other (income) loss including equity
    income in affiliates

2,871 
120 
115 
126 
202 
2 

(139)

2,391 
259 
86 
72 
28 
56 

39 

1,202 
135 
150 
70 
59 
- 

- 

(1,397)
- 
- 
- 
- 
- 

77 

5,067 
514 
351 
268 
289 
58 

(23)

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

Total costs and expenses

3,297 

2,931 

1,616 

(1,320)

6,524 

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

Income (loss) from continuing operations
   before income taxes
Benefit (provision) for income taxes

60 
5 

(23)
3 

119 
(58)

(77)
- 

79 
(50)

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

(Loss) income from continuing operations
Income from discontinued operation,
   net of taxes

65 

- 

(20)

36 

61 

- 

(77)

- 

29 

36 

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

Net income (loss)

$    65 

$    16 

$    61 

$    (77)

$     65 

========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

========================================================================================

Net sales

$   4,865 

$   4,969 

$   3,552 

$   (1,368)

$  12,018 

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

Costs and expenses
  Cost of sales, excluding depreciation and
    amortization
  Selling and distribution
  Depreciation and amortization
  General and administrative
  Interest
  Asset impairment
  Other loss (income) including equity
    income in affiliates

4,119 
231 
229 
251 
312 
- 

398 

4,060 
444 
126 
130 
35 
208 

(1)

2,471 
319 
164 
151 
107 
- 

- 

(1,368)
- 
- 
- 
- 
- 

(387)

9,282 
994 
519 
532 
454 
208 

10 

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

Total costs and expenses

5,540 

5,002 

3,212 

(1,755)

11,999 

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

(Loss) income from continuing operations
   before income taxes
Benefit (provision) for income taxes

(675)
108 

(33)
(32)

340 
(117)

387 
- 

19 
(41)

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

(Loss) income from continuing operations
Income from discontinued operation
   net of taxes

(567)

- 

(65)

- 

223 

- 

387 

- 

(22)

- 

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

(Loss) income before extraordinary loss
   and accounting change
Extraordinary loss from early retirement
   of debt, net of taxes
Cumulative effect of accounting change
   net of taxes

(567)

- 

- 

(65)

- 

(545)

223 

- 

- 

387 

- 

- 

(22)

- 

(545)

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

Net (loss) income

$    (567)

$     (610)

$     223 

$     387 

$    (567)

========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

========================================================================================

Net sales

$   5,972 

$   6,183 

$   3,436 

$    (2,671)

$  12,920 

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

Costs and expenses
  Cost of sales, excluding depreciation and
    amortization
  Selling and distribution
  Depreciation and amortization
  General and administrative
  Interest
  Asset impairment
  Other (income) loss including equity
    income

5,263 
236 
231 
257 
405 
2 

(213)

5,050 
528 
172 
152 
68 
113 

(14)

2,412 
262 
303 
140 
126 
- 

- 

(2,671)
- 
- 
- 
- 
- 

200 

10,054 
1,026 
706 
549 
599 
115 

(27)

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

Total costs and expenses

6,181 

6,069 

3,243 

(2,471)

13,022 

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

(Loss) income from continuing operations
   before income taxes
Benefit (provision) for income taxes

(209)
148 

114 
(53)

193 
(100)

(200)
- 

(102)
(5)

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

(Loss) income from continuing operations
Income from discontinued operation
   net of taxes

(61)

- 

61 

58 

93 

- 

(200)

- 

(107)

58 

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

(Loss) income before extraordinary loss
   and accounting change
Extraordinary loss from early retirement
   of debt, net of taxes
Cumulative effect of accounting change
   net of taxes

(61)

- 

11 

119 

- 

- 

93 

(12)

- 

(200)

- 

- 

(49)

(12)

11 

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

Net (loss) income

$    (50)

$    119 

$     81 

$    (200)

$    (50)

========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Cash provided by (used for) operations

$   171 

$   (288)

$   570 

$   (34)

$     419 

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

Cash flows from investing activities
Property, plant and equipment investments
Proceeds from sales of assets
Other

(141)
(5)
- 

(46)
27 
(2)

(81)
- 
(2)

- 
- 
- 

(268)
22 
(4)

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

Cash used for
   investing activities

(146)

(21)

(83)

- 

(250)

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

Cash flows from financing activities
Net (decrease) increase in debt
Net change in intercompany payable
Proceeds from option plan exercises
Cash dividends paid

(154)
185 
3 
(58)

(109)
418 
- 
- 

162 
(637)
- 
- 

- 
34 
- 
- 

(101)
- 
3 
(58)

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

Cash (used for) provided by financing
   activities

(24)

309 

(475)

34 

(156)

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

Increase in cash
Balance at beginning of year

1 
- 

- 
18 

12 
13 

- 
- 

13 
31 

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

Balance at end of year

$       1 

$      18 

$     25 

$      - 

$      44 

=========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Cash provided by (used for) operations

$   268 

$   (244)

$    (2)

$   649 

$     671 

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

Cash flows from investing activities
Property, plant and equipment investments
Timber and timberlands purchases
Acquisitions
Proceeds from sales of assets
Other

(146)
- 
- 
144 
- 

(96)
(22)
(26)
550 
(7)

(140)
- 
(42)
- 
5 

- 
- 
- 
- 
- 

(382)
(22)
(68)
694 
(2)

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

Cash (used for) provided by
   investing activities

(2)

399 

(177)

- 

220 

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

Cash flows from financing activities
Net (decrease) increase in debt
Net change in intercompany payable
Proceeds from option plan exercises
Cash dividends paid

(972)
731 
72 
(97)

494 
(641)
- 
- 

(378)
559 
- 
- 

- 
(649)
- 
- 

(856)
- 
72 
(97)

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

Cash (used for) provided by financing
   activities

(266)

(147)

181 

(649)

(881)

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

Increase in cash
Balance at beginning of year

- 
1 

8 
31 

2 
8 

- 
- 

10 
40 

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

Balance at end of year

$      1 

$      39 

$      10 

$      - 

$        50 

=========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Assets
Current assets
  Cash
  Receivables, less allowances
  Inventories
  Deferred income tax assets
  Other current assets

$      1 
(30)
857 
33 
1,226 

$     18 
2,242 
756 
(5)
273 

$      25 
376 
893 
70 
18 

$       - 
- 
- 
- 
(1,025)

$     44 
2,588 
2,506 
98 
492 

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

Total current assets

2,087 

3,284 

1,382 

(1,025)

5,728 

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

Total property, plant and equipment, net

3,113 

1,995 

4,417 

- 

9,525 

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

Goodwill, net

486 

451 

6,672 

- 

7,609 

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

Intangible assets, net

38 

- 

664 

- 

702 

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

Other assets

13,512 

1,791 

166 

(13,438)

2,031 

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

Total assets

$   19,236 

$   7,521 

$    13,301 

$    (14,463)

$   25,595 

=========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Liabilities and shareholders' equity
Current liabilities
  Short-term debt
  Accounts payable
  Other current liabilities

$     1,864 
589 
918 

$    356 
597 
348 

$      177 
530 
508 

(585)

$   2,397 
1,716 
1,189 

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

Total current liabilities

3,371 

1,301 

1,215 

(585)

5,302 

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

Long-term debt, excluding current portion

7,669 

135 

1,885 

- 

9,689 

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

Senior deferrable notes

863 

- 

- 

- 

863 

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

Other long-term liabilities

2,813 

2,755 

1,457 

(3,404)

3,621 

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

Deferred income tax liabilities

163 

532 

1,068 

- 

1,763 

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

Shareholders' equity

4,357 

2,798 

7,676 

(10,474)

4,357 

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

Total liabilities and shareholders' equity

$    19,236 

$   7,521 

$    13,301 

$    (14,463)

$   25,595 

=========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Assets
Current assets
  Cash
  Receivables, less allowances
  Inventories
  Deferred income tax assets
  Other current assets

$      - 
35 
781 
34 
1,039 

$     18 
1,642 
809 
(5)
228 

$      13 
675 
922 
72 
104 

$       - 
- 
- 
- 
(907)

$     31 
2,352 
2,512 
101 
464 

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

Total current assets

1,889 

2,692 

1,786 

(907)

5,460 

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

Total property, plant and equipment, net

3,169 

2,195 

4,428 

- 

9,792 

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

Goodwill, net

761 

877 

6,627 

- 

8,265 

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

Intangible assets, net

18 

19 

676 

- 

713 

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

Other assets

13,770 

1,769 

196 

(13,601)

2,134 

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

Total assets

$   19,607 

$    7,552 

$   13,713 

$   (14,508)

$   26,364 

=========================================================================================

In millions

Georgia-
Pacific Corp.

Non-
Guarantor
Subsidiaries

Fort
James Corp.

Consolidating
Adjustments

Consolidated
Amounts

=========================================================================================

Liabilities and shareholders' equity
Current liabilities
  Short-term debt
  Accounts payable
  Other current liabilities

$     2,052 
602 
849 

$     619 
526 
289 

$     185 
502 
635 

$      - 
- 
(449)