Form 10-Q

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.): Yes ¨ No x

The number of shares of common stock outstanding as of September 30, 2005: 29,196,335 shares of Common Stock, par value $1 per share.

Net interest payments (net of amounts capitalized) for the nine months ended September 30, 2005 and 2004 were $15.1 million and $35.9 million, respectively. Net income tax payments for the nine months ended September 30, 2005 and 2004 were $15.9 million and $2.5 million, respectively.

Certain 2004 amounts have been reclassified to conform to the 2005 presentation.

NOTE 1. GENERAL - The accompanying Condensed Balance Sheets at September 30, 2005, and December 31, 2004, the Statements of Operations and Comprehensive Income for the quarters and nine months ended September 30, 2005 and 2004, and the Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004, have been prepared in conformity with accounting principles generally accepted in the United States of America. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included. All adjustments were of a normal recurring nature; there were no material nonrecurring adjustments. In September 2004, we completed the sale of our oriented strand board (OSB) facilities and associated assets to Ainsworth Lumber Co. Ltd. As a result, the OSB operations have been classified as “discontinued operations” in the financial statements presented herein.

The financial statements presented in this Form 10-Q for the quarter and nine months ended September 30, 2005, differ from those contained in our earnings release, which was filed with the Securities and Exchange Commission on Form 8-K on October 19, 2005. The difference is the result of adjustments to estimated employee benefit costs that are allocated to our business segments. The adjustments, which occurred in the third quarter, resulted in additional earnings of $0.5 million after tax, or an additional $0.02 per diluted common share.

This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS - In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of Statement of Financial Accounting Standards (SFAS) No. 123, “Share-Based Payment.” The revised Statement requires the recognition of compensation cost in the Statement of Operations for equity instruments awarded to employees, based on the grant date fair value of the award. The revised Statement was to become effective for interim or annual periods beginning after June 15, 2005. However, in April 2005, the effective date was amended by the Securities and Exchange Commission to allow companies to implement the revised Statement in the next fiscal year beginning after June 15, 2005. We will therefore use the modified prospective method to implement the revised Statement on January 1, 2006, and we believe the effect of adoption on our results of operations will be comparable to the pro forma disclosures contained in Note 7, “Equity-Based Compensation.”

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47), which states that a company must recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. FIN 47 clarifies that conditional obligations meet the definition of an asset retirement obligation in SFAS No. 143, “Accounting for Asset Retirement Obligations,” and therefore should be recognized if their fair value is reasonably estimable. Companies must adopt FIN 47 no later than the end of the fiscal year ending after December 15, 2005. We are currently reviewing FIN 47 to determine what effect, if any, it may have on our financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. This Statement’s retrospective-application requirement replaces Accounting Principles Board (APB) Opinion No. 20’s requirement to recognize most voluntary changes in an accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The requirements of SFAS No. 154 become effective for voluntary changes in an accounting principle made in fiscal years beginning after December 15, 2005.

NOTE 3. INCOME TAXES - The income tax provision and benefit presented in the Statements of Operations have been computed by applying an estimated annual effective tax rate. This rate was 38.0% for the nine months ended September 30, 2005 and 39.5% for the quarter and nine months ended September 30, 2004. A tax rate of 39.5% was also applied to income from discontinued operations for 2004. The provision for third quarter 2005 reflects the adjustment of the rate to 38.0% from 38.5% used for the first half of the year. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect of the Qualified Domestic Production Activity Credit and the estimated effect of changes to state tax apportionments.

NOTE 4. DISCONTINUED OPERATIONS - In September 2004, we sold our OSB facilities and associated assets to Ainsworth Lumber Co. Ltd. for approximately $452 million in cash, after closing adjustments. For the quarter and nine months ended September 30, 2004, these facilities generated pre-tax operating income of $37.3 million and $153.9 million, respectively, which amounts are classified as discontinued operations in the Statements of Operations, as required by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

NOTE 5. CASH FLOW HEDGES - During the third quarter of 2003, we entered into several derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. As designated cash flow hedges, changes in the fair value of the financial instruments were recognized in “Other comprehensive loss, net of tax” to the extent the hedges were deemed effective, until the hedged item was recognized in the statement of operations. As of March 31, 2004, the derivative financial instruments entered into in the third quarter 2003 had expired, and we have not entered into any additional instruments to hedge our expected future natural gas purchases.

NOTE 6. EARNINGS (LOSS) PER COMMON SHARE - Earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted average number of common shares outstanding in accordance with SFAS No. 128, “Earnings Per Share.” The following table reconciles the number of common shares used in the basic and diluted earnings per share calculations:

Stock options to purchase 0, 515,075, 116,850 and 1,002,125 shares of common stock for the quarters ended September 30, 2005 and 2004 and nine months ended September 30, 2005 and 2004, respectively, were not included in the computation of diluted earnings per share because the exercise prices of the stock options were greater than the average market price of the common shares.

The computation of diluted average common shares outstanding is affected by our accelerated stock repurchase program, which was completed during the quarter, to the extent that the volume weighted average price of the shares purchased by the counterparty under the program exceeded the price per share initially paid at the program’s inception. Throughout the repurchase program, it was assumed that any additional amounts payable to the counterparty would be settled by shares of the company’s stock, and thus any such differential that existed at the end of each reporting period was included in the computation of diluted average common shares outstanding. The reverse treasury stock method is used to calculate the additional number of shares included in the diluted share total. At the completion of the repurchase program, we elected to settle the differential due to the counterparty with a $1.9 million cash payment rather than with shares of the company’s stock.

NOTE 7. EQUITY-BASED COMPENSATION - We currently have three stock incentive plans, the 1989, 1995 and 2000 plans, under which stock options or performance share grants are issued and outstanding. In addition, at the May 2, 2005 Annual Meeting of Stockholders, our shareholders approved the adoption of the Potlatch 2005 Stock Incentive Plan (the “2005 Plan”). Under the 2005 Plan, we are authorized to issue up to 1,600,000 shares, none of which are currently issued and outstanding. Currently, we apply the intrinsic value method under APB Opinion No. 25 and related Interpretations in accounting for our equity-based compensation. No compensation cost is recognized for options granted under the plans when the exercise price is equal to market value at the grant date. For performance share awards, which were first granted in December 2003, compensation expense is recorded ratably over the performance period based upon the market value of our stock and the likelihood that performance measurements will be met. Compensation expense related to performance shares was $0.5 million, $0.2 million, $1.6 million and $0.7 million, before taxes, for the quarters ended September 30, 2005 and 2004 and nine months ended September 30, 2005 and 2004, respectively.

Had equity-based compensation costs been determined based on the fair value at the grant dates, as prescribed by SFAS No. 123 (as amended by SFAS No. 148), our net earnings and earnings per share would have been the pro forma amounts indicated below:

As previously discussed in Note 2, beginning in 2006, we will recognize equity-based compensation costs in the Statements of Operations as required by SFAS No. 123R.

NOTE 8. SHORT-TERM INVESTMENTS - Short-term investments consist of such instruments as money market funds, commercial paper, and corporate and municipal bonds. Investments are selected based upon issuers with excellent credit ratings; therefore, there is minimal investment risk. These investments have maturity periods of less than one year. Short-term investments are managed to provide the necessary liquidity throughout the year for working capital needs, capital expenditures or other uses by management, as considered appropriate.

NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS - The tables below detail the components of net periodic costs (benefit):

The pension benefits presented above do not reflect a cost of $1.1 million related to the sale of our OSB operations, which is included in the 2004 “Earnings from discontinued operations” in the Statement of Operations.

Due to the funded status of our qualified pension plans at December 31, 2004, no minimum pension contributions are required for 2005. In the notes to our financial statements for the year ended December 31, 2004, we estimated contributions to our non-qualified pension plan in 2005 would total approximately $1.4 million. As of September 30, 2005, we have made contributions totaling $1.0 million. No change to the original estimate is anticipated.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act, which goes into effect on January 1, 2006, introduces a drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide an equivalent benefit. Pursuant to FASB Staff Position (FSP) No. 106-2, we determined in 2004, with the assistance of consulting actuaries, that certain benefits provided under our plans were actuarially equivalent to the Medicare Part D standard plan and were eligible for the employer subsidy. In the notes to our financial statements for the year ended December 31, 2004, we stated that we had chosen the prospective application option for adoption of the FSP as of July 1, 2004, and that the effects of the Act on the accumulated postretirement benefit obligation (APBO) were measured at July 1, 2004 and were determined to reduce the APBO by $25.9 million. After receiving further guidance from the Centers for Medicare and Medicaid Services in 2005, our consulting actuaries have determined that the effects of the Act will reduce the APBO by an additional $21.5 million. The aggregate effect in 2005 of this $21.5 million change on service cost, interest cost and amortization of (gain)/loss is approximately $1.8 million.

On September 19, 2005, we announced that our Board of Directors approved a restructuring plan to qualify the company as a real estate investment trust (REIT), effective January 1, 2006. A REIT is a company that derives most of its income from investments in real estate, including sales of standing timber. If a corporation qualifies as a REIT, it generally will not be subject to U.S. federal corporate income taxes on income and gain from investments in real estate that it distributes to its stockholders, thereby reducing its corporate-level taxes and substantially eliminating the double taxation on income and gain that usually results in the case of a distribution by a regular C corporation. Double taxation occurs where a non-REIT corporation, such as a C corporation, is first taxed upon its income and then a separate tax is imposed on the corporation’s stockholders when distributions are made. We will continue to be required to pay federal corporate income tax on earnings from our non-real estate investments, principally our manufacturing operations. As a result, deferred tax liabilities of approximately $58 million, relating to REIT qualifying activities, will no longer be required as of January 1, 2006, and the deferred tax balance will be reduced at that time. Other non-qualifying operations, which will continue to pay corporate-level tax on earnings, will be transferred into a wholly owned “taxable REIT subsidiary” (TRS). The TRS is expected to include all of our

manufacturing activities, including our wood products, pulp and paperboard, and consumer products businesses, as well as all timber harvesting, log sales, “higher and better use” land sales activities and other related activities. REIT conversion costs are expected to be approximately $8.3 million.

In connection with the REIT conversion, we also announced that we plan to increase our regular distributions to stockholders to an aggregate of approximately $76 million on an annual basis, compared with the current regular annual dividend rate of an aggregate of approximately $17.5 million, and to effect a special taxable distribution, required by the REIT tax rules, of our historic earnings and profits, which we expect will occur in the first quarter of 2006 and which we expect will involve an aggregate amount of between $440 million and $480 million, to be paid at least 80% in stock and the remainder in cash.

This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding future revenues, costs, manufacturing output, capital expenditures, the Company’s expected REIT conversion and timber supply issues. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect management’s current views regarding future events based on estimates and assumptions, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, changes in the United States and international economies; changes in exchange rates between the U.S. dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; changes in raw material, energy, and other costs; implementation or revision of governmental policies and regulations affecting import and export controls or taxes; the timing of the Company’s election to be taxed as a REIT and the ability to satisfy complex rules in order to qualify as a REIT or to remain qualified as a REIT; changes in tax laws that could reduce the benefits associated with REIT status; and the factors discussed under the section titled “Factors influencing our results of operations” on pages 13-16 of this Form 10-Q. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.

We are a vertically integrated and diversified forest products company. We own approximately 1.5 million acres of timberland and operate 14 manufacturing facilities, located in Arkansas, Idaho, Illinois, Michigan, Minnesota and Nevada. Our business is organized into four segments:

Amounts reported for “Discontinued operations” in the Statements of Operations and Comprehensive Income include the results of operations for the first nine months of 2004 for the OSB operations sold to Ainsworth Lumber Co. Ltd. in September 2004.

On September 19, 2005, we announced that our board of directors approved a plan to restructure our business and operations so that we can elect to be treated as a real estate investment trust, or REIT, for federal income tax purposes effective January 1, 2006. A REIT is a company that derives most of its income from investments in real estate, including sales of standing timber. If a corporation qualifies as a REIT, it generally will not be

subject to U.S. federal corporate income taxes on income and gain from investments in real estate that it distributes to its stockholders, thereby reducing its corporate-level taxes and substantially eliminating the double taxation on income and gain that usually results in the case of a distribution by a regular C corporation. Double taxation occurs where a non-REIT corporation, such as a C corporation, is first taxed upon its income and then a separate tax is imposed on the corporation’s stockholders when distributions are made. We will continue to be required to pay federal corporate income taxes on earnings from our non-real estate investments, principally our manufacturing operations.

For a detailed discussion of the planned REIT conversion, including the financial and tax consequences thereof, we refer you to the registration statement on Form S-4 of our affiliate, Potlatch Holdings, Inc., filed with the SEC on September 19, 2005 and amended on November 1, 2005.

Our operating results have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, competition, international trade agreements or disputes, the efficiency and level of capacity utilization of our manufacturing operations, changes in our principal expenses, such as wood fiber and energy costs, changes in harvest levels from our timberlands, changes in the production capacity of our manufacturing operations as a result of major capital spending projects, asset dispositions or acquisitions and other factors.

Our operating results generally reflect the cyclical pattern of the forest products industry. Historical prices for our manufactured products have been volatile, and we, like other manufacturers in the forest products industry, have limited direct influence over the timing and extent of price changes for our products. Product pricing is significantly affected by the relationship between supply and demand. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state of the economy in general and a variety of other factors. The demand for our timber resources and wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions and other factors. The demand for most of our pulp and paperboard products is primarily affected by the general state of the global economy, and the economies in North America and east Asia in particular. The demand for our tissue products is primarily affected by the state of the United States economy, as well as North American tissue manufacturers’ operating rates and our competitors’ excess capacities.

The markets for our products are highly competitive and companies that have substantially greater financial resources than we do compete with us in each of our lines of business. Logs and other fiber from our timberlands, as

well as our wood products, are subject to competition from timberland owners and wood products manufacturers in North America and to a lesser extent in South America, Europe, Australia and New Zealand. Our pulp-based products, other than tissue products, are globally-traded commodity products. Because our competitors in these segments are located throughout the world, variations in exchange rates between the U.S. dollar and other currencies can significantly affect our competitive position compared to our international competitors. As it is generally not profitable to sell tissue products overseas due to high transportation costs, currency exchange rates do not have a major effect on our ability to compete in our tissue business. However, the U.S.-Canadian exchange rate does affect Canadian tissue producers’ efforts to place tissue products in the United States.

Tariffs, quotas or trade agreements can also affect the markets for our products, particularly our wood products. For example, in 2002, the United States imposed duties on imported lumber from Canada in response to a dispute over the stumpage pricing policies of some provincial governments. Canada is challenging the tariffs in a number of forums, seeking to force the United States to revoke the import duty and return more than $4 billion in deposits collected on imports since duties were first imposed. Both countries are pursuing their own independent litigation and administrative remedies. Negotiations between the countries to resolve the dispute are currently stalled, and it is not clear when negotiations will resume or if they will result in a resolution of the matter. Any resulting agreement or other determination could have a significant effect on lumber prices in the United States.

Our manufacturing businesses are capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors may currently be lower-cost producers in some of the businesses in which we operate, and accordingly these competitors may be less adversely affected than we are by price decreases. For the periods presented in this Form 10-Q, no downtime was taken at any of our facilities due to an inability to cover variable costs. However, downtime was taken in the third quarter of 2005 at our particleboard facility to reduce inventories.

Energy costs, which have become one of our most volatile operating expenses over the past several years, impact almost every aspect of our operations, from natural gas used at our manufacturing facilities to in-bound and out-bound transportation surcharges. In periods of high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases, and therefore such increased costs could adversely affect our operating results. For example, energy costs for the third quarter of 2005 were particularly high, exacerbated by petroleum and natural gas supply curtailments in the wake of recent Gulf Coast hurricanes. We have taken steps through conservation and electrical production to reduce our exposure to the volatile spot market for energy and to rate increases by regulated utilities. Our energy costs in future periods will depend principally on our ability to continue to produce a substantial portion of our electricity needs internally, on changes in market prices for natural gas and on reducing usage. From time to time we have entered into derivative financial instruments as a hedge against potential increases in the cost of natural gas. We entered into several such contracts in the third quarter of 2003, covering a portion of our expected natural gas purchases from November 2003 through March 2004. We have not entered into any such contracts since the third quarter of 2003.

Another significant expense is the cost of wood fiber needed to supply our manufacturing facilities. The cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of economic or industry conditions. Selling prices of our products have not always increased in response to wood fiber price increases, nor have wood fiber prices always decreased in conjunction with declining product prices. On occasion, our results of operations have been and may in the future be adversely affected if we are unable to pass cost increases through to our customers.

Changes in timber harvest levels also may have a significant impact on our results of operations, due in part to the low cost basis of our timber from timberlands we acquired many years ago. Over the long term, we manage our timberlands on a sustainable yield basis to achieve a balance between timber growth and timber harvests. From time to time, however, we may choose, consistent with our environmental commitments, to harvest timber at levels above or below our estimate of sustainability for various reasons. For example, in recent years we have been harvesting timber in Idaho at a level below the estimated long-term sustainable harvest level. Due to a current imbalance in timber ages on our Idaho timberlands, beginning in 2005 and for a period of approximately 5-10 years, we expect to significantly increase the timber harvest level on our Idaho timberlands in order to improve the long-term productivity and sustainability of these timberlands. We also anticipate that as a result of this period of increased timber harvest activity the annual harvest levels on our existing Idaho timberlands will subsequently decrease to a level below the sustainable harvest level for a period of time, before increasing again to achieve the optimal long-term sustainable harvest level. On a short-term basis, our timber harvest levels may be impacted by factors such as demand for timber, weather conditions and harvesting capacity. Longer term, our timber harvest levels may also be affected by purchases of additional timberlands, sales of existing timberlands and changes in estimates of long-term sustainable yield because of genetic improvements and other silvicultural advances, as well as by natural disasters, regulatory constraints and other factors beyond our control.

Beginning in the fourth quarter of 2005, our 17,000 acre hybrid poplar plantation transitioned from a development stage to an operating stage. As a result, we expect to increase our harvest and sale of wood fiber over the next three to five years to a sustainable annual harvest level of approximately 375,000 tons and thereby significantly increase our cash flow from the plantation operations. The increased harvests will also increase the amount of depletion and depreciation expense that we expect to incur as we amortize our approximate $100 million investment in the plantation over an eleven-year harvest cycle. This plantation was originally established to provide an alternative source of wood chips for pulp making. In 2001, due to declining wood chip prices, we altered our strategy for the plantation toward the production of high-quality logs for conversion into higher value, non-structural lumber products, such as furniture and moldings. It is our belief that hybrid poplar lumber will serve as a cost-competitive alternative to other regional hardwood species, mainly red alder, which are in tight supply. However, because there are no other producers of hybrid poplar sawlogs in the United States, it is uncertain whether we will be successful in developing an adequate market for hybrid poplar lumber. The amount of cash flows that we will generate from our hybrid poplar plantation will depend primarily on our ability to develop new markets for products manufactured from hybrid poplar sawlogs and on the prices we are able to obtain for hybrid poplar sawlogs converted into these products.

The disparity between the cost of wood fiber harvested and the cost of wood fiber purchased on the open market is due to the fact that the capitalized costs to establish fee timber were expended many years ago. The initial stand establishment costs remain as a capitalized asset until the timber reaches maturity, which typically ranges from 30 to 60 years. Ongoing forest management costs include recurring items necessary to the ownership and administration of timber producing property and are expensed as incurred. The cost of purchased wood fiber is significantly higher due to the fact that the wood fiber being purchased from third parties is mature and is purchased at the current market price.

Finally, changes in our manufacturing capacity, primarily as a result of capital spending programs or asset purchases and dispositions, have significantly affected our results of operations in recent periods. In early 2004, we began operating a new tissue machine in Las Vegas, Nevada, which produces approximately 30,000 tons a year. In June 2004, we began operating a tissue converting facility in Elwood, Illinois. In September 2004, we sold our three OSB operations in Bemidji, Cook and Grand Rapids, Minnesota. In May 2005, we purchased a lumber mill in Gwinn, Michigan. Each of these changes has affected or will affect our levels of net sales and expenses, as well as the comparability of our operating results from period to period. Additionally, the profitability of our manufacturing segments depends largely on our ability to operate our manufacturing facilities efficiently and at or near full capacity. Our operating results would be adversely affected if market demand does not justify operating at these levels or if our operations are inefficient or suffer significant interruption for any reason.

Our principal accounting policies are discussed on pages 44-48 of our Annual Report on Form 10-K for the year ended December 31, 2004. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported financial position and operating results of the company. Management believes the accounting policies discussed below represent the most complex, difficult and subjective judgments it makes in this regard.

Long-lived assets. Due to the capital-intensive nature of our industry, a significant portion of our total assets are invested in our manufacturing facilities. Also, the cyclical patterns of our businesses cause cash flows to fluctuate by varying degrees from period to period. As a result, long-lived assets are a material component of our financial position with the potential for material change in valuation if assets are determined to be impaired. We account for impairment of long-lived assets in accordance with SFAS No. 144. The Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as measured by its undiscounted estimated future cash flows. We use our operational budgets to estimate future cash flows. Budgets are inherently uncertain estimates of future performance due to the fact that all inputs (revenues, costs, capital spending) are subject to frequent change for many different reasons, as previously described in “Factors Affecting Our Results of Operations.” Because of the number of variables involved, the interrelationship between the variables, and the long-term nature of the impairment measurement, sensitivity analysis of individual variables is not practical. Budget estimates are adjusted periodically to reflect changing business conditions and operations are reviewed, as appropriate, for impairment using the most

current data available. To date, this process has not resulted in an impairment charge for any of our assets.

Timber and timberlands. Timber and timberlands are recorded at cost, net of fee timber harvested. Expenditures for reforestation, including all costs related to stand establishment, such as site preparation, costs of seeds or seedlings and tree planting, are capitalized. Expenditures for forest management, consisting of regularly recurring items necessary to the ownership and administration of our timber and timberlands, are accounted for as current operating expense. Our cost of timber harvested is determined based on costs capitalized and the related current estimated recoverable timber volume. Recoverable volume does not include anticipated future growth, nor are anticipated future costs considered.

There are currently no authoritative accounting rules relating to costs to be capitalized for timber and timberlands. We have used relevant portions of current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations and judgments could significantly affect the amounts capitalized. Additionally, models and observations used to estimate the current recoverable timber volume on our lands are subject to judgments that could significantly affect volume estimates. As examples: harvest cycles can vary by geographic region and by species of timber; weather patterns can affect harvest cycles; environmental regulations and restrictions may limit the company’s ability to harvest certain timberlands; changes in harvest plans may occur; and scientific advancement in seedlings and timber growing technology may affect future harvests. Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon amounts reported in our statements of operations and financial condition. Because of the number of variables involved and the interrelationship between the variables, sensitivity analysis of individual variables is not practical.

Restructuring charges and discontinued operations. In 2002, we completed the sale of a majority of the assets of our Printing Papers segment and closed a printing papers facility in Brainerd, Minnesota, which was subsequently sold in 2003. In January 2004, we recorded a charge for a workforce reduction in our Consumer Products segment. In September 2004, we sold our three OSB operations in Minnesota. These events required us to record estimates of liabilities for employee benefits, environmental clean-up and other costs at the time of the events. In making these judgments, we considered contractual obligations, legal liabilities, and possible incremental costs incurred as a result of restructuring plans to determine the liability. Our estimated liabilities could differ materially from actual costs incurred, with resulting adjustments to future period earnings for any differences, although no material adjustments to our original estimates have occurred for the events described above.

Environmental liabilities. We record accruals for estimated environmental liabilities in accordance with SFAS No. 5, “Accounting for Commitments and Contingencies.” These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities. In making these estimates, we consider, among other things, the activities we have conducted at any particular site, information obtained through consultation with applicable regulatory authorities and third-parties, and our historical experience at other sites that are judged to be comparable. We must also consider the likelihood of changes in governmental regulations, advancements in environmental technologies, and changing legal standards regarding liability. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and changes in governmental regulations and

environmental technologies, our accruals are subject to substantial uncertainties and our actual costs could be materially more or less than the estimated amounts.

Pension and postretirement benefits. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. Two critical assumptions are the discount rate applied to pension plan obligations and the rate of return on plan assets. For other postretirement employee benefit (OPEB) plans, which provide certain health care and life insurance benefits to qualified retired employees, critical assumptions in determining OPEB expense are the discount rate applied to benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations.

Note 11 to our 2004 Form 10-K consolidated financial statements included information for the three years ended December 31, 2004, on the components of pension and OPEB expense and the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2004 and 2003. Note 10, “Pension and Other Postretirement Benefit Plans,” on pages 8-9 of this Form 10-Q, includes information on the components of pension and OPEB expense for the quarters and nine months ended September 30, 2005 and 2004.

The discount rate used in the determination of pension benefit obligations and pension expense is based on high-quality fixed income investment interest rates. At December 31, 2004, we calculated obligations using a 5.90% discount rate. The discount rates used at December 31, 2003 and 2002 were 6.25% and 6.75%, respectively. To determine the expected long-term rate of return on pension assets, we employ a process that analyzes historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return. The assumed long-term rate of return on pension plan assets used for the three-year period ended December 31, 2004, was 9.5%. Over the past 27 years, the period during which we have actively managed pension assets, our actual average annual return on pension plan assets has been approximately 12%.

Total periodic pension plan income in 2004 was $11.5 million. An increase in the discount rate or the expected return on plan assets, all other assumptions remaining the same, would reduce pension plan expense, and conversely, a decrease in either of these measures would increase plan expense. As an indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $1.3 million. A 25 basis point change in the assumption for expected return on plan assets would affect annual plan expense by approximately $1.6 million. The actual rates on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.

No minimum pension contributions are required for 2005 due to the funded status of our pension plans at December 31, 2004. We estimate contributions to our non-qualified pension plan will total approximately $1.4 million in 2005.

For our OPEB plans, expense for 2004 was $25.2 million. The discount rate used to calculate OPEB obligations was 5.90% at December 31, 2004, and 6.25% and 6.75% at December 31, 2003 and 2002, respectively. The assumed health care cost trend rate used to calculate OPEB obligations and expense for 2004 was a 7% increase over the previous year, with the rate of increase

adjusted to 12% in 2005 and declining 1 percent annually to a long-term ultimate rate increase assumption of 6% for 2011 and thereafter.

As an indication of the sensitivity that OPEB expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $0.8 million. A 1% change in the assumption for health care cost trend rates would have affected 2004 plan expense by approximately $2.2-$2.7 million and the total postretirement obligation by approximately $30.3-$35.6 million. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.

Periodic pension and OPEB expense are included in “Materials, labor and other operating expenses” and “Selling, general and administrative expenses” in the Statements of Operations. The expense is allocated to all business segments. Depending upon the funded status of the different plans, either a long-term asset or long-term liability is recorded for plans with overfunding or underfunding, respectively. Any unfunded accumulated pension benefit obligation in excess of recorded liabilities is accounted for in stockholders’ equity as accumulated other comprehensive income. See Note 11 to our 2004 Form 10-K financial statements for related balance sheet effects at December 31, 2004 and 2003.

In December 2004 the FASB issued a revision of SFAS No. 123, “Share-Based Payment.” The revised Statement requires the recognition of compensation cost in the Statement of Operations for equity instruments awarded to employees, based on the grant date fair value of the award. The revised Statement was to become effective for interim or annual periods beginning after June 15, 2005. However, in April 2005, the effective date was amended by the Securities and Exchange Commission to allow companies to implement the revised Statement in the next fiscal year beginning after June 15, 2005. We will therefore use the modified prospective method to implement the revised Statement on January 1, 2006, and believe the effect of adoption on our results of operations will be comparable to the pro forma disclosures contained in Note 7, “Equity-Based Compensation,” on pages 7-8.

In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations,” which states that a company must recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. FIN 47 clarifies that conditional obligations meet the definition of an asset retirement obligation in SFAS No. 143, “Accounting for Asset Retirement Obligations,” and therefore should be recognized if their fair value is reasonably estimable. Companies must adopt FIN 47 no later than the end of the fiscal year ending after December 15, 2005. We are currently reviewing FIN 47 to determine what effect, if any, it may have on our financial condition or results of operations.

requirements of SFAS No. 154 become effective for accounting changes made in fiscal years beginning after December 15, 2005.

As noted above, our business is organized into four reporting segments: Resource; Wood Products; Pulp and Paperboard; and Consumer Products. Sales or transfers between segments are recorded as intersegment sales based on prevailing market prices. Because of the role of the Resource segment in supplying our manufacturing segments with wood fiber, intersegment sales represent a significant portion of the Resource segment’s total net sales. Intersegment sales represent a substantially smaller percentage of net sales for our other segments.

A summary of period-to-period changes in items included in the Statements of Operations is presented on page 30 of this Form 10-Q. In the period-to-period discussion of our results of operations below, when we discuss our consolidated net sales, contributions by each of the segments to our net sales are reported after elimination of intersegment sales. In the “Discussion of Business Segments” sections below, each segment’s net sales are set forth before elimination of intersegment sales.

As a result of our decision in August 2004 to sell our OSB operations and associated assets, those operations have been classified as “Discontinued operations” in the Statements of Operations for the quarter and nine months ended September 30, 2004. The discussion below addresses our continuing businesses.

Quarter Ended September 30, 2005, Compared to Quarter Ended September 30, 2004

Net Sales - Net sales increased 9%, to $404.7 million for the quarter ended September 30, 2005, from $370.1 million for the same period in 2004. Resource segment net sales were $4.0 million higher primarily due to increased harvests of fee timber in Idaho and Arkansas and higher selling prices for logs, partially offset by lower land sales revenue. Wood Products net sales increased $5.2 million as a result of increased shipments for lumber, partially offset by lower selling prices for lumber, plywood and particleboard. Pulp and Paperboard segment net sales were $12.2 million higher due to higher selling prices for paperboard and increased pulp shipments to external customers, which were partially offset by lower pulp selling prices. Consumer Products segment net sales increased $13.2 million due to higher selling prices and increased shipments of consumer tissue products.

Depreciation, amortization and cost of fee timber harvested - For the quarter ended September 30, 2005, depreciation, amortization and cost of fee timber harvested totaled $23.4 million, an increase of $0.9 million from the prior year amount of $22.5 million. The increase was primarily due to depreciation from the Gwinn, Michigan lumber mill, which was acquired in May 2005, and higher depletion expense in Idaho, Arkansas and Oregon, partially offset by lower Minnesota depletion expense.

Materials, labor and other operating expenses - Materials, labor and other operating expenses increased 22% to $337.6 million for the quarter ended September 30, 2005, from $275.6 million for the third quarter of 2004. The higher costs were due primarily to increased lumber, pulp, paperboard and consumer tissue shipments, higher wood fiber costs for the Wood Products segment, increased chemical and energy costs for the Pulp and Paperboard segment, and higher packaging and energy costs for the Consumer Products segment.

Selling, general and administrative expenses - Selling, general and administrative expenses were $19.2 million for the third quarter of 2005, compared to $20.7 million incurred for the same period of 2004, with the decrease due principally to a decrease in corporate administration expense.

Interest expense, net of capitalized interest - Interest expense totaled $7.2 million for the quarter ended September 30, 2005, compared to $12.5 million in the prior year period. The decrease was the result of the repayment of approximately $282 million in debt during the fourth quarter of 2004, using a portion of the proceeds from the sale of our OSB operations.

Interest income - For the quarter ended September 30, 2005, interest income was $0.5 million, compared to $1.1 million for the same period of 2004. The decrease was primarily due to a higher average short-term investments balance during the third quarter of 2004.

Provision for taxes - During the third quarter of 2005, the estimated effective tax rate of 38.5% that had been used in the first half of 2005 was revised to 38%. The revised rate resulted in a tax provision for 2005’s third quarter of $6.6 million. We recorded an income tax provision of $15.8 million for the third quarter of 2004, reflecting an estimated tax rate of 39.5% on earnings from continuing operations of $40.0 million. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect

of the Qualified Domestic Production Activity Credit and the estimated effect of changes to state tax apportionments.

Earnings from continuing operations - We recorded earnings from continuing operations of $11.1 million for the quarter ended September 30, 2005, compared to earnings of $24.2 million for the same period in 2004. Lower results for the Resource, Wood Products and Pulp and Paperboard segments were responsible for the unfavorable comparison, partially offset by lower interest expense.

Discontinued operations - For the quarter ended September 30, 2004, “discontinued operations” consisted of the results of our OSB operations. For the third quarter of 2004, the OSB operations recorded pre-tax income of $37.3 million on net sales of $92.7 million. A gain on the sale of the OSB operations, totaling $269.5 million before taxes, was recorded in September 2004.

Discussion of business segments - The Resource segment reported operating income of $26.1 million for the third quarter of 2005, a decrease of $4.1 million from the $30.2 million earned in the same period of 2004. Segment net sales were $97.1 million for the third quarter of 2005 compared to $93.0 million for the 2004 period. The lower operating income was due to decreased income from land sales, while the higher net sales were primarily due to increased harvests of fee timber in Idaho and Arkansas and higher sales prices for logs. Revenue from sales of nonstrategic land for the segment was $6.9 million in the third quarter of 2005, compared to $12.0 million in the third quarter of 2004. The portion of land sale revenue generated by the sale of conservation easements amounted to $4.1 million in the third quarter of 2004. There was no conservation easement revenue in the third quarter of 2005. No long-term pattern or trends should be associated with the land sales portion of the segment’s operating activities, as land sale amounts can and usually do vary between reporting periods. The period-to-period variances are due to the unique characteristics of each transaction, such as location, size, accessibility, parcel attributes and the value to certain buyers. Resource segment expenses were $71.0 million in the third quarter of 2005 compared to $62.8 million in the third quarter of 2004, reflecting the increased harvests of fee timber. Land sales generally do not have a material effect on segment expenses due to the low cost basis on most of our timberland.

The Wood Products segment reported operating income of $6.0 million for the third quarter of 2005, compared to $26.4 million recorded in the third quarter of 2004. Higher wood fiber costs and lower selling prices were primarily responsible for the decline. Net sales for the segment were $130.2 million for the third quarter of 2005, $5.3 million higher than the $124.9 million recorded for the same period of 2004. Lumber net sales were $103.8 million, up from $97.4 million in 2004. The favorable comparison was due to increased shipments, which were largely the result of shipments from the Gwinn, Michigan, lumber mill, which we acquired in May 2005. Lower selling prices for lumber partially offset the increased shipments. Plywood net sales decreased to $12.9 million for the third quarter of 2005, compared to $15.4 million in 2004. Sales prices were 10% lower, and shipments decreased 6% compared to the same period a year ago. Particleboard net sales were $4.0 million for the third quarter of 2005, compared to $5.2 million for the third quarter of 2004. The decrease was the result of an 18% decrease in selling prices, combined with decreased shipments compared to the third quarter of 2004. Our particleboard mill took downtime during the third quarter of 2005 to reduce inventories. “Other” sales for the segment, which consist primarily of by-products such as chips, were $9.5 million for the third quarter of 2005, 39% higher than the $6.8 million recorded for the third

quarter of 2004, due largely to chip sales at our Gwinn lumber mill. Segment expenses were higher for the third quarter of 2005, totaling $124.2 million versus $98.5 million in 2004. Increased lumber shipments and higher wood fiber costs for the segment were primarily responsible for the higher expenses.

The Pulp and Paperboard segment reported operating income for 2005’s third quarter of $0.6 million, compared to income of $12.2 million for the same period of 2004. Segment net sales were $151.5 million for the third quarter of 2005, up from $142.2 million for the 2004 period. Paperboard net sales increased to $133.2 million, compared to $125.3 million in the third quarter of 2004. The favorable comparison was primarily due to a 6% increase in selling prices and slightly increased shipments. Pulp sales (including intersegment sales) were $18.1 million for the third quarter of 2005, compared to $16.9 million for the same period in 2004. The increase in pulp sales for 2005 was due to increased shipments to external customers, partially offset by lower selling prices. Segment expenses were higher for the third quarter of 2005, totaling $150.9 million, compared to $130.0 million in the third quarter of 2004. The increase was due primarily to increased pulp shipments to external customers and higher chemical and energy costs. Operating income for the third quarter of 2004 included $3.0 million received from the bankruptcy liquidation of Beloit Corporation.

The Consumer Products segment reported operating income of $2.6 million for the third quarter of 2005, compared to an operating loss of $5.0 million recorded in the third quarter of 2004. Segment net sales improved 16% to $95.5 million versus $82.4 million recorded for the 2004 period. Selling prices and shipments increased 11% and 4%, respectively, compared to the prior year period. Selling prices were positively affected by our new ultra through-air-dried towel product and increased prices for our other consumer tissue products. Segment expenses were higher for the third quarter of 2005, totaling $93.0 million, versus $87.3 million in 2004. The increased expenses in 2005 were largely attributable to increased shipments and higher packaging and energy costs.

Nine Months Ended September 30, 2005, Compared to Nine Months Ended September 30, 2004

Net Sales - Net sales increased 8% to $1,108.5 million for the nine months ended September 30, 2005, from $1,029.9 million for the same period in 2004. Resource net sales increased to $83.4 million, compared to $81.0 million for the first nine months of 2004. Increased harvests of fee timber in Idaho and Arkansas and higher selling prices for logs were primarily responsible for the increase. Wood Products net sales increased to $358.0 million from $343.4 million for the first nine months of 2004, due largely to increased lumber shipments. Pulp and Paperboard segment net sales were $385.9 million, $19.9 million more than the $366.0 million reported for the first nine months of 2004 due primarily to higher paperboard selling prices. Consumer Products segment net sales increased to $281.1 million from $239.4 million due to higher selling prices and increased shipments.

Depreciation, amortization and cost of fee timber harvested - For the nine months ended September 30, 2005, depreciation, amortization and cost of fee timber harvested totaled $64.2 million, a $2.6 million decrease compared to $66.8 million recorded in the first nine months of 2004. The decrease was due to lower depletion expense in Minnesota and lower amortization expense, partially offset by depreciation from the Gwinn, Michigan lumber mill acquired in May 2005, and higher depletion expense in Idaho, Arkansas and Oregon.

Materials, labor and other operating expenses - Materials, labor and other operating expenses increased to $924.9 million for the nine months ended September 30, 2005, from $821.7 million for the nine months ended September 30, 2004. The higher costs were due primarily to increased shipments of lumber and consumer tissue products, higher wood fiber costs for the Wood Products and Pulp and Paperboard segments, increased chemical and energy costs for the Pulp and Paperboard and Consumer Products segments, and increased packaging and outside converting costs for the Consumer Products segment.

Selling, general and administrative expenses - Selling, general and administrative expenses were $62.4 million for the first nine months of 2005, a slight decrease from the $63.7 million incurred for the same period of 2004.

Restructuring charge - A pre-tax charge of $1.3 million was recorded in January 2004 for a workforce reduction at our Consumer Products segment. A total of 60 production and 8 salaried employees were terminated in 2004 due to the workforce reduction. By June 2004, all costs had been incurred for the workforce reduction, resulting in a reversal of less than $0.1 million to the initial charge.

Interest expense, net of capitalized interest - Interest expense totaled $21.7 million for the nine months ended September 30, 2005, compared to $36.8 million in the comparable prior year period. The decrease was the result of the repayment of approximately $282 million in debt during the fourth quarter of 2004, using a portion of the proceeds from the sale of our OSB operations.

Interest income - For the nine months ended September 30, 2005, interest income was $1.8 million, compared to $1.7 million for the same period in 2004.

Provision for taxes - For the nine months ended September 30, 2005, we recorded an income tax provision of $14.1 million on earnings from continuing operations of $37.2 million, based on an estimated effective tax rate of 38.0%. During the first nine months of 2004, an estimated tax rate of 39.5% was used to derive an income tax provision of $16.3 million, calculated on our earnings from continuing operations, before taxes, of $41.4 million. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect of the Qualified Domestic Production Activity Credit and the estimated effect of changes to state tax apportionments.

Earnings from continuing operations - We recorded earnings from continuing operations of $23.0 million for the nine months ended September 30, 2005, compared to earnings from continuing operations of $25.0 million for the same period in 2004. The unfavorable comparison was due to lower results for the Wood Products and Pulp and Paperboard segments.

Discontinued operations - Discontinued operations for the nine months ended September 30, 2004, consisted of the results of our OSB operations. For the first nine months of 2004, the OSB operations recorded pre-tax income of $153.9 million on net sales of $326.0 million. A gain on the sale of the OSB operations, totaling $269.5 million before taxes, was recorded in September 2004.

Other comprehensive loss, net of tax - For the nine months ended September 30, 2004, we recorded a net derivative loss due to cash flow hedges on natural gas of less than $0.1 million, after-tax. There were no derivative transactions in the first nine months of 2005.

Discussion of business segments - The Resource segment reported operating income of $50.9 million for the first nine months of 2005, compared to $49.0 million recorded in the same period of 2004. Segment net sales were $217.1 million for the first nine months of 2005, $17.5 million higher than the $199.6 million recorded for the same period of 2004. The higher earnings and net sales for 2005 were due largely to increased fee harvests in Idaho and Arkansas, combined with higher sales prices for logs. Revenue from sales of nonstrategic land for the segment was $9.5 million in the first nine months of 2005, compared to $17.1 million in the first nine months of 2004. Conservation easement revenue of $4.1 million was included in the total land sales revenues for the first nine months of 2004. There was no conservation easement revenue in the first nine months of 2005. No long-term pattern or trends should be associated with the land sales portion of the segment’s operating activities. Resource segment expenses were $166.2 million in the first nine months of 2005, compared to $150.6 million in the first nine months of 2004. The higher expenses were primarily attributable to the increased harvests of fee timber. Land sales generally do not have a material effect on segment expenses due to the low cost basis on most of our timberland.

The Wood Products segment reported operating income of $28.8 million for the first nine months of 2005, compared to income of $62.0 million recorded in the first nine months of 2004. Net sales for the segment rose to $368.0 million for the first nine months of 2005, $15.7 million higher than the $352.3 million recorded for the same period of 2004. Lumber net sales were $289.6 million, up from $269.3 million in 2004. The favorable comparison was the result of increased shipments, largely due to shipments from the Gwinn, Michigan, lumber mill, which was acquired in May 2005. Plywood net sales decreased to $40.2 million for the first nine months of 2005, compared to $47.0 million for the first nine months of 2004. Shipment volume decreased 7% and sales prices were 9% lower than in the same period a year ago. Particleboard net sales were $13.3 million for the first nine months of 2005, 13% lower than the $15.3 million recorded for the first nine months of 2004 due to decreased shipments and selling prices. Our particleboard mill took downtime during the third quarter of 2005 to reduce inventories. Segment expenses were $339.1 million for the first nine months of 2005, versus $290.4 million for the first nine months of 2004. Higher wood fiber costs and increased lumber shipments largely accounted for the increase over 2004.

The Pulp and Paperboard segment reported operating income for the first nine months of 2005 of $3.7 million, compared to $10.3 million for the first nine months of 2004. Segment net sales were $418.7 million for the first nine months of 2005, up from $401.1 million for the 2004 period. Paperboard net sales increased to $372.7 million, compared to $353.6 million in the first nine months of 2004. Selling prices were 8% higher than the same period a year ago, although shipments decreased 3% compared to the prior year’s first nine months. Pulp sales (including intersegment sales) were lower for the first nine months of 2005, totaling $45.3 million, compared to $47.4 million for the same period in 2004. The decrease in pulp sales for the 2005 period was due to an 8% decrease in selling prices, partially offset by increased shipments. Segment expenses were $415.0 million for the first nine months of 2005, compared to $390.8 million in the first nine months of 2004. The increase primarily reflected higher chemical, wood fiber and energy costs. Operating income for the first nine months of 2004 included $3.0 million received from the bankruptcy liquidation of Beloit Corporation.

The Consumer Products segment reported operating earnings of $4.1 million for the first nine months of 2005, compared to a loss of $10.0 million for the first nine months of 2004. Segment net sales were $281.2 million for the

first nine months of 2005, 17% higher than the $239.5 million recorded for the 2004 period. The increase in net sales was due to an 11% increase in selling prices and a 6% increase in product shipments compared to the prior year period. Shipments were positively affected by sales of our new ultra through-air-dried towel product and increased demand for facial and bathroom tissues. Segment expenses were higher for the first nine months of 2005, totaling $277.1 million, versus $249.5 million in the first nine months of 2004. Increased product shipments and higher packaging, transportation and outside converting costs contributed to the increase. Segment expenses for the first nine months of 2004 included a pre-tax charge of $1.2 million for a workforce reduction.

At September 30, 2005, our financial position included long-term debt of $335.4 million, including current installments on long-term debt of $2.4 million. Long-term debt at September 30, 2005 (including current installments) declined slightly from the balance at December 31, 2004 of $336.5 million due to normal repayments on maturing debt of $1.1 million. Stockholders’ equity for the first nine months of 2005 increased $20.6 million, largely due to net earnings of $23.0 million and the utilization of treasury stock upon exercise of employee stock options for an aggregate consideration of $10.9 million, which were partially offset by dividend payments of $13.1 million. The ratio of long-term debt (including current installments) to stockholders’ equity was .48 to 1 at September 30, 2005, compared to .50 to 1 at December 31, 2004.

Scheduled payments due on long-term debt during each of the five years subsequent to December 31, 2005, are as follows:

Working capital totaled $237.2 million at September 30, 2005, a decrease of $17.8 million from December 31, 2004. The significant changes in the components of working capital are as follows:

Net cash provided by continuing operations for the first nine months of 2005 totaled $44.1 million, compared with $131.2 million for the same period in 2004. Cash used for working capital changes in 2005, versus cash provided by working capital changes in 2004, was largely responsible for the unfavorable comparison. Net earnings from continuing operations of $23.0 million in 2005, versus net earnings from continuing operations of $25.0 million in 2004, and lower depletion and amortization expense also contributed to the unfavorable comparison. The lower earnings were generally due to lower results for the Wood Products and Pulp and Paperboard segments.

For the nine months ended September 30, 2005, net cash used for investing was $36.7 million, compared to $741.8 million for the first nine months of 2004. In 2005, a decrease in our short-term investments provided $60.9 million in cash, as discussed above, which was more than offset by capital spending of $91.2 million. Capital spending in 2005 included $22.5 million for the purchase of the Gwinn, Michigan, lumber mill, $5.8 million in additional equipment and installation costs associated with our tissue converting facility in Elwood, Illinois, and $5.4 million toward the replacement of dry kilns at our lumber operation in Lewiston, Idaho. The balance of capital spending in the first nine months of 2005 focused on forest resources and various projects designed to improve product quality and manufacturing efficiency. Cash was used in the first nine months of 2004 primarily for increasing short-term investments and for capital spending projects.

Net cash used for financing totaled $4.1 million for the nine months ended September 30, 2005, compared with cash provided by financing of $26.2 million during the same period in 2004. The majority of cash used for financing in 2005’s first nine months resulted from dividend payments of $13.1 million, which were partially offset by the issuance of treasury stock totaling $10.9 million related to the exercise of stock options. The majority of the cash provided in 2004 was from the issuance of treasury stock related to the exercise of employee stock options and an increase in book overdrafts, partially offset by the payment of dividends.

Cash generated from discontinued operations in the first nine months of 2004 totaled $586.5 million, which was largely related to operating results for our former OSB operations and the sale of the OSB operations in September 2004. There were no discontinued operations in the first nine months of 2005.

In connection with our planned REIT conversion, we expect to increase our regular annual distribution rate from an aggregate amount of approximately $17.5 million in 2005 to approximately $76 million in 2006. Based on historical operating results and taking into account planned increases in harvest activities on our Idaho timberlands and on our Boardman, Oregon hybrid poplar farm, we expect to fund these annual distributions entirely or predominantly using the cash flows from our REIT-qualifying timberland operations, although we anticipate that it may be necessary to utilize some short-term borrowing to fully fund distributions in the first half of each year as a result of the lower harvest activity during winter and early spring. Significant decreases in timber prices or other factors that materially adversely affect the cash flows from our timberlands could result in our inability to maintain the proposed initial REIT distribution rate. In addition, the rules with which we must comply to maintain our status as a REIT will limit our ability to use dividends from our manufacturing

businesses for the payment of stockholder distributions. In particular, at least 75% of our gross income for each taxable year as a REIT must be derived from sales of our standing timber and other types of real estate income. No more than 25% of our gross income may consist of dividends from our manufacturing operations and other non-qualifying types of income. Our board of directors, in its sole discretion, will determine the actual amount of distributions to be made to stockholders based on consideration of all relevant factors, including our results of operations and cash flows.

Our current unsecured bank credit facility, which expires June 28, 2007, is comprised of a revolving line of credit of up to $125 million, including a $35 million subfacility for letters of credit and a $10 million subfacility for swing line loans. Usage under either or both subfacilities reduces availability under the revolving line of credit. As of September 30, 2005, there were no borrowings outstanding under the revolving line of credit; however, approximately $9.8 million of the letter of credit subfacility was being used to support several outstanding letters of credit. Outstanding loans under the credit facility bear interest at LIBOR plus between 0.875% and 1.625% for LIBOR loans and a base rate, effectively equal to the bank’s prime rate, plus up to 0.625%, for other loans. We are eligible to borrow under the credit facility at LIBOR plus 0.875%.

The agreement governing our credit facility contains certain covenants that, among other things, limit to a certain degree our ability and our subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The credit facility also contains financial maintenance covenants establishing a maximum funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the credit facility include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or asserted invalidity of security interests or loan documentation, and certain change of control events involving our company. As of September 30, 2005, we were in compliance with the covenants of our credit facility.

In connection with the REIT conversion, we expect to enter into an amended and restated credit facility, which we expect will provide a revolving line of credit of up to $175 million. Amendment of the existing credit facility will require approval by the participating banks.

We believe that our cash, cash flows from continuing operations and available borrowings under our current unsecured bank credit facility will be sufficient to fund our operations, capital expenditures and debt service obligations for the next twelve months. The use of a portion of the proceeds from the OSB sale to reduce debt has improved cash flow by reducing interest expense. We cannot assure, however, that our business will generate sufficient cash flow from operations or that we will be in compliance with the financial covenants in our credit facility so that future borrowings thereunder will be available to us. Thus, our ability to fund our operations will be dependent upon our future financial performance, which will be affected by general economic, competitive and other factors, including those discussed above under “Factors Influencing Our Results of Operations,” many of which are beyond our control.

On October 27, 2005, Standard & Poor’s Ratings Services (S&P) downgraded our senior unsecured debt from BB+ to BB. Since the first quarter of 2003, Fitch, Inc. has rated our senior unsecured debt at BB+. Moody’s Investors Service Inc. has rated our senior unsecured debt at Ba1 and our senior secured subordinated debt at Ba2 since October 2004. Both Fitch and Moody’s affirmed their ratings, with stable outlooks, in October 2005. The interest rate we pay on some of our debt is influenced by our credit ratings. See Item 3 – Quantitative and Qualitative Disclosures About Market Risk on pages 31-32 for additional information.

It is our practice to periodically review strategic and operational alternatives to improve our operating results and financial position. In this regard, we consider and plan to continue to consider, among other things, adjustments to our capital expenditures and overall spending, the expanding or restructuring of our operations to achieve greater efficiencies, and the disposition of assets that may have greater value to others, as in the sale of our OSB operations in 2004. There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position.

Our exposure to market risks on financial instruments includes interest rate risk on our short-term investments, unsecured bank credit facility and long-term debt, credit rate risk on our credit sensitive debentures and equity price risk related to our accelerated stock repurchase program.

Our short-term investments are invested in money market funds and bonds with very short maturity periods and therefore earn an interest rate commensurate with low-risk instruments. We do not attempt to hedge our exposure to interest rate risk for our short-term investments.

As of September 30, 2005, we had no borrowings outstanding under our unsecured bank credit facility. The interest rates applied to borrowings under the credit facility are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. We do not attempt to mitigate the effects of short-term interest rate fluctuations on our credit facility borrowings through the use of derivative financial instruments.

All of our long-term debt is fixed-rate and therefore changes in market interest rates do not expose us to interest rate risk for these financial instruments. In 2004 and prior years, we hedged a portion of our long-term debt using interest rate swaps. These swaps were designated as fair value hedges. We currently have no such hedges, and we do not anticipate entering into any in the foreseeable future.

We currently have $100 million of credit sensitive debentures outstanding that pay interest to the debt holder based upon our credit ratings as established by S&P or Moody’s. The following table denotes the interest rate applicable based on various credit ratings:

On October 27, 2005, S&P announced that it had lowered our senior unsecured debt rating to BB from BB+. The rating downgrade caused the interest rate on our credit sensitive debentures to increase from 12.5% to 13.0%, effective October 27, 2005. Since October 2004, Moody’s has rated our senior unsecured debt at Ba1. Moody’s affirmed this rating, with a stable outlook, in October 2005.

During the third quarter of 2003, we entered into several derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. As designated cash flow hedges, changes in the fair value of the financial instruments were recognized in “Other comprehensive loss, net of tax” to the extent the hedges were deemed effective, until the hedged item was recognized in the statement of operations. As of March 31, 2004, the derivative financial instruments entered into in the third quarter of 2003 had expired, and we have not

entered into any additional instruments to hedge our expected future natural gas purchases.

In October 2004, our board of directors authorized the repurchase of approximately $75 million of our outstanding common stock, to be implemented through an accelerated stock repurchase program with a financial counterparty. In November 2004, we repurchased 1,560,397 shares for $75.4 million, or approximately $48.29 per share, subject to adjustment as described below. In connection with the repurchase, the counterparty purchased shares for its own account in the open market over a nine-month period, which ended in August 2005. At the end of that period, we paid a price adjustment based on the difference between the volume weighted average price of shares traded during the period and the initial price paid for the shares in November 2004. Approximately 808,900 of the shares purchased through the accelerated stock repurchase program were subject to a collar, which set a minimum and maximum price for shares repurchased, for the purpose of limiting the price adjustment. The price adjustment for the remainder of the shares was not subject to any limitation. We had the option of paying the price adjustment in cash or by the issuance of common stock. During the third quarter of 2005, we paid $1.9 million in cash to the counterparty to settle our obligation under the stock repurchase program.

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934 (the Exchange Act), which are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end

of the fiscal quarter covered by the quarterly report on this Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that, as of such date, our disclosure controls and procedures are effective to meet the objective for which they were designed and operate at the reasonable assurance level.

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In September, 2004, we sold three oriented strand board mills located in Minnesota to Ainsworth Lumber Co. Ltd. for approximately $452 million. On September 28, 2005, Ainsworth Lumber Co. Ltd. notified us by letter of its claims under the indemnification provisions in the Asset Purchase Agreement between us and Ainsworth. The claims involve alleged breaches of representations and warranties regarding the condition of certain of the assets sold to Ainsworth. The amount Ainsworth is claiming exceeds the $60 million indemnity limitation provided in the Asset Purchase Agreement. Ainsworth has not furnished us with sufficient information to enable us to fully investigate and evaluate the validity of the claims, although we have no reason to believe that the claims are meritorious. We expect to vigorously contest any lawsuit that may be brought asserting these claims.

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


POTLATCH CORPORATION (Registrant)

By		/s/ GERALD L. ZUEHLKE
		Gerald L. Zuehlke
		Vice President, Finance, Chief
		Financial Officer
		(Duly Authorized; Principal
		Financial Officer)

By		/s/ TERRY L. CARTER
		Terry L. Carter
		Controller
		(Duly Authorized; Principal
		Accounting Officer)


A Delaware Corporation		82-0156045
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


601 West Riverside Ave., Suite 1100 Spokane, Washington		99201
(Address of principal executive offices)		(Zip Code)


		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

Consolidated Statements of Operations and Comprehensive Income for the quarters and nine months ended September 30, 2005 and 2004		2

Consolidated Condensed Balance Sheets at September 30, 2005 and December 31, 2004		3

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		4

Notes to Consolidated Financial Statements		5 - 11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11 - 30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31 - 32

Item 4.	Controls and Procedures	32 - 33

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 6.	Exhibits	33

SIGNATURES		34

EXHIBIT INDEX		35


	Quarter Ended September 30						Nine Months Ended September 30
	2005			2004			2005			2004
Net sales	$	404,662		$	370,100		$	1,108,505		$	1,029,874

Costs and expenses:
Depreciation, amortization and cost of fee timber harvested		23,449			22,465			64,151			66,796
Materials, labor and other operating expenses		337,563			275,564			924,931			821,738
Selling, general and administrative expenses		19,197			20,668			62,357			63,654
Restructuring charge		—			—			—			1,193

		380,209			318,697			1,051,439			953,381

Earnings from operations		24,453			51,403			57,066			76,493
Interest expense		(7,236	)		(12,484	)		(21,722	)		(36,822	)
Interest income		514			1,078			1,827			1,697

Earnings before taxes		17,731			39,997			37,171			41,368
Provision for taxes (Note 3)		6,641			15,798			14,125			16,340

Earnings from continuing operations		11,090			24,199			23,046			25,028

Discontinued operations (Note 4):
Earnings from discontinued operations (including gain on disposal of $-, $269,544, $-, and $269,544)		—			306,857			—			423,480
Income tax provision		—			121,209			—			167,275

		—			185,648			—			256,205

Net earnings		11,090			209,847			23,046			281,233

Other comprehensive loss, net of tax:
Cash flow hedges (Note 5):
Net derivative losses, net of income tax benefit of $-, $-, $- and $44		—			—			—			(68	)

Comprehensive income	$	11,090		$	209,847		$	23,046		$	281,165

Earnings per common share from continuing operations (Note 6):
Basic	$	.38		$	.82		$	.79		$	.85
Diluted		.38			.81			.79			.85
Earnings per common share from discontinued operations:
Basic		—			6.26			—			8.70
Diluted		—			6.24			—			8.66
Net earnings per common share:
Basic		.38			7.08			.79			9.55
Diluted		.38			7.05			.79			9.51
Dividends per common share (annual rate)⁽¹⁾		.60			3.10			.60			3.10
Average shares outstanding (in thousands):
Basic		29,179			29,638			29,055			29,460
Diluted		29,401			29,769			29,238			29,570


	September 30, 2005		December 31, 2004
Assets
Current assets:
Cash	$	12,008	$	8,646
Short-term investments (Note 8)		51,058		111,975
Receivables, net		115,024		103,474
Inventories (Note 9)		201,231		167,015
Prepaid expenses		17,193		16,260

Total current assets		396,514		407,370
Land, other than timberlands		8,559		8,351
Plant and equipment, at cost less accumulated depreciation		595,665		567,471
Timber, timberlands and related logging facilities		405,022		401,078
Other assets		223,159		210,402

	$	1,628,919	$	1,594,672

Liabilities and Stockholders’ Equity
Current liabilities:
Current installments on long-term debt	$	2,357	$	1,107
Accounts payable and accrued liabilities		156,908		151,198

Total current liabilities		159,265		152,305
Long-term debt		333,087		335,415
Other long-term obligations		243,344		234,311
Deferred taxes		201,252		201,252
Stockholders’ equity		691,971		671,389

	$	1,628,919	$	1,594,672

Stockholders’ equity per common share	$	23.70	$	23.22
Working capital	$	237,249	$	255,065
Current ratio		2.5:1		2.7:1

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	Nine Months Ended September 30
	2005			2004
Cash Flows From Continuing Operations
Net earnings	$	23,046		$	281,233
Adjustments to reconcile net earnings to net operating cash flows:
Earnings from discontinued operations		—			(93,131	)
Gain on disposal of discontinued operations		—			(163,074	)
Depreciation, amortization and cost of fee timber harvested		64,151			66,796
Deferred taxes		—			(44	)
Working capital changes		(41,826	)		41,040
Employee benefit plans		(1,272	)		(1,588	)

Net cash provided by operating activities of continuing operations		44,099			131,232

Cash Flows From Investing
Increase in restricted cash		—			(2,033	)
Decrease (increase) in short-term investments		60,917			(697,609	)
Additions to plant and properties		(91,162	)		(36,038	)
Other, net		(6,430	)		(6,098	)

Net cash used for investing activities of continuing operations		(36,675	)		(741,778	)

Cash Flows From Financing
Change in book overdrafts		837			3,822
Repayment of long-term debt		(1,078	)		(477	)
Issuance of treasury stock		10,880			29,011
Purchase of treasury stock		(1,868	)		—
Dividends		(13,103	)		(13,212	)
Other, net		270			7,006

Net cash provided by (used for) financing activities of continuing operations		(4,062	)		26,150

Cash from continuing operations		3,362			(584,396	)
Cash from discontinued operations		—			586,503

Increase in cash		3,362			2,107
Cash at beginning of period		8,646			7,190

Cash at end of period	$	12,008		$	9,297


	Quarter Ended September 30		Nine Months Ended September 30
	2005	2004	2005	2004
Basic average common shares outstanding	29,179,174	29,638,372	29,055,127	29,460,494
Incremental shares due to:
Common stock options	209,720	130,619	174,758	109,705
Accelerated stock repurchase program	12,456	—	7,920	—

Diluted average common shares outstanding	29,401,350	29,768,991	29,237,805	29,570,199


	Quarter Ended September 30						Nine Months Ended September 30
(Dollars in thousands - except per-share amounts)	2005			2004			2005			2004
Net earnings, as reported	$	11,090		$	209,847		$	23,046		$	281,233
Add: equity-based compensation expense recorded under APB No. 25, net of tax		316			146			1,009			405
Deduct: equity-based compensation determined under SFAS No. 123, net of tax		(454	)		(358	)		(1,379	)		(1,190	)

Pro forma net earnings	$	10,952		$	209,635		$	22,676		$	280,448

Basic net earnings per share, as reported	$	.38		$	7.08		$	.79		$	9.55
Diluted net earnings per share, as reported		.38			7.05			.79			9.51
Pro forma basic net earnings per share		.38			7.07			.78			9.52
Pro forma diluted net earnings per share		.37			7.04			.78			9.49


(Dollars in thousands)	September 30, 2005		December 31, 2004
Raw materials	$	96,224	$	79,670
Finished goods		105,007		87,345

	$	201,231	$	167,015


	Pension Benefit Plans						Other Postretirement Benefit Plans
(Dollars in thousands)	2005			2004			2005			2004
Service cost	$	2,573		$	2,651		$	386		$	965
Interest cost		8,171			8,459			4,086			4,808
Expected return on plan assets		(15,075	)		(14,494	)		—			—
Amortization of prior service cost		513			452			(650	)		(520	)
Recognized actuarial loss		331			54			2,470			1,044

Net periodic cost (benefit)	$	(3,487	)	$	(2,878	)	$	6,292		$	6,297


Contract Expiration Date	Location	Union	Approximate Number of Hourly Employees
May 8*	Wood Products Division	International Association	250
	& Resource Management	of Machinists &
	Division	Aerospace Workers
	Warren, Arkansas

August 1**	Pulp & Paperboard	United Steel, Paper and	250
	Division	Forestry, Rubber,
	Cypress Bend, Arkansas	Manufacturing, Energy, Allied
		Industrial and Service Workers
		International Union


(Dollars in thousands)
2006	$	2,358
2007		6,159
2008		209
2009		100,410
2010		11


	Quarter Ended September 30								Nine Months Ended September 30
	2005			2004			Increase (Decrease)		2005			2004			Increase (Decrease)
Net sales	$	404,662		$	370,100		9	%	$	1,108,505		$	1,029,874		8	%
Costs and expenses:
Depreciation, amortization and cost of fee timber harvested		23,449			22,465		4	%		64,151			66,796		(4	%)
Materials, labor and other operating expenses		337,563			275,564		22	%		924,931			821,738		13	%
Selling, general and administrative expenses		19,197			20,668		(7	%)		62,357			63,654		(2	%)
Restructuring charge		—			—		—			—			1,193			*
Earnings from operations		24,453			51,403		(52	%)		57,066			76,493		(25	%)
Interest expense		(7,236	)		(12,484	)	(42	%)		(21,722	)		(36,822	)	(41	%)
Interest income		514			1,078		(52	%)		1,827			1,697		8	%
Provision for taxes		6,641			15,798		(58	%)		14,125			16,340		(14	%)
Earnings from continuing operations		11,090			24,199		(54	%)		23,046			25,028		(8	%)
Discontinued operations:
Earnings from discontinued operations		—			306,857			*		—			423,480			*
Income tax provision		—			121,209			*		—			167,275			*
Net earnings	$	11,090		$	209,847		(95	%)	$	23,046		$	281,233		(92	%)


Ratings
Moody’s	S&P	Applicable Rate(%)
Aaa	AAA	8.825
Aa1 – Aa3	AA+ - AA-	8.925
A1 – Baa2	A+ - BBB	9.125
Baa3	BBB-	9.425
Ba1	BB+	12.500
Ba2	BB	13.000
Ba3	BB-	13.500
B1 or lower	B+ or lower	14.000


	Expected Maturity Date (as of September 30, 2005)
(Dollars in thousands)	2005			2006			2007			2008			2009			Thereafter			Total
Long-term debt:
Fixed rate	$	—		$	2,358		$	6,159		$	209		$	100,410		$	226,308		$	335,444
Average interest rate		—	%		6.3	%		6.1	%		6.9	%		12.5	%		7.0	%		8.6	%
Fair value at 09/30/05																			$	376,423


	Quarter Ended September 30				Nine Months Ended September 30
(Dollars in thousands)	2005		2004		2005		2004
Segment Sales
Resource	$	97,132	$	93,039	$	217,081	$	199,613

Wood products
Lumber		103,795		97,402		289,602		269,329
Plywood		12,943		15,422		40,197		47,039
Particleboard		4,036		5,196		13,286		15,285
Other		9,467		6,832		24,887		20,672

		130,241		124,852		367,972		352,325


	Quarter Ended September 30						Nine Months Ended September 30
(Dollars in thousands)	2005			2004			2005			2004
Pulp and paperboard
Paperboard		133,178			125,261			372,682			353,581
Pulp		18,099			16,901			45,317			47,442
Other		206			41			681			114

		151,483			142,203			418,680			401,137

Consumer products		95,541			82,354			281,203			239,467

		474,397			442,448			1,284,936			1,192,542
Elimination of intersegment sales		(69,735	)		(72,348	)		(176,431	)		(162,668	)

Total consolidated net sales	$	404,662		$	370,100		$	1,108,505		$	1,029,874

Intersegment sales or transfers
Resource	$	56,350		$	56,232		$	133,673		$	118,578
Wood products		3,274			3,112			9,953			8,927
Pulp and paperboard		10,084			12,980			32,735			35,100
Consumer products		27			24			70			63

Total	$	69,735		$	72,348		$	176,431		$	162,668

Operating Income (Loss)
Resource	$	26,087		$	30,206		$	50,919		$	49,015
Wood products		6,049			26,352			28,826			61,975
Pulp and paperboard		591			12,212			3,725			10,323
Consumer products		2,554			(4,977	)		4,129			(10,032	)
Eliminations		(1,506	)		(2,299	)		625			(195	)

		33,775			61,494			88,224			111,086
Corporate		(16,044	)		(21,497	)		(51,053	)		(69,718	)

Consolidated earnings from continuing operations before taxes	$	17,731		$	39,997		$	37,171		$	41,368


Exhibit		PART II
(4)		Registrant undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.

(31)		Rule 13a-14(a) / 15d-14(a) Certifications

(32)		Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350