##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the Quarterly Period Ended July 1, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 for the Transition Period From  to
 Commission
File Number: 001-08634
 Temple-Inland Inc.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    75-1903917
(I.R.S. Employer Identification Number)
 1300 MoPac Expressway South, Austin, Texas 78746
 (512) 434-5800
 Not Applicable
 þ  ̈
  þ  ̈  ̈
  ̈ þ
  Number of common shares outstandingClass
    
    as of July 1, 2006Common Stock (par value $1.00 per share)
    
    
    108,751,440
  Page 1 of 52
    
    The Exhibit Index is page 52.




---



##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Temple-Inland Inc. and Subsidiaries
    
    
    3Consolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Parent Company (Temple-Inland Inc. and its manufacturing and real estate subsidiaries)
    
    
    7Summarized Balance Sheets
    
    
    7Summarized Statements of Income
    
    
    8Summarized Statements of Cash Flows
    
    
    9Financial Services
    
    
    10Summarized Balance Sheets
    
    
    10Summarized Statements of Income
    
    
    11Summarized Statements of Cash Flows
    
    
    12Notes to the Consolidated Financial Statements
    
    
    13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4. Controls and Procedures
    
    
    48PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    49Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3. Defaults Upon Senior Securities
    
    
    49Item 4. Submission of Matters to a Vote of Security Holders
    
    
    50Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50SIGNATURES
    
    
    51Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
 
 Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    25
    
    
    $
    261
    
    
    $
    286Trade receivables, less allowance for doubtful accounts of $17
    
    
    511
    
    
    
    
    
    
    
    511Inventories
    
    
    420
    
    
    
    
    
    
    
    420Timber and timberland
    
    
    385
    
    
    
    
    
    
    
    385Real estate
    
    
    446
    
    
    
    
    
    
    
    446Loans held for sale
    
    
    
    
    
    
    37
    
    
    
    37Commercial loans held for sale
    
    
    
    
    
    
    295
    
    
    
    295Loans, net of allowance for loan losses of $71
    
    
    
    
    
    
    9,570
    
    
    
    9,570Securities available-for-sale
    
    
    
    
    
    
    587
    
    
    
    587Securities held-to-maturity
    
    
    
    
    
    
    5,251
    
    
    
    5,251Investment in Federal Home Loan Bank stock
    
    
    
    
    
    
    307
    
    
    
    307Property, premises, and equipment
    
    
    1,661
    
    
    
    203
    
    
    
    1,864Goodwill
    
    
    365
    
    
    
    152
    
    
    
    517Other intangible assets
    
    
    
    
    
    
    29
    
    
    
    29Prepaid expenses and other assets
    
    
    442
    
    
    
    218
    
    
    
    628Investment in financial services
    
    
    1,024
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    5,279
    
    
    $
    16,910
    
    
    $
    21,133LIABILITIESAccounts payable, accrued expenses, and other liabilities
    
    $
    779
    
    
    $
    154
    
    
    $
    928Long-term debt and other borrowings
    
    
    1,744
    
    
    
    141
    
    
    
    1,885Deposits
    
    
    
    
    
    
    9,277
    
    
    
    9,266Federal Home Loan Bank borrowings
    
    
    
    
    
    
    6,009
    
    
    
    6,009Deferred income taxes
    
    
    167
    
    
    
    
    
    
    
    151Pension liability
    
    
    262
    
    
    
    
    
    
    
    262Postretirement benefits liability
    
    
    136
    
    
    
    
    
    
    
    136Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    3,088
    
    
    
    15,886
    
    
    
    18,942SHAREHOLDERS EQUITYPreferred stock  par value $1 per share:authorized 25,000,000 shares; none issued
    
    
    
    
    
    
    
    
    
    
    Common stock  par value $1 per share: authorized 200,000,000 shares;
issued 123,605,344 shares, including shares held in the treasury
    
    
    
    
    
    
    
    
    
    
    124Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    458Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (197
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,3542,739Cost of shares held in the treasury: 14,853,904 shares
    
    
    
    
    
    
    
    
    
    
    (548
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,191TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    21,133
  3




---



##### Table of Contents



Parent
    
    
    FinancialCompany
    
    
    Services
    
    
    Consolidated(In millions)ASSETSCash and cash equivalents
    
    $
    13
    
    
    $
    431
    
    
    $
    441Trade receivables, less allowance for doubtful accounts of $14
    
    
    411
    
    
    
    
    
    
    
    411Inventories
    
    
    425
    
    
    
    
    
    
    
    425Timber and timberland
    
    
    394
    
    
    
    
    
    
    
    394Real estate
    
    
    403
    
    
    
    
    
    
    
    403Loans held for sale
    
    
    
    
    
    
    280
    
    
    
    280Loans, net of allowance for loan losses of $74
    
    
    
    
    
    
    9,845
    
    
    
    9,845Securities available-for-sale
    
    
    
    
    
    
    654
    
    
    
    654Securities held-to-maturity
    
    
    
    
    
    
    5,558
    
    
    
    5,558Investment in Federal Home Loan Bank stock
    
    
    
    
    
    
    300
    
    
    
    300Property, premises, and equipment
    
    
    1,633
    
    
    
    193
    
    
    
    1,826Goodwill
    
    
    236
    
    
    
    159
    
    
    
    395Other intangible assets
    
    
    
    
    
    
    31
    
    
    
    31Prepaid expenses and other assets
    
    
    469
    
    
    
    240
    
    
    
    667Investment in financial services
    
    
    1,017
    
    
    
    
    
    
    
    TOTAL ASSETS
    
    $
    5,001
    
    
    $
    17,691
    
    
    $
    21,630LIABILITIESAccounts payable, accrued expenses, and other liabilities
    
    $
    750
    
    
    $
    175
    
    
    $
    909Long-term debt and other borrowings
    
    
    1,599
    
    
    
    101
    
    
    
    1,700Deposits
    
    
    
    
    
    
    9,201
    
    
    
    9,194Federal Home Loan Bank borrowings
    
    
    
    
    
    
    6,892
    
    
    
    6,892Deferred income taxes
    
    
    165
    
    
    
    
    
    
    
    143Pension liability
    
    
    270
    
    
    
    
    
    
    
    270Postretirement benefits liability
    
    
    137
    
    
    
    
    
    
    
    137Preferred stock issued by subsidiaries
    
    
    
    
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    2,921
    
    
    
    16,674
    
    
    
    19,550SHAREHOLDERS EQUITYPreferred stock  par value $1 per share:authorized 25,000,000 shares; none issued
    
    
    
    
    
    
    
    
    
    
    Common stock  par value $1 per share: authorized 200,000,000 shares;
issued 123,605,344 shares, including shares held in the treasury
    
    
    
    
    
    
    
    
    
    
    124Additional paid-in capital
    
    
    
    
    
    
    
    
    
    
    445Accumulated other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (189
    )Retained earnings
    
    
    
    
    
    
    
    
    
    
    2,1412,521Cost of shares held in the treasury: 12,630,953 shares
    
    
    
    
    
    
    
    
    
    
    (441
    )TOTAL SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    
    2,080TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    
    
    
    
    
    
    
    
    $
    21,630
  4




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions, except per share amounts)REVENUESManufacturing and real estate
    
    $
    1,134
    
    
    $
    1,035
    
    
    $
    2,235
    
    
    $
    2,034Financial services
    
    
    299
    
    
    
    239
    
    
    
    582
    
    
    
    4611,433
    
    
    
    1,274
    
    
    
    2,817
    
    
    
    2,495COSTS AND EXPENSESManufacturing and real estate
    
    
    (992
    )
    
    
    (970
    )
    
    
    (1,984
    )
    
    
    (1,909
    )Financial services
    
    
    (244
    )
    
    
    (192
    )
    
    
    (481
    )
    
    
    (372
    )(1,236
    )
    
    
    (1,162
    )
    
    
    (2,465
    )
    
    
    (2,281
    )OPERATING INCOME
    
    
    197
    
    
    
    112
    
    
    
    352
    
    
    
    214Parent company interest
    
    
    (34
    )
    
    
    (29
    )
    
    
    (67
    )
    
    
    (58
    )Other non-operating income (expense)
    
    
    91
    
    
    
    1
    
    
    
    91
    
    
    
    2INCOME BEFORE INCOME TAXES
    
    
    254
    
    
    
    84
    
    
    
    376
    
    
    
    158Income tax expense
    
    
    (62
    )
    
    
    (16
    )
    
    
    (108
    )
    
    
    (45
    )INCOME FROM CONTINUING OPERATIONS
    
    
    192
    
    
    
    68
    
    
    
    268
    
    
    
    113Discontinued operations
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1NET INCOME
    
    $
    192
    
    
    $
    69
    
    
    $
    268
    
    
    $
    114WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBasic
    
    
    109.8
    
    
    
    113.7
    
    
    
    110.5
    
    
    
    113.2Diluted
    
    
    111.8
    
    
    
    115.0
    
    
    
    112.6
    
    
    
    115.4EARNINGS PER SHAREBasic:Income from continuing operations
    
    $
    1.75
    
    
    $
    0.60
    
    
    $
    2.42
    
    
    $
    1.00Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.01Net income
    
    $
    1.75
    
    
    $
    0.61
    
    
    $
    2.42
    
    
    $
    1.01Diluted:Income from continuing operations
    
    $
    1.71
    
    
    $
    0.59
    
    
    $
    2.38
    
    
    $
    0.98Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    0.01Net income
    
    $
    1.71
    
    
    $
    0.60
    
    
    $
    2.38
    
    
    $
    0.99DIVIDENDS PAID PER SHARE OF COMMON STOCK
    
    $
    0.25
    
    
    $
    0.221/2
    
    
    $
    0.50
    
    
    $
    0.45
  5




---



##### Table of Contents



First Six Months2006
    
    
    2005(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    268
    
    
    $
    114Adjustments:Depreciation and amortization
    
    
    124
    
    
    
    125Amortization and accretion of financial instruments discounts and premiums, net
    
    
    13
    
    
    
    7Provision for credit losses
    
    
    
    
    
    
    10Deferred income taxes
    
    
    7
    
    
    
    13Non-cash real estate cost of sales
    
    
    27
    
    
    
    14Real estate development expenditures
    
    
    (60
    )
    
    
    (24
    )Other non-cash charges and (credits), net
    
    
    6
    
    
    
    33Other
    
    
    
    
    
    
    (4
    )Changes in:Trade receivables
    
    
    (81
    )
    
    
    (72
    )Inventories
    
    
    11
    
    
    
    Prepaid expenses and other
    
    
    22
    
    
    
    24Accounts payable and accrued expenses
    
    
    (9
    )
    
    
    (7
    )Loans held for sale:Originations
    
    
    (131
    )
    
    
    (1,366
    )Sales
    
    
    374
    
    
    
    1,548Collections on loans serviced for others, net
    
    
    
    
    
    
    (119
    )571
    
    
    
    296CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (100
    )
    
    
    (126
    )Sale of non-strategic assets and operations
    
    
    4
    
    
    
    36Securities available-for-sale, net
    
    
    65
    
    
    
    98Securities held-to-maturity, net
    
    
    297
    
    
    
    614Loans originated or acquired, net of principal collected
    
    
    (20
    )
    
    
    (392
    )Proceeds from sale of loans and mortgage servicing rights
    
    
    
    
    
    
    46Acquisitions, net of cash acquired, and joint ventures
    
    
    (135
    )
    
    
    (22
    )Other
    
    
    10
    
    
    
    3121
    
    
    
    257CASH PROVIDED BY (USED FOR) FINANCINGPayments of debt
    
    
    (229
    )
    
    
    (339
    )Additions to debt
    
    
    2
    
    
    
    1Borrowings under accounts receivable securitization facility, net
    
    
    39
    
    
    
    50Borrowings under revolving credit facility, net
    
    
    47
    
    
    
    (12
    )Deposits, net
    
    
    72
    
    
    
    64Repurchase agreements and short-term borrowings, net
    
    
    (617
    )
    
    
    (132
    )Cash dividends paid to shareholders
    
    
    (55
    )
    
    
    (52
    )Repurchase of common stock
    
    
    (153
    )
    
    
    (435
    )Exercise of stock options
    
    
    34
    
    
    
    35Tax benefit on stock options exercised
    
    
    7
    
    
    
    Settlement of equity purchase contracts
    
    
    
    
    
    
    345Other
    
    
    8
    
    
    
    (27
    )(845
    )
    
    
    (502
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    Discontinued operations, principally operating activities
    
    
    (1
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    (155
    )
    
    
    51Cash and cash equivalents at beginning of period
    
    
    441
    
    
    
    372Cash and cash equivalents at end of period
    
    $
    286
    
    
    $
    423
  6




---



##### Table of Contents



SecondQuarter-End
    
    
    Year-End2006
    
    
    2005(In millions)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    25
    
    
    $
    13Trade receivables, less allowance for doubtful accounts of
$17 in 2006 and $14 in 2005
    
    
    511
    
    
    
    411Inventories:Finished goods and work in process
    
    
    104
    
    
    
    95Raw materials
    
    
    204
    
    
    
    224Supplies and other
    
    
    112
    
    
    
    106Total inventories
    
    
    420
    
    
    
    425Prepaid expenses and other
    
    
    70
    
    
    
    94Total current assets
    
    
    1,026
    
    
    
    943Investment in Financial Services
    
    
    1,024
    
    
    
    1,017Timber and Timberland
    
    
    385
    
    
    
    394Real Estate
    
    
    446
    
    
    
    403Property and EquipmentLand and buildings
    
    
    650
    
    
    
    619Machinery and equipment
    
    
    3,412
    
    
    
    3,337Construction in progress
    
    
    63
    
    
    
    62Less allowance for depreciation
    
    
    (2,464
    )
    
    
    (2,385
    )Total property and equipment
    
    
    1,661
    
    
    
    1,633Goodwill
    
    
    365
    
    
    
    236Assets Held for Sale
    
    
    31
    
    
    
    34Other Assets
    
    
    341
    
    
    
    341TOTAL ASSETS
    
    $
    5,279
    
    
    $
    5,001LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    229
    
    
    $
    200Accrued employee compensation and benefits
    
    
    86
    
    
    
    101Accrued interest
    
    
    37
    
    
    
    19Accrued property taxes
    
    
    24
    
    
    
    27Other accrued expenses
    
    
    127
    
    
    
    136Liabilities of discontinued operations
    
    
    7
    
    
    
    9Current portion of long-term debt
    
    
    8
    
    
    
    12Total current liabilities
    
    
    518
    
    
    
    504Long-Term Debt
    
    
    1,744
    
    
    
    1,599Deferred Income Taxes
    
    
    167
    
    
    
    165Pension Liability
    
    
    262
    
    
    
    270Postretirement Benefits Liability
    
    
    136
    
    
    
    137Other Long-Term Liabilities
    
    
    261
    
    
    
    246Total liabilities
    
    
    3,088
    
    
    
    2,921Shareholders Equity
    
    
    2,191
    
    
    
    2,080TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    5,279
    
    
    $
    5,001
  7




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)NET REVENUES
    
    $
    1,134
    
    
    $
    1,035
    
    
    $
    2,235
    
    
    $
    2,034COSTS AND EXPENSESCost of sales
    
    
    (906
    )
    
    
    (872
    )
    
    
    (1,820
    )
    
    
    (1,723
    )Selling
    
    
    (34
    )
    
    
    (31
    )
    
    
    (68
    )
    
    
    (62
    )General and administrative
    
    
    (58
    )
    
    
    (53
    )
    
    
    (114
    )
    
    
    (98
    )Other operating income (expense)
    
    
    6
    
    
    
    (14
    )
    
    
    18
    
    
    
    (26
    )(992
    )
    
    
    (970
    )
    
    
    (1,984
    )
    
    
    (1,909
    )142
    
    
    
    65
    
    
    
    251
    
    
    
    125FINANCIAL SERVICES PRE-TAX EARNINGS
    
    
    55
    
    
    
    47
    
    
    
    101
    
    
    
    89OPERATING INCOME
    
    
    197
    
    
    
    112
    
    
    
    352
    
    
    
    214Interest expense
    
    
    (34
    )
    
    
    (29
    )
    
    
    (67
    )
    
    
    (58
    )Other non-operating income (expense)
    
    
    91
    
    
    
    1
    
    
    
    91
    
    
    
    2INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    254
    
    
    
    84
    
    
    
    376
    
    
    
    158Income tax expense
    
    
    (62
    )
    
    
    (16
    )
    
    
    (108
    )
    
    
    (45
    )INCOME FROM CONTINUING OPERATIONS
    
    
    192
    
    
    
    68
    
    
    
    268
    
    
    
    113Discontinued operations
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1NET INCOME
    
    $
    192
    
    
    $
    69
    
    
    $
    268
    
    
    $
    114
  8




---



##### Table of Contents



First Six Months2006
    
    
    2005(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    268
    
    
    $
    114Adjustments:Depreciation and amortization
    
    
    113
    
    
    
    112Non-cash share-based compensation
    
    
    24
    
    
    
    16Non-cash pension and postretirement expense
    
    
    28
    
    
    
    29Cash contribution to pension and postretirement plans
    
    
    (37
    )
    
    
    (34
    )Deferred income taxes (benefit)
    
    
    
    
    
    
    6Net earnings of financial services
    
    
    (63
    )
    
    
    (56
    )Dividends of earnings from financial services
    
    
    60
    
    
    
    25Earnings of joint ventures
    
    
    (19
    )
    
    
    (27
    )Dividends of earnings from joint ventures
    
    
    7
    
    
    
    19Non-cash real estate cost of sales
    
    
    27
    
    
    
    14Real estate development expenditures
    
    
    (60
    )
    
    
    (24
    )Other non-cash charges (credits)
    
    
    6
    
    
    
    33Other
    
    
    (6
    )
    
    
    1Changes in:Trade receivables
    
    
    (81
    )
    
    
    (72
    )Inventories
    
    
    11
    
    
    
    Prepaid expenses and other
    
    
    22
    
    
    
    24Accounts payable and accrued expenses
    
    
    (9
    )
    
    
    (7
    )291
    
    
    
    173CASH PROVIDED BY (USED FOR) INVESTINGCapital expenditures
    
    
    (79
    )
    
    
    (113
    )Sales of non-strategic assets and operations and proceeds from
sale of property and equipment
    
    
    13
    
    
    
    36Acquisitions, net of cash acquired, and joint ventures
    
    
    (134
    )
    
    
    (3
    )(200
    )
    
    
    (80
    )CASH PROVIDED BY (USED FOR) FINANCINGPayments of debt
    
    
    (3
    )
    
    
    (24
    )Additions of debt
    
    
    2
    
    
    
    Borrowings under accounts receivable securitization facility, net
    
    
    39
    
    
    
    50Borrowings under revolving credit facility, net
    
    
    47
    
    
    
    (12
    )Cash dividends paid to shareholders
    
    
    (55
    )
    
    
    (52
    )Repurchase of common stock
    
    
    (153
    )
    
    
    (435
    )Exercise of stock options
    
    
    34
    
    
    
    35Tax benefit on stock options exercised
    
    
    7
    
    
    
    Settlement of equity purchase contracts
    
    
    
    
    
    
    345Other
    
    
    5
    
    
    
    (6
    )(77
    )
    
    
    (99
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (1
    )
    
    
    Discontinued operations, principally operating cash flows
    
    
    (1
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    12
    
    
    
    (6
    )Cash and cash equivalents at beginning of period
    
    
    13
    
    
    
    22Cash and cash equivalents at end of period
    
    $
    25
    
    
    $
    16
  9




---



##### Table of Contents



SecondQuarter-End
    
    
    Year-End2006
    
    
    2005(In millions)ASSETSCash and cash equivalents
    
    $
    261
    
    
    $
    431Loans held for sale
    
    
    37
    
    
    
    280Commercial loans held for sale
    
    
    295
    
    
    
    Loans, net of allowance for loan losses of $71 in 2006 and $74 in 2005
    
    
    9,570
    
    
    
    9,845Securities available-for-sale
    
    
    587
    
    
    
    654Securities held-to-maturity
    
    
    5,251
    
    
    
    5,558Investment in Federal Home Loan Bank stock
    
    
    307
    
    
    
    300Premises and equipment, net
    
    
    203
    
    
    
    193Accounts, notes, and accrued interest receivable
    
    
    118
    
    
    
    120Goodwill
    
    
    152
    
    
    
    159Other intangible assets
    
    
    29
    
    
    
    31Other assets
    
    
    100
    
    
    
    120TOTAL ASSETS
    
    $
    16,910
    
    
    $
    17,691LIABILITIES AND STOCKHOLDERS EQUITYDeposits
    
    $
    9,277
    
    
    $
    9,201Federal Home Loan Bank borrowings
    
    
    6,009
    
    
    
    6,892Other liabilities
    
    
    154
    
    
    
    175Other borrowings
    
    
    141
    
    
    
    101Preferred stock issued by subsidiaries
    
    
    305
    
    
    
    305TOTAL LIABILITIES
    
    
    15,886
    
    
    
    16,674Shareholders Equity
    
    
    1,024
    
    
    
    1,017TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    16,910
    
    
    $
    17,691
  10




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)INTEREST INCOMELoans and loans held for sale
    
    $
    176
    
    
    $
    142
    
    
    $
    342
    
    
    $
    271Securities available-for-sale
    
    
    12
    
    
    
    15
    
    
    
    23
    
    
    
    30Securities held-to-maturity
    
    
    64
    
    
    
    30
    
    
    
    126
    
    
    
    64Other earning assets
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    2Total interest income
    
    
    253
    
    
    
    188
    
    
    
    494
    
    
    
    367INTEREST EXPENSEDeposits
    
    
    (66
    )
    
    
    (45
    )
    
    
    (128
    )
    
    
    (84
    )Borrowed funds
    
    
    (80
    )
    
    
    (46
    )
    
    
    (155
    )
    
    
    (91
    )Total interest expense
    
    
    (146
    )
    
    
    (91
    )
    
    
    (283
    )
    
    
    (175
    )NET INTEREST INCOME
    
    
    107
    
    
    
    97
    
    
    
    211
    
    
    
    192(Provision) credit for credit losses
    
    
    2
    
    
    
    (8
    )
    
    
    
    
    
    
    (10
    )NET INTEREST INCOME AFTER (PROVISION) CREDIT FOR
CREDIT LOSSES
    
    
    109
    
    
    
    89
    
    
    
    211
    
    
    
    182NONINTEREST INCOMELoan origination and sale of loans
    
    
    
    
    
    
    8
    
    
    
    2
    
    
    
    14Insurance commissions and fees
    
    
    19
    
    
    
    18
    
    
    
    33
    
    
    
    31Service charges on deposits
    
    
    13
    
    
    
    11
    
    
    
    24
    
    
    
    21Operating lease income
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    3Other
    
    
    12
    
    
    
    12
    
    
    
    25
    
    
    
    25Total noninterest income
    
    
    46
    
    
    
    51
    
    
    
    88
    
    
    
    94NONINTEREST EXPENSECompensation and benefits
    
    
    (46
    )
    
    
    (43
    )
    
    
    (94
    )
    
    
    (89
    )Insurance operations, other than compensation
    
    
    (4
    )
    
    
    (4
    )
    
    
    (8
    )
    
    
    (8
    )Occupancy
    
    
    (6
    )
    
    
    (6
    )
    
    
    (12
    )
    
    
    (12
    )Information systems and technology
    
    
    (4
    )
    
    
    (4
    )
    
    
    (7
    )
    
    
    (8
    )Charges related to asset impairments and severance
    
    
    (7
    )
    
    
    
    
    
    
    (10
    )
    
    
    Other
    
    
    (33
    )
    
    
    (36
    )
    
    
    (67
    )
    
    
    (70
    )Total noninterest expense
    
    
    (100
    )
    
    
    (93
    )
    
    
    (198
    )
    
    
    (187
    )INCOME BEFORE INCOME TAXES
    
    
    55
    
    
    
    47
    
    
    
    101
    
    
    
    89Income tax expense
    
    
    (21
    )
    
    
    (17
    )
    
    
    (38
    )
    
    
    (33
    )NET INCOME
    
    $
    34
    
    
    $
    30
    
    
    $
    63
    
    
    $
    56
  11




---



##### Table of Contents



First Six Months2006
    
    
    2005(In millions)CASH PROVIDED BY (USED FOR) OPERATIONSNet income
    
    $
    63
    
    
    $
    56Adjustments:Depreciation
    
    
    8
    
    
    
    10Depreciation of leased assets
    
    
    3
    
    
    
    3Provision for credit losses
    
    
    
    
    
    
    10Amortization and accretion of financial instrument discounts and premiums, net
    
    
    13
    
    
    
    7Deferred income taxes
    
    
    7
    
    
    
    7Changes in:Loans held for sale:Originations
    
    
    (131
    )
    
    
    (1,366
    )Sales
    
    
    374
    
    
    
    1,548Collections on loans serviced for others, net
    
    
    
    
    
    
    (119
    )Other
    
    
    (4
    )
    
    
    (8
    )333
    
    
    
    148CASH PROVIDED BY (USED FOR) INVESTINGSecurities available-for-sale:Purchases
    
    
    (2
    )
    
    
    Principal payments and maturities
    
    
    67
    
    
    
    98Securities held-to-maturity:Purchases
    
    
    (351
    )
    
    
    (3
    )Principal payments and maturities
    
    
    648
    
    
    
    617Loans originated or acquired, net of collections
    
    
    (20
    )
    
    
    (392
    )Collection of mortgage servicing rights sale receivables
    
    
    
    
    
    
    46Acquisitions, net of cash acquired
    
    
    (1
    )
    
    
    (19
    )Capital expenditures
    
    
    (21
    )
    
    
    (13
    )Other
    
    
    1
    
    
    
    3321
    
    
    
    337CASH PROVIDED BY (USED FOR) FINANCINGDeposits, net
    
    
    76
    
    
    
    64Repurchase agreements and short-term borrowings, net
    
    
    (617
    )
    
    
    (132
    )Additions to debt and long-term FHLB borrowings
    
    
    
    
    
    
    1Payments of long-term FHLB and other borrowings
    
    
    (226
    )
    
    
    (315
    )Dividends paid to parent company
    
    
    (60
    )
    
    
    (25
    )Other
    
    
    3
    
    
    
    (21
    )(824
    )
    
    
    (428
    )Net increase (decrease) in cash and cash equivalents
    
    
    (170
    )
    
    
    57Cash and cash equivalents at beginning of period
    
    
    431
    
    
    
    350Cash and cash equivalents at end of period
    
    $
    261
    
    
    $
    407
  12




---



##### Table of Contents



Note 1  Basis of Presentation
      Note 2  New Accounting Pronouncements
 Share-Based Compensation
 Share-Based
Payment , Accounting for Stock-Based Compensation-Transition and Disclosure, an
amendment of FASB Statement No. 123
 
    
    The fair value of awards granted to retirement eligible employees is expensed at the
date of grant because our stock option awards and some of our other awards provide for
accelerated or continued vesting upon retirement. Previously, the fair value of these
awards was expensed over the expected service period. The
 13




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 change accelerated about $7 million of expense into first quarter 2006 related to awards
granted in 2006. We will continue to expense the fair value of awards granted prior to 2006
over the expected service period.
    
    Forfeitures over the expected term of the award are estimated at the date of grant and
the estimates adjusted to reflect actual subsequent forfeitures. Previously, we had
reflected forfeitures as they occurred. The effect of this change was not significant.
    
    Tax benefits recognized as a result of the exercise of employee stock options are
classified as a financing cash flow. Previously, we had classified these tax benefits as
an operating cash flow.
    
    The fair value of unvested outstanding options at the beginning of first quarter 2006
will be expensed over the remaining service period. The effect of this change was not
significant because of our accounting for options at fair value determined at the date of
grant beginning in 2003. As a result this applied only to our unvested outstanding options
granted prior to 2003.
   Second
    
    
    First SixQuarter 2005
    
    
    Months 2005(In millions, except per share)Net income, as reported
    
    $
    69
    
    
    $
    114Add: Stock-based compensation expense,
net of related tax effects, included in
the determination of reported net income
    
    
    7
    
    
    
    13Deduct: Total stock-based
compensation expense, net of related tax
effects, determined under the fair value
based method for all awards
    
    
    (8
    )
    
    
    (15
    )Pro forma net income
    
    $
    68
    
    
    $
    112Earnings per share:Basic, as reported
    
    $
    0.61
    
    
    $
    1.01Basic, pro forma
    
    $
    0.60
    
    
    $
    0.99Diluted, as reported
    
    $
    0.60
    
    
    $
    0.99Diluted, pro forma
    
    $
    0.59
    
    
    $
    0.97
 Accounting for Purchases and Sales of Inventory with the Same Counterparty
 Accounting for Purchases and Sales of Inventory with the Same Counterparty
  14




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Pending Accounting Pronouncements
  How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net
Presentation).
 Accounting for Uncertainty in Income Taxes
 Note 3  Employee Benefit Plans
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Service costs  benefits earned during the period
    
    $
    7
    
    
    $
    6
    
    
    $
    14
    
    
    $
    13Interest cost on projected benefit obligation
    
    
    18
    
    
    
    18
    
    
    
    36
    
    
    
    36Expected return on plan assets
    
    
    (20
    )
    
    
    (18
    )
    
    
    (40
    )
    
    
    (36
    )Amortization of prior service costs
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    Amortization of actuarial net loss
    
    
    6
    
    
    
    6
    
    
    
    12
    
    
    
    12Defined benefit expense
    
    $
    12
    
    
    $
    12
    
    
    $
    24
    
    
    $
    25
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Service costs  benefits earned during the period
    
    $
    1
    
    
    $
    1
    
    
    $
    2
    
    
    $
    2Interest cost on projected benefit obligation
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    4Amortization of prior service costs
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Amortization of actuarial net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Defined benefit expense
    
    $
    2
    
    
    $
    2
    
    
    $
    4
    
    
    $
    4
 Note 4  Share-Based Compensation
  15




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Restricted or performance units
  WeightedAverageGrant Date
    
    
    AggregateFair Value Per
    
    
    CurrentShares
    
    
    Share
    
    
    Value(In thousands)
    
    
    
    
    
    
    (In millions)Not vested beginning of the year
    
    
    744
    
    
    $
    32Granted
    
    
    685
    
    
    
    46Vested and settled
    
    
    (5
    )
    
    
    30Forfeited
    
    
    (16
    )
    
    
    36Not vested end of second quarter 2006
    
    
    1,408
    
    
    
    39
    
    
    $
    60Not vested end of second quarter 2006 subject toTime vesting requirements
    
    
    824
    
    
    
    
    
    
    $
    35Performance requirements
    
    
    584
    
    
    
    
    
    
    
    25Total
    
    
    1,408
    
    
    
    
    
    
    $
    60Not vested end of second quarter 2006 to be settled inCash
    
    
    879
    
    
    
    
    
    
    $
    38Stock
    
    
    529
    
    
    
    
    
    
    
    22Total
    
    
    1,408
    
    
    
    
    
    
    $
    60
  Restricted stock
  Stock options
  16




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Weighted
    
    
    AggregateWeighted
    
    
    Average
    
    
    Intrinsic ValueAverage
    
    
    Remaining
    
    
    (Current valueExercise Price
    
    
    Contractual
    
    
    less exerciseShares
    
    
    Per Share
    
    
    Term
    
    
    price)(In thousands)
    
    
    
    
    
    
    (In years)
    
    
    (In millions)Outstanding beginning of the year
    
    
    6,832
    
    
    $
    28Granted
    
    
    1,103
    
    
    
    46Exercised
    
    
    (1,317
    )
    
    
    27Forfeited
    
    
    (104
    )
    
    
    32Outstanding end of second quarter 2006
    
    
    6,514
    
    
    
    31
    
    
    
    7
    
    
    $
    74Exercisable end of second quarter 2006
    
    
    3,657
    
    
    
    28
    
    
    
    5
    
    
    $
    56
   First Six Months2006
    
    
    2005Expected life of options
    
    6.0 years
    
    8.0 yearsExpected stock price volatility
    
    
    25.1
    %
    
    
    28.2
    %Expected dividend yield
    
    
    2.4
    %
    
    
    2.3
    %Risk-free interest rate
    
    
    4.5
    %
    
    
    4.1
    %Weighted average estimated
fair value per option of
options granted
    
    $
    11.53
    
    
    $
    11.13
  Share-based compensation expense
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Restricted or performance units
    
    $
    5
    
    
    $
    4
    
    
    $
    13
    
    
    $
    7Restricted stock
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    1Stock options
    
    
    2
    
    
    
    2
    
    
    
    9
    
    
    
    4Total pre-tax share-based
compensation expense
    
    $
    8
    
    
    $
    6
    
    
    $
    24
    
    
    $
    12
   17




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Other information
 Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Cash paid to settle restricted or performance units
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Cash received from the exercise of stock options
    
    
    7
    
    
    
    5
    
    
    
    34
    
    
    
    35Income tax benefit recognized from the exercise of
stock options
    
    
    1
    
    
    
    
    
    
    
    7
    
    
    
    
 Note 5  Earnings Per Share
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Weighted average common shares outstanding  basic
    
    
    109.8
    
    
    
    113.7
    
    
    
    110.5
    
    
    
    113.2Dilutive effect of equity purchase contracts
(settled in first and second quarter of 2005)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.7Dilutive effect of stock options
    
    
    2.0
    
    
    
    1.3
    
    
    
    2.1
    
    
    
    1.5Weighted average shares outstanding  diluted
    
    
    111.8
    
    
    
    115.0
    
    
    
    112.6
    
    
    
    115.4
  Note 6  Comprehensive Income
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Net income
    
    $
    192
    
    
    $
    69
    
    
    $
    268
    
    
    $
    114Other comprehensive income (loss), net
of taxes:Unrealized gains (losses) on:Available-for-sale securities
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    Derivative instruments
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Minimum pension liability adjustment
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Foreign currency translation adjustments
    
    
    (5
    )
    
    
    3
    
    
    
    (7
    )
    
    
    3Other comprehensive income (loss)
    
    
    (6
    )
    
    
    5
    
    
    
    (8
    )
    
    
    2Comprehensive income
    
    $
    186
    
    
    $
    74
    
    
    $
    260
    
    
    $
    116
  18




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Note 7  Contingencies




Note 8  Segment Information






19




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Expenses NotAllocated toCorrugated
    
    
    Forest
    
    
    Real
    
    
    Financial
    
    
    Segments andPackaging
    
    
    Products
    
    
    Estate
    
    
    Services
    
    
    Eliminations
    
    
    TotalFor Second Quarter 2006(In millions)Revenues from external customers
    
    $
    758
    
    
    $
    341
    
    
    $
    35
    
    
    $
    299
    
    
    $
    
    
    
    $
    1,433Depreciation and amortization
    
    
    39
    
    
    
    14
    
    
    
    
    
    
    
    6
    
    
    
    4
    
    
    
    63Segment operating income or income
(loss) before taxes
    
    
    67
    
    
    
    101
    
    
    
    9
    
    
    
    62
    
    
    
    15
    (a)
    
    
    254Financial services, net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    107Capital expenditures
    
    
    28
    
    
    
    16
    
    
    
    
    
    
    
    7
    
    
    
    3
    
    
    
    54For First Six Months 2006 or at Second
Quarter-End 2006(In millions)Revenues from external customers
    
    $
    1,479
    
    
    $
    674
    
    
    $
    82
    
    
    $
    582
    
    
    $
    
    
    
    $
    2,817Depreciation and amortization
    
    
    77
    
    
    
    28
    
    
    
    1
    
    
    
    11
    
    
    
    7
    
    
    
    124Segment operating income or income
(loss) before taxes
    
    
    107
    
    
    
    183
    
    
    
    35
    
    
    
    111
    
    
    
    (60
    )(a)
    
    
    376Financial services, net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    
    
    
    
    211Total assets
    
    
    2,336
    
    
    
    1,066
    
    
    
    485
    
    
    
    16,910
    
    
    
    336
    
    
    
    21,133Investment in equity method investees
and joint ventures
    
    
    11
    
    
    
    21
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    108Capital expenditures
    
    
    47
    
    
    
    26
    
    
    
    
    
    
    
    21
    
    
    
    6
    
    
    
    100Goodwill
    
    
    236
    
    
    
    129
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    517For Second Quarter 2005(In millions)Revenues from external customersAs reported
    
    $
    738
    
    
    $
    265
    
    
    $
    
    
    
    $
    252
    
    
    $
    
    
    
    $
    1,255Reclassification
    
    
    2
    
    
    
    5
    
    
    
    25
    
    
    
    (13
    )
    
    
    
    
    
    
    19
    (b)As reclassified
    
    
    740
    
    
    
    270
    
    
    
    25
    
    
    
    239
    
    
    
    
    
    
    
    1,274Depreciation and amortizationAs reported
    
    
    39
    
    
    
    13
    
    
    
    
    
    
    
    7
    
    
    
    4
    
    
    
    63Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    As reclassified
    
    
    39
    
    
    
    13
    
    
    
    
    
    
    
    7
    
    
    
    4
    
    
    
    63Segment operating income or income
(loss) before taxesAs reported
    
    
    58
    
    
    
    58
    
    
    
    
    
    
    
    51
    
    
    
    (83
    )
    
    
    84Reclassification
    
    
    
    
    
    
    (3
    )
    
    
    9
    
    
    
    (4
    )
    
    
    (2
    )As reclassified
    
    
    58
    
    
    
    55
    
    
    
    9
    
    
    
    47
    
    
    
    (85
    )(a)
    
    
    84Financial services, net interest incomeAs reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    95Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2As reclassified
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    97Capital expendituresAs reported
    
    
    36
    
    
    
    15
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    63Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    As reclassified
    
    
    36
    
    
    
    15
    
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    63
 20




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Expenses NotAllocated toSegmentsCorrugated
    
    
    Forest
    
    
    Real
    
    
    Financial
    
    
    andPackaging
    
    
    Products
    
    
    Estate
    
    
    Services
    
    
    Eliminations
    
    
    TotalFor First Six Months 2005 or atSecond
Quarter-End 2005(In millions)Revenues from external customersAs reported
    
    $
    1,456
    
    
    $
    514
    
    
    $
    
    
    
    $
    488
    
    
    $
    
    
    
    $
    2,458Reclassification
    
    
    3
    
    
    
    7
    
    
    
    54
    
    
    
    (27
    )
    
    
    
    
    
    
    37
    (b)As reclassified
    
    
    1,459
    
    
    
    521
    
    
    
    54
    
    
    
    461
    
    
    
    
    
    
    
    2,495Depreciation and amortizationAs reported
    
    
    79
    
    
    
    26
    
    
    
    
    
    
    
    14
    
    
    
    6
    
    
    
    125Reclassification
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    As reclassified
    
    
    79
    
    
    
    26
    
    
    
    1
    
    
    
    13
    
    
    
    6
    
    
    
    125Segment operating income or income
(loss) before taxesAs reported
    
    
    108
    
    
    
    112
    
    
    
    
    
    
    
    98
    
    
    
    (160
    )
    
    
    158Reclassification
    
    
    
    
    
    
    (6
    )
    
    
    18
    
    
    
    (9
    )
    
    
    (3
    )
    
    
    As reclassified
    
    
    108
    
    
    
    106
    
    
    
    18
    
    
    
    89
    
    
    
    (163
    )(a)
    
    
    158Financial services, net interest incomeAs reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189
    
    
    
    
    
    
    
    189Reclassification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3As reclassified
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    
    
    
    
    192Total AssetsAs reported
    
    
    2,432
    
    
    
    972
    
    
    
    
    
    
    
    16,143
    
    
    
    286
    
    
    
    19,833Reclassification
    
    
    
    
    
    
    (97
    )
    
    
    400
    
    
    
    (334
    )
    
    
    31
    
    
    
    As reclassified
    
    
    2,432
    
    
    
    875
    
    
    
    400
    
    
    
    15,809
    
    
    
    317
    
    
    
    19,833Investment in equity method investees
and joint venturesAs reported
    
    
    14
    
    
    
    38
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    115Reclassification
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    (63
    )
    
    
    
    
    
    
    As reclassified
    
    
    14
    
    
    
    38
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    115Capital expendituresAs reported
    
    
    75
    
    
    
    29
    
    
    
    
    
    
    
    13
    
    
    
    10
    
    
    
    127Reclassification
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )(c)As reclassified
    
    
    75
    
    
    
    28
    
    
    
    
    
    
    
    13
    
    
    
    10
    
    
    
    126GoodwillAs reported
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    394
 
 (a)
    
    See table below for expenses not allocated to segments.(b)
    
    Revenues increased because we recast segment revenues to include gross real estate sales that had previously been reported net and certain ancillary revenues that had
previously been reported as a reduction of cost of sales.(c)
    
    Capital expenditures decreased because we reclassified real estate development expenditures separately. 21




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)General and administrative
    
    $
    (26
    )
    
    $
    (22
    )
    
    $
    (49
    )
    
    $
    (42
    )Share-based compensation
    
    
    (8
    )
    
    
    (6
    )
    
    
    (24
    )
    
    
    (12
    )Other operating income (expense)
    
    
    (8
    )
    
    
    (29
    )
    
    
    (11
    )
    
    
    (53
    )Other non-operating income(expense)
    
    
    91
    
    
    
    1
    
    
    
    91
    
    
    
    2Parent company interest
    
    
    (34
    )
    
    
    (29
    )
    
    
    (67
    )
    
    
    (58
    )$
    15
    
    
    $
    (85
    )
    
    $
    (60
    )
    
    $
    (163
    )Other operating income (expense) applies to:Corrugated packaging
    
    $
    (2
    )
    
    $
    (2
    )
    
    $
    (4
    )
    
    $
    (20
    )Forest products
    
    
    1
    
    
    
    (27
    )
    
    
    1
    
    
    
    (27
    )Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial services
    
    
    (7
    )
    
    
    
    
    
    
    (10
    )
    
    
    Unallocated
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (6
    )$
    (8
    )
    
    $
    (29
    )
    
    $
    (11
    )
    
    $
    (53
    )
  Note 9  Real Estate
  SecondQuarter-End
    
    
    Year-End2006
    
    
    2005(In millions)Developed land and land under development
    
    $
    232
    
    
    $
    199Land held for investment or future development and timber
    
    
    113
    
    
    
    104Investment in real estate ventures
    
    
    76
    
    
    
    76Income producing properties, net of accumulated depreciation
    
    
    25
    
    
    
    24Total
    
    $
    446
    
    
    $
    403
   22




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 SecondQuarter-End
    
    
    Year-End2006
    
    
    2005(In millions)Real estate
    
    $
    174
    
    
    $
    184Total assets
    
    
    260
    
    
    
    240Borrowings, principally non-recourse
    
    
    83
    
    
    
    76Total liabilities
    
    
    96
    
    
    
    77Equity
    
    
    164
    
    
    
    163Our investment in real estate ventures:Our share of their equity
    
    $
    84
    
    
    $
    84Unrecognized deferred gain(a)
    
    
    (8
    )
    
    
    (8
    )Investment in real estate ventures
    
    $
    76
    
    
    $
    76
 (a) We recognize the deferred gain from our sale to the venture as the
venture sells the real estate to third parties.
 Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Revenues
    
    $
    20
    
    
    $
    59
    
    
    $
    73
    
    
    $
    103Earnings
    
    
    5
    
    
    
    33
    
    
    
    25
    
    
    
    47Our equity in their earnings
    
    
    3
    
    
    
    4
    
    
    
    13
    
    
    
    8
   Note 10  Assets Held For Sale
    23




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Note 11  Other Operating Income (Expense)
 Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Equity in earnings of manufacturing joint ventures
    
    $
    4
    
    
    $
    11
    
    
    $
    6
    
    
    $
    19Equity in earnings of real estate ventures
    
    
    3
    
    
    
    4
    
    
    
    13
    
    
    
    8Closure and sale of converting and production facilities
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (39
    )Antitrust litigation
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (8
    )Proxy contest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Other
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Total
    
    $
    6
    
    
    $
    (14
    )
    
    $
    18
    
    
    $
    (26
    )
   Beginning
    
    
    
    
    
    
    Cash
    
    
    End ofof Period
    
    
    Additions
    
    
    Payments
    
    
    Period(In millions)Involuntary employee terminations
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    1Demolition
    
    
    6
    
    
    
    
    
    
    
    (2
    )
    
    
    4Total
    
    $
    7
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    5
  Note 12  Acquisitions and Other Items
   24




---



##### Table of Contents



TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
 Total(In millions)Current assets
    
    $
    35Property and equipment
    
    
    74Goodwill
    
    
    129Total assets
    
    
    238Current liabilities
    
    
    (13
    )Current portion of long-term debt
    
    
    (56
    )Total liabilities
    
    
    (69
    )Net assets at date of acquisition
    
    $
    169
   2005First SixMonths
    
    
    Year(In millions, except per share)Parent company revenues
    
    $
    2,130
    
    
    $
    4,175Income from continuing operations
    
    
    122
    
    
    
    190Income from continuing operations, per diluted share
    
    $
    1.06
    
    
    $
    1.66
  Note 13  Income Taxes and Tax Litigation Settlement
    25




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
 Forward-Looking Statements
  
    
    general economic, market or business conditions;
    
    the opportunities (or lack thereof) that may be presented to and pursued by us;
    
    the availability and price of raw materials we use;
    
    fluctuations in the cost of purchased energy;
    
    fluctuations in the cost we incur to transport the raw materials we use and the
products we manufacture;
    
    assumptions related to pension and postretirement costs, and share-based compensation;
    
    assumptions related to accounting for impaired assets;
    
    the collectibility of loans and accounts receivable and related provision for losses;
    
    competitive actions by other companies;
    
    changes in laws or regulations and actions or restrictions of regulatory agencies;
    
    the accuracy of certain judgments and estimates concerning our integration of acquired operations;
    
    our ability to execute certain strategic and business improvement initiatives; and
    
    other factors, many of which are beyond our control.
  Non-GAAP Financial Measure
    26




---



##### Table of Contents



Accounting Policies
 Critical Accounting Estimates
   New and Pending Accounting Pronouncements
 Share-Based Payment Accounting
for Purchases and Sales of Inventory with the Same Counterparty
 Results of Operations for Second Quarter 2006 and 2005
 Summary
  27




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions, except per share)RevenuesCorrugated packaging
    
    $
    758
    
    
    $
    740
    
    
    $
    1,479
    
    
    $
    1,459Forest products
    
    
    341
    
    
    
    270
    
    
    
    674
    
    
    
    521Real estate
    
    
    35
    
    
    
    25
    
    
    
    82
    
    
    
    54Financial services
    
    
    299
    
    
    
    239
    
    
    
    582
    
    
    
    461Total revenues
    
    $
    1,433
    
    
    $
    1,274
    
    
    $
    2,817
    
    
    $
    2,495Segment Operating IncomeCorrugated packaging
    
    $
    67
    
    
    $
    58
    
    
    $
    107
    
    
    $
    108Forest products
    
    
    101
    
    
    
    55
    
    
    
    183
    
    
    
    106Real estate
    
    
    9
    
    
    
    9
    
    
    
    35
    
    
    
    18Financial services
    
    
    62
    
    
    
    47
    
    
    
    111
    
    
    
    89Total segment operating income
    
    
    239
    
    
    
    169
    
    
    
    436
    
    
    
    321Expenses not allocated to segmentsGeneral and administrative
    
    
    (26
    )
    
    
    (22
    )
    
    
    (49
    )
    
    
    (42
    )Share-based compensation
    
    
    (8
    )
    
    
    (6
    )
    
    
    (24
    )
    
    
    (12
    )Other operating income (expense)
    
    
    (8
    )
    
    
    (29
    )
    
    
    (11
    )
    
    
    (53
    )Other non-operating income (expense)
    
    
    91
    
    
    
    1
    
    
    
    91
    
    
    
    2Parent company interest
    
    
    (34
    )
    
    
    (29
    )
    
    
    (67
    )
    
    
    (58
    )Income before income taxes
    
    
    254
    
    
    
    84
    
    
    
    376
    
    
    
    158Income taxes
    
    
    (62
    )
    
    
    (16
    )
    
    
    (108
    )
    
    
    (45
    )Income from continuing operations
    
    
    192
    
    
    
    68
    
    
    
    268
    
    
    
    113Discontinued operations
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Net income
    
    $
    192
    
    
    $
    69
    
    
    $
    268
    
    
    $
    114Average diluted shares outstanding
    
    
    111.8
    
    
    
    115.0
    
    
    
    112.6
    
    
    
    115.4Income from continuing operations, per diluted share
    
    $
    1.71
    
    
    $
    0.59
    
    
    $
    2.38
    
    
    $
    0.98ROI, annualized
    
    
    
    
    
    
    
    
    
    
    15.7
    %
    
    
    10.0
    %
  
    
    In 2006, we experienced improved markets for our corrugated packaging and forest
products, principally gypsum and particleboard, and we benefited from the acquisition
of our partners 50 percent interest in Standard Gypsum LP. While we continued to see
the benefit in our manufacturing operations from our initiatives to lower costs,
improve asset utilization and increase operating efficiencies, costs, principally
energy and freight, offset much of the benefit. In addition, we began classifying real
estate as our fourth business segment. Real estate operations benefited from an $8
million gain on sale of land held for commercial use. Financial services operations
benefited from improved net interest income attributable to an increase in earning
assets, principally mortgage-backed securities, and improved credit conditions.
Actions taken to lower costs in our financial services operation associated with the
elimination of the wholesale mortgage and the majority of our asset-based lending
operations resulted in charges of $10 million. As a result of the adoption of the new
share-based compensation accounting pronouncement related to awards granted to
retirement eligible employees, we accelerated the expensing of $7 million of
share-based compensation. In addition, we recognized an $89 million net pre-tax gain
resulting from the tax litigation settlement, most of which was non-taxable.
    
    In 2005, we continued to see the benefits in our manufacturing operations of our
initiatives to lower costs, improve asset utilization and increase operating
efficiencies despite higher raw material costs. In addition, we experienced higher
prices and shipments for most of our product offerings. Our financial services
operations were negatively impacted by lower net interest income resulting from a
decrease in average earning assets and more normalized credit loss provisions. Actions
taken to lower costs and improve asset utilization and operating efficiencies resulted
in charges and expenses of $53 million, principally related to the closure of our
Antioch, California converting facility and the sale of
 28




---



##### Table of Contents



our Pembroke, Canada MDF facility and charges associated with antitrust litigation and the
2005 proxy contest. As a result of the sale of our Pembroke, Canada MDF facility, we
recognized a one-time tax benefit of $16 million.
  Corrugated Packaging
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)Revenues
    
    $
    758
    
    
    $
    740
    
    
    $
    1,479
    
    
    $
    1,459Costs and expenses
    
    
    (691
    )
    
    
    (682
    )
    
    
    (1,372
    )
    
    
    (1,351
    )Segment operating income
    
    $
    67
    
    
    $
    58
    
    
    $
    107
    
    
    $
    108Segment ROI
    
    
    
    
    
    
    
    
    
    
    10.4
    %
    
    
    10.1
    %
  Second Quarter
    
    
    First Six Months2006 versus Second
    
    
    2006 versus First SixQuarter 2005
    
    
    Months 2005Increase (Decrease)Corrugated packagingAverage prices
    
    
    4
    %
    
    
    1
    %Shipments, average week
    
    
    2
    %
    
    
    1
    %Industry shipments, average week (a)
    
    
    5
    %
    
    
    2
    %LinerboardAverage prices
    
    
    17
    %
    
    
    2
    %Shipments, tons
    
    
    (25
    )%
    
    
    (19
    )%
 
 (a) Source: Fibre Box Association    29




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006 versus Second
    
    
    2006 versus FirstQuarter 2005
    
    
    Six Months 2005Increase (Decrease)(In millions)Wood fiber
    
    $
    2
    
    
    $
    2Recycled fiber
    
    
    (5
    )
    
    
    (16
    )Freight
    
    
    11
    
    
    
    22Energy
    
    
    4
    
    
    
    13Depreciation
    
    
    
    
    
    
    (2
    )Pension and postretirement
    
    
    (1
    )
    
    
    (2
    )
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005Number of converting facilities (at quarter-end)
    
    
    65
    
    
    
    68
    
    
    
    65
    
    
    
    68Mill capacity, in thousand tons
    
    
    892
    
    
    
    859
    
    
    
    1,784
    
    
    
    1,718Mill production, in thousand tons
    
    
    883
    
    
    
    863
    
    
    
    1,773
    
    
    
    1,738Percent mill production used internally
    
    
    95
    %
    
    
    93
    %
    
    
    94
    %
    
    
    92
    %Percent of total fiber requirements sourced from recycled fiber
    
    
    34
    %
    
    
    36
    %
    
    
    34
    %
    
    
    36
    %Corrugating medium purchases from our Premier Boxboard Limited
LLC joint venture, in thousand tons
    
    
    23
    
    
    
    22
    
    
    
    37
    
    
    
    37
 Forest Products
  30




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005Pro
    
    
    
    
    
    
    
    
    
    
    ProActual
    
    
    Actual
    
    
    forma(a)
    
    
    Actual
    
    
    Actual
    
    
    forma(a)(Dollars in millions)Revenues
    
    $
    341
    
    
    $
    270
    
    
    $
    320
    
    
    $
    674
    
    
    $
    521
    
    
    $
    617Costs and expenses
    
    
    (240
    )
    
    
    (215
    )
    
    
    (256
    )
    
    
    (491
    )
    
    
    (415
    )
    
    
    (495
    )Segment operating income
    
    $
    101
    
    
    $
    55
    
    
    $
    64
    
    
    $
    183
    
    
    $
    106
    
    
    $
    122Segment ROI
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37.1
    %
    
    
    25.0
    %
    
    
    23.4
    %
 
 (a) Pro forma to reflect the consolidation of Standard Gypsum LP.  Second Quarter
    
    
    First Six Months2006 versus Second
    
    
    2006 versus FirstQuarter 2005
    
    
    Six Months 2005Increase (Decrease)Lumber:Average prices
    
    
    (15
    )%
    
    
    (9
    )%Shipments
    
    
    8
    %
    
    
    10
    %Gypsum:Average prices
    
    
    37
    %
    
    
    34
    %Shipments
    
    
    155
    %
    
    
    163
    %Particleboard:Average prices
    
    
    13
    %
    
    
    5
    %Shipments
    
    
    1
    %
    
    
    (2
    )%MDF:Average prices
    
    
    5
    %
    
    
    (1
    )%Shipments
    
    
    (33
    )%
    
    
    (38
    )%
    Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Our share of joint venture operating income
    
    $
    1
    
    
    $
    8
    
    
    $
    1
    
    
    $
    14Mineral and hunting lease
    
    
    14
    
    
    
    8
    
    
    
    28
    
    
    
    14$
    15
    
    
    $
    16
    
    
    $
    29
    
    
    $
    28
   31




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006 versus Second
    
    
    2006 versus FirstQuarter 2005
    
    
    Six Months 2005Increase (Decrease)(In millions)Wood fiber
    
    $
    (2
    )
    
    $
    (3
    )Energy, principally natural gas
    
    
    4
    
    
    
    15Freight
    
    
    9
    
    
    
    17Chemical
    
    
    (1
    )
    
    
    (3
    )Depreciation
    
    
    1
    
    
    
    2Pension and postretirement
    
    
    (1
    )
    
    
    (2
    )
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005Timber harvest, in million tons:Sawtimber
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.2
    
    
    
    1.2Pulpwood
    
    
    0.7
    
    
    
    0.9
    
    
    
    1.5
    
    
    
    1.7Total
    
    
    1.3
    
    
    
    1.5
    
    
    
    2.7
    
    
    
    2.9Number of converting and manufacturing facilities (at quarter-end)
    
    
    17
    
    
    
    17
    
    
    
    17
    
    
    
    17Average operating rates for all product lines excluding sold or closed
facilities:High
    
    
    116
    %
    
    
    106
    %
    
    
    113
    %
    
    
    102
    %Low
    
    
    88
    %
    
    
    91
    %
    
    
    93
    %
    
    
    91
    %Average
    
    
    100
    %
    
    
    96
    %
    
    
    100
    %
    
    
    96
    %Gypsum facing paper purchases from our Premier Boxboard Limited LLC joint
venture, in thousand tons
    
    
    21
    
    
    
    30
    
    
    
    37
    
    
    
    38Percent of gypsum facing paper supplied by our Premier Boxboard Limited LLC
joint venture
    
    
    
    
    
    
    
    
    
    
    76
    %
    
    
    85
    %
 Real Estate
  32




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)Revenues
    
    $
    35
    
    
    $
    25
    
    
    $
    82
    
    
    $
    54Costs and expenses
    
    
    (29
    )
    
    
    (20
    )
    
    
    (60
    )
    
    
    (44
    )Our share of real estate ventures income
    
    
    3
    
    
    
    4
    
    
    
    13
    
    
    
    8Segment operating income
    
    $
    9
    
    
    $
    9
    
    
    $
    35
    
    
    $
    18Segment ROI
    
    
    
    
    
    
    
    
    
    
    17.0
    %
    
    
    9.7
    %
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)Residential real estate revenue
    
    $
    19
    
    
    $
    14
    
    
    $
    36
    
    
    $
    23Lots sold
    
    
    463
    
    
    
    354
    
    
    
    805
    
    
    
    548Commercial real estate revenue
    
    $
    2
    
    
    $
    
    
    
    $
    18
    
    
    $
    10Acres sold
    
    
    36
    
    
    
    4
    
    
    
    43
    
    
    
    130Land held for investment or
future development revenue
    
    $
    6
    
    
    $
    4
    
    
    $
    13
    
    
    $
    8Acres sold
    
    
    845
    
    
    
    514
    
    
    
    1,768
    
    
    
    962Income producing properties,
timber and other revenues
    
    $
    8
    
    
    $
    7
    
    
    $
    15
    
    
    $
    13Total revenues
    
    $
    35
    
    
    $
    25
    
    
    $
    82
    
    
    $
    54
  33




---



##### Table of Contents



SecondQuarter-End2006Owned and consolidated ventures:Developed land and land under developmentNumber of projects
    
    
    31Residential lots remaining
    
    
    11,951Commercial acres remaining
    
    
    722Land held for investment or future developmentNumber of projects
    
    
    20Acres in entitlement process
    
    
    21,950Acres undeveloped
    
    
    196,379Ventures accounted for using the equity method:Ventures lot sales, (for first six months 2006)Lots sold
    
    
    1,122(a)Revenue per lot sold
    
    $
    52,098Ventures developed land and land under developmentNumber of projects
    
    
    23Residential lots remaining
    
    
    11,789Commercial acres remaining
    
    
    669Land held for investment or future development, in acres
    
    
    6,519(b)
 
 (a) The previously discussed elimination of the one month reporting lag resulted
in a one-time increase in the number of lots sold of 122 lots.(b) Sales in second quarter 2006 totaled 75 acres. Financial Services
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)Net interest income
    
    $
    107
    
    
    $
    97
    
    
    $
    211
    
    
    $
    192Segment operating income
    
    
    62
    
    
    
    47
    
    
    
    111
    
    
    
    89Segment ROI
    
    
    
    
    
    
    
    
    
    
    21.8
    %
    
    
    19.2
    %
 Net Interest Income and Earning Assets and Deposits
  34




---



##### Table of Contents



Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005Average
    
    
    Yield/
    
    
    Average
    
    
    Yield/
    
    
    Average
    
    
    Yield/
    
    
    Average
    
    
    Yield/Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in millions)Earning assets
    
    $
    16,363
    
    
    
    6.19
    %
    
    $
    14,912
    
    
    
    5.05
    %
    
    $
    16,474
    
    
    
    6.00
    %
    
    $
    14,937
    
    
    
    4.91
    %Interest-bearing liabilities
    
    
    15,147
    
    
    
    (3.84
    )%
    
    
    13,871
    
    
    
    (2.64
    )%
    
    
    15,278
    
    
    
    (3.70
    )%
    
    
    13,918
    
    
    
    (2.52
    )%Impact of noninterest bearing funds
    
    
    
    
    
    
    0.29
    %
    
    
    
    
    
    
    0.18
    %
    
    
    
    
    
    
    0.27
    %
    
    
    
    
    
    
    0.18
    %Net interest margin
    
    
    
    
    
    
    2.64
    %
    
    
    
    
    
    
    2.59
    %
    
    
    
    
    
    
    2.57
    %
    
    
    
    
    
    
    2.57
    %
 Quantitative and Qualitative Disclosures About Market Risk,
  Second Quarter-End2006
    
    
    2005(Dollars in millions)Residential housing assets:Loans held for sale
    
    $
    37
    
    
    $
    315Loans
    
    
    6,853
    
    
    
    7,189Securities
    
    
    6,145
    
    
    
    4,531Total residential housing assets
    
    
    13,035
    
    
    
    12,035Other earning assets
    
    
    3,198
    (a)
    
    
    3,114Total earning assets
    
    $
    16,233
    
    
    $
    15,149Residential housing assets as a percentage of total earning assets
    
    
    80
    %
    
    
    79
    %Noninterest bearing deposit accounts
    
    $
    777
    
    
    $
    716Interest bearing deposit accounts
    
    
    3,500
    
    
    
    3,840Certificates of deposit
    
    
    5,000
    
    
    
    4,471Total deposits
    
    $
    9,277
    
    
    $
    9,027
 
 (a) Includes $295 million of commercial loans held for sale.    35




---



##### Table of Contents



Asset Quality and Allowance for Credit Losses
  Second Quarter-End
    
    
    Year-End2006
    
    
    2005
    
    
    2005(Dollars in millions)Non-performing loans
    
    $
    35
    
    
    $
    52
    
    
    $
    35Foreclosed real estate
    
    
    2
    
    
    
    3
    
    
    
    2Non-performing assets
    
    $
    37
    
    
    $
    55
    
    
    $
    37Non-performing loans as a percentage of total loans
    
    
    0.37
    %
    
    
    0.52
    %
    
    
    0.35
    %Non-performing assets ratio
    
    
    0.39
    %
    
    
    0.55
    %
    
    
    0.37
    %Allowance for loan losses as a percentage of non-performing loans
    
    
    199
    %
    
    
    150
    %
    
    
    213
    %Allowance for loan losses as a percentage of total loans
    
    
    0.73
    %
    
    
    0.78
    %
    
    
    0.75
    %
  Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)Loans:Balance at beginning of period
    
    $
    69
    
    
    $
    82
    
    
    $
    74
    
    
    $
    85Provision (credit) for loan losses
    
    
    (2
    )
    
    
    6
    
    
    
    
    
    
    
    8Net charge-offs
    
    
    4
    
    
    
    (10
    )
    
    
    (3
    )
    
    
    (15
    )Balance at end of period
    
    
    71
    
    
    
    78
    
    
    
    71
    
    
    
    78Unfunded credit commitments:Balance at beginning of period
    
    
    7
    
    
    
    6
    
    
    
    7
    
    
    
    7Provision for commitment-related credit losses
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Net charge-offs
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (3
    )Balance at end of period
    
    
    7
    
    
    
    6
    
    
    
    7
    
    
    
    6Combined allowances for credit losses at period end
    
    $
    78
    
    
    $
    84
    
    
    $
    78
    
    
    $
    84Provision (credit) for:Loan losses
    
    $
    (2
    )
    
    $
    6
    
    
    $
    
    
    
    $
    8Commitment-related credit losses
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Combined provision (credit) for credit losses
    
    $
    (2
    )
    
    $
    8
    
    
    $
    
    
    
    $
    10Net charge-offs as a percentage of average loans outstanding
    
    
    (0.12
    )%
    
    
    0.47
    %
    
    
    0.08
    %
    
    
    0.37
    %
  Noninterest Income and Noninterest Expense
  36




---



##### Table of Contents



Expenses Not Allocated to Segments
    Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(In millions)Closure of converting and production facilities and
sale of non-strategic assets
    
    $
    
    
    
    $
    (28
    )
    
    $
    
    
    
    $
    (39
    )Elimination of wholesale mortgage origination network
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Goodwill impairment
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    Antitrust litigation
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (8
    )Proxy contest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Other
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Total
    
    $
    (8
    )
    
    $
    (29
    )
    
    $
    (11
    )
    
    $
    (53
    )
     Income Taxes
   37




---



##### Table of Contents



Average Shares Outstanding
  Capital Resources and Liquidity for First Six Months 2006
  Sources and Uses of Cash
  Parent Company Sources and Uses of Cash
 First Six Months2006
    
    
    2005(In millions)We received cash from:Operations
    
    $
    230
    
    
    $
    213Dividends from financial services(a)
    
    
    60
    
    
    
    25Proceeds from tax litigation settlement, net
    
    
    89
    
    
    
    Real estate development expenditures net of non-cash cost of sales
    
    
    (33
    )
    
    
    (10
    )Working capital changes
    
    
    (57
    )
    
    
    (55
    )From operations
    
    
    289
    
    
    
    173Sale of non-strategic and other assets
    
    
    13
    
    
    
    36Exercise of options and related tax benefits, and in 2005 the settlement of
equity purchase contracts
    
    
    41
    
    
    
    380Borrowing, net
    
    
    85
    
    
    
    14Total sources
    
    
    428
    
    
    
    603We used cash to:Return to shareholders through:Dividends
    
    
    (55
    )
    
    
    (52
    )Repurchase of common stock
    
    
    (153
    )
    
    
    (435
    )Reinvest in the business through:Capital expenditures
    
    
    (79
    )
    
    
    (113
    )Acquisition, joint ventures, and other
    
    
    (129
    )
    
    
    (9
    )Total uses
    
    
    (416
    )
    
    
    (609
    )Change in cash and cash equivalents
    
    $
    12
    
    
    $
    (6
    )
 
 (a)
    
    Dividends we receive from financial services are eliminated in the consolidated statements of cash flows.  38




---



##### Table of Contents



Financial Services Sources and Uses of Cash
 First Six Months2006
    
    
    2005(In millions)We received cash from:Operations
    
    $
    94
    
    
    $
    93Changes in loans held for sale, and other
    
    
    239
    
    
    
    55Net repayments on loans and securities
    
    
    342
    
    
    
    320From operations
    
    
    675
    
    
    
    468Collection of mortgage servicing rights sale receivables
    
    
    
    
    
    
    46Total sources
    
    
    675
    
    
    
    514We used cash to:Pay dividends to the parent company
    
    
    (60
    )
    
    
    (25
    )Change in deposits and borrowings
    
    
    (767
    )
    
    
    (382
    )Reinvest in the business through
capital expenditures, acquisitions and other uses
    
    
    (18
    )
    
    
    (50
    )Total uses
    
    
    (845
    )
    
    
    (457
    )Change in cash and cash equivalents
    
    $
    (170
    )
    
    $
    57
   39




---



##### Table of Contents



Liquidity
  Parent Company Liquidity
   AccountsReceivableCredit
    
    
    SecuritizationAgreements
    
    
    Facility
    
    
    Total(In millions)Committed
    
    $
    850
    
    
    $
    250
    
    
    $
    1,100Less: borrowings
    
    
    (185
    )
    
    
    (70
    )
    
    
    (255
    )Unused borrowing capacity at second quarter-end 2006
    
    $
    665
    
    
    $
    180
    
    
    $
    845
   Financial Services Liquidity
  Off-Balance Sheet Arrangements
 Parent Company
  
    
    $28 million as a result of the Standard Gypsum LP acquisition and
 40




---



##### Table of Contents




    
    $20 million as a result of the refinancing by the parent company of borrowings by a
financial services subsidiary related to real estate.
 Financial Services
  SecondQuarter-End
    
    
    Year-End2006
    
    
    2005(In millions)Single-family mortgage loans
    
    $
    87
    
    
    $
    204Unused lines of credit
    
    
    1,839
    
    
    
    2,209Unfunded portion of loan commitments
    
    
    4,261
    
    
    
    4,141Unfunded portion of commercial loans held for sale
    
    
    142
    
    
    
    Commitments to originate commercial loans
    
    
    911
    
    
    
    571Letters of credit
    
    
    430
    
    
    
    373Total
    
    $
    7,670
    
    
    $
    7,498
 Capital Adequacy and Other Regulatory Matters
   SecondQuarter-End
    
    Year-End2006
    
    2005(In millions)Balance sheet data:Total assets
    
    $
    16,881
    
    
    $
    17,652Total deposits
    
    
    9,285
    
    
    
    9,201Shareholders equity
    
    
    1,098
    
    
    
    1,099
 Regulatory
    
    For Categorization asActual
    
    Minimum
    
    "Well Capitalized"Regulatory capital ratios:Tangible capital
    
    
    7.29
    %
    
    
    2.00
    %
    
    
    N/ALeverage capital
    
    
    7.29
    %
    
    
    4.00
    %
    
    
    5.00
    %Risk-based capital
    
    
    10.56
    %
    
    
    8.00
    %
    
    
    10.00
    %
 Pension and Postretirement Matters
  41




---



##### Table of Contents



Energy
  Litigation and Related Matters
   42




---



##### Table of Contents



Calculation of Non-GAAP Financial Measure
 Parent
    
    
    Corrugated
    
    
    Forest
    
    
    Real
    
    
    FinancialCompany
    
    
    Packaging
    
    
    Products
    
    
    Estate
    
    
    Services(Dollars in millions)First Six Months 2006ReturnOperating income or segment operating income determined in
accordance with GAAP
    
    $
    352
    (a)
    
    $
    107
    
    
    $
    183
    
    
    $
    35
    
    
    $
    111Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    352
    
    
    $
    107
    
    
    $
    183
    
    
    $
    35
    
    
    $
    111InvestmentBeginning of year total assets, segment assets or
investment in financial services determined in accordance
with GAAP
    
    $
    5,001
    
    
    $
    2,318
    
    
    $
    866
    
    
    $
    422
    
    
    $
    1,017Adjustments:Current liabilities
(excluding current
portion of
long-term debt)
    
    
    (492
    )
    
    
    (269
    )
    
    
    (76
    )
    
    
    (11
    )
    
    
    Assets held for sale
    
    
    (34
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds
related to capital
leases included in
other assets
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAcquisition of
Standard Gypsum, LP
in January 2006
    
    
    196
    
    
    
    N/A
    
    
    
    196
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    4,483
    
    
    $
    2,049
    
    
    $
    986
    
    
    $
    411
    
    
    $
    1,017ROI, annualized
    
    
    15.7
    %
    
    
    10.4
    %
    
    
    37.1
    %
    
    
    17.0
    %
    
    
    21.8
    %First Six Months 2005ReturnOperating income or segment operating income determined in
accordance with GAAP
    
    $
    214
    (a)
    
    $
    108
    
    
    $
    106
    
    
    $
    18
    
    
    $
    89Adjustments for significant unusual items
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    214
    
    
    $
    108
    
    
    $
    106
    
    
    $
    18
    
    
    $
    89InvestmentBeginning of year total assets, segment assets or
investment in financial services determined in accordance
with GAAP
    
    $
    5,006
    
    
    $
    2,459
    
    
    $
    919
    
    
    $
    381
    
    
    $
    927Adjustments:Current liabilities
(excluding current
portion of
long-term debt)
    
    
    (519
    )
    
    
    (323
    )
    
    
    (71
    )
    
    
    (9
    )
    
    
    N/AAssets held for sale
    
    
    (34
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AMunicipal bonds
related to capital
leases included in
other assets
    
    
    (188
    )
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AAs defined
    
    $
    4,265
    
    
    $
    2,136
    
    
    $
    848
    
    
    $
    372
    
    
    $
    927ROI, annualized
    
    
    10.0
    %
    
    
    10.1
    %
    
    
    25.0
    %
    
    
    9.7
    %
    
    
    19.2
    %
 
 (a)
    
    Net of expenses not allocated to segments of $84 million in 2006 and $107 million in 2005.  43




---



##### Table of Contents



STATISTICAL AND OTHER DATA
 Parent Company
   Second Quarter
    
    
    First Six Months2006
    
    
    2005
    
    
    2006
    
    
    2005(Dollars in millions)RevenuesCorrugated PackagingCorrugated packaging
    
    $
    737
    
    
    $
    715
    
    
    $
    1,435
    
    
    $
    1,406Linerboard
    
    
    21
    
    
    
    25
    
    
    
    44
    
    
    
    53Total
    
    $
    758
    
    
    $
    740
    
    
    $
    1,479
    
    
    $
    1,459Forest ProductsPine lumber
    
    $
    76
    
    
    $
    84
    
    
    $
    160
    
    
    $
    159Gypsum wallboard(a)
    
    
    116
    
    
    
    34
    
    
    
    228
    
    
    
    65Particleboard
    
    
    58
    
    
    
    50
    
    
    
    107
    
    
    
    104Medium density fiberboard(a)
    
    
    19
    
    
    
    26
    
    
    
    35
    
    
    
    57Fiberboard
    
    
    22
    
    
    
    21
    
    
    
    43
    
    
    
    41Mineral and
hunting leases
    
    
    14
    
    
    
    8
    
    
    
    28
    
    
    
    14Fiber and other
    
    
    36
    
    
    
    47
    
    
    
    73
    
    
    
    81Total
    
    $
    341
    
    
    $
    270
    
    
    $
    674
    
    
    $
    521Unit sales
Corrugated PackagingCorrugated packaging, thousands of tons
    
    
    884
    
    
    
    886
    
    
    
    1,753
    
    
    
    1,743Linerboard, thousands of tons
    
    
    47
    
    
    
    63
    
    
    
    107
    
    
    
    132Total, thousands of tons
    
    
    931
    
    
    
    949
    
    
    
    1,860
    
    
    
    1,875Forest ProductsPine lumber, million board feet
    
    
    216
    
    
    
    200
    
    
    
    434
    
    
    
    393Gypsum wallboard, million square feet(a)
    
    
    537
    
    
    
    211
    
    
    
    1,100
    
    
    
    418Particleboard, million square feet
    
    
    164
    
    
    
    162
    
    
    
    329
    
    
    
    335Medium density fiberboard, million square feet(a)
    
    
    41
    
    
    
    61
    
    
    
    80
    
    
    
    130Fiberboard, million square feet
    
    
    106
    
    
    
    109
    
    
    
    208
    
    
    
    216
 
 (a)
    
    Comparisons of revenue and unit sales of gypsum wallboard are affected by the
January 2006 acquisition of Standard Gypsum LP and of MDF are affected by the June 2005
sale of the Pembroke facility. 44




---



##### Table of Contents



(a)
 Project
    
    County
    
    Project Acres(b)Projects we ownCaliforniaHidden Creek Estates
    
    Chatsworth
    
    
    700Terrace at Hidden Hills
    
    Calabasas
    
    
    30GeorgiaBay Springs
    
    Carroll
    
    
    440Dry Pond
    
    Cherokee
    
    
    950Fox Hall
    
    Coweta
    
    
    350Friendship Road
    
    Cherokee
    
    
    110Garland Mountain
    
    Cherokee
    
    
    350Gold Creek
    
    Dawson
    
    
    1,090Grove Park
    
    Coweta
    
    
    160Happy Valley Farm
    
    Coweta
    
    
    750Jackson Park
    
    Jackson
    
    
    690Legion Lake
    
    Carroll
    
    
    210Lithia Springs
    
    Haralson
    
    
    260Mill Creek
    
    Coweta
    
    
    770Pickens School
    
    Pickens
    
    
    420The Overlook at Waleska
    
    Cherokee
    
    
    510Town West
    
    Bartow
    
    
    1,110Triple C Road
    
    Bartow
    
    
    180Wolf Creek
    
    Carroll
    
    
    11,810Yellow Creek
    
    Cherokee
    
    
    1,060Total
    
    
    
    
    21,950
 
 (a)
    
    A project is deemed to be in the entitlement process when customary steps
necessary for the preparation and submittal of an application, like conducting
pre-application meetings or similar discussions with governmental officials, have
commenced, or an application has been filed. Projects listed may have significant steps
remaining, and there is no assurance that entitlements ultimately will be received.(b)
    
    Project acres are approximate. The actual number of acres entitled may vary. 45




---



##### Table of Contents



(a)
 Residential Lots
    
    
    Commercial Acres(c)Lots Sold
    
    
    
    
    
    
    Acres SoldInterest
    
    
    Since
    
    
    Lots
    
    
    Since
    
    
    AcresProject
    
    County
    
    Owned(b)
    
    
    Inception
    
    
    Remaining
    
    
    Inception
    
    
    RemainingProjects we ownColoradoBuffalo Highlands
    
    Weld
    
    
    100
    %
    
    
    
    
    
    
    645
    
    
    
    
    
    
    
    Johnstown Farms
    
    Weld
    
    
    100
    %
    
    
    115
    
    
    
    699
    
    
    
    
    
    
    
    Stonebraker
    
    Weld
    
    
    100
    %
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    TexasCaruth Lakes
    
    Rockwall
    
    
    100
    %
    
    
    245
    
    
    
    629
    
    
    
    
    
    
    
    Cibolo Canyons
    
    Bexar
    
    
    100
    %
    
    
    226
    
    
    
    1,523
    
    
    
    32
    
    
    
    113Harbor Lakes
    
    Hood
    
    
    100
    %
    
    
    177
    
    
    
    401
    
    
    
    
    
    
    
    13Hunters Crossing
    
    Bastrop
    
    
    100
    %
    
    
    192
    
    
    
    385
    
    
    
    19
    
    
    
    95Maxwell Creek
    
    Collin
    
    
    100
    %
    
    
    494
    
    
    
    529
    
    
    
    
    
    
    
    Oakcreek Estates
    
    Comal
    
    
    100
    %
    
    
    
    
    
    
    630
    
    
    
    
    
    
    
    The Colony
    
    Bastrop
    
    
    100
    %
    
    
    332
    
    
    
    1,093
    
    
    
    22
    
    
    
    50The Gables at North Hill
    
    Collin
    
    
    100
    %
    
    
    156
    
    
    
    126
    
    
    
    
    
    
    
    The Preserve at Pecan Creek
    
    Denton
    
    
    100
    %
    
    
    
    
    
    
    819
    
    
    
    
    
    
    
    9The Ridge at Ribelin Ranch
    
    Travis
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189Other Texas Projects (8)
    
    Various
    
    
    100
    %
    
    
    2,463
    
    
    
    208
    
    
    
    107
    
    
    
    61Missouri, Tennessee, and UtahOther Projects (4)
    
    Various
    
    
    100
    %
    
    
    829
    
    
    
    375
    
    
    
    
    
    
    
    5,229
    
    
    
    8,662
    
    
    
    180
    
    
    
    530Projects in entities we consolidateTexasCity Park
    
    Harris
    
    
    75
    %
    
    
    513
    
    
    
    788
    
    
    
    36
    
    
    
    129Lantana
    
    Denton
    
    
    55
    % (d)
    
    
    75
    
    
    
    2,260
    
    
    
    
    
    
    
    Other Texas Projects (4)
    
    Various
    
    
    Various
    
    
    
    213
    
    
    
    241
    
    
    
    2
    
    
    
    63801
    
    
    
    3,289
    
    
    
    38
    
    
    
    192Total owned and consolidated
    
    
    
    
    
    
    
    
    6,030
    
    
    
    11,951
    
    
    
    218
    
    
    
    722Projects in ventures that we account for using the equity methodGeorgiaSeven Hills
    
    Paulding
    
    
    50
    %
    
    
    474
    
    
    
    605
    
    
    
    5
    
    
    
    14The Georgian
    
    Paulding
    
    
    38
    %
    
    
    274
    
    
    
    1,112
    
    
    
    
    
    
    
    Other Georgia Projects (6)
    
    Various
    
    
    Various
    
    
    
    2,061
    
    
    
    656
    
    
    
    TexasBar C Ranch
    
    Tarrant
    
    
    50
    %
    
    
    94
    
    
    
    1,087
    
    
    
    
    
    
    
    Fannin Farms West
    
    Tarrant
    
    
    50
    %
    
    
    224
    
    
    
    220
    
    
    
    
    
    
    
    Lantana
    
    Denton
    
    
    Various
    (d)
    
    
    1,569
    
    
    
    296
    
    
    
    1
    
    
    
    79Long Meadow Farms
    
    Fort Bend
    
    
    19
    %
    
    
    342
    
    
    
    2,370
    
    
    
    
    
    
    
    134Southern Trails
    
    Brazoria
    
    
    40
    %
    
    
    162
    
    
    
    897
    
    
    
    
    
    
    
    Stonewall Estates
    
    Bexar
    
    
    25
    %
    
    
    
    
    
    
    386
    
    
    
    
    
    
    
    Summer Creek
    
    Fort Bend
    
    
    50
    %
    
    
    
    
    
    
    525
    
    
    
    
    
    
    
    37Summer Creek Ranch
    
    Tarrant
    
    
    50
    %
    
    
    742
    
    
    
    1,703
    
    
    
    
    
    
    
    374Summer Lakes
    
    Fort Bend
    
    
    50
    %
    
    
    294
    
    
    
    850
    
    
    
    42
    
    
    
    9Village Park
    
    Collin
    
    
    30
    %
    
    
    242
    
    
    
    327
    
    
    
    
    
    
    
    7Other Texas Projects (5)
    
    Various
    
    
    Various
    
    
    
    752
    
    
    
    359
    
    
    
    
    
    
    
    15FloridaOther Projects (3)
    
    Various
    
    
    Various
    
    
    
    449
    
    
    
    396
    
    
    
    
    
    
    
    Total in ventures
    
    
    
    
    
    
    
    
    7,679
    
    
    
    11,789
    
    
    
    48
    
    
    
    669Combined Total
    
    
    
    
    
    
    
    
    13,709
    
    
    
    23,740
    
    
    
    266
    
    
    
    1,391
 
 (a)
    
    A project is deemed entitled when all major discretionary land-use
approvals have been received. Some projects may require additional permits for
development.(b)
    
    Interest owned reflects our net equity interest in the project, whether owned
directly or indirectly. There are some projects that have multiple ownership
structures within them. Accordingly, portions of these projects may appear as owned,
consolidated, and/or accounted for on the equity method.(c)
    
    Commercial acres are net developable acres, and may be fewer than the gross
acres available in the project.(d)
    
    The Lantana project consists of a series of 17 partnerships in which our
interests range from 25% to 55%. We account for eight of these partnerships in which
our interests range from 25% to 50% using the equity method and we consolidate the
remaining partnerships. 46




---



##### Table of Contents



Financial Services
  Second Quarter-End
    
    
    Year-End2006
    
    
    2005
    
    
    2005(In millions)Single-family mortgage
    
    $
    2,748
    
    
    $
    3,447
    
    
    $
    3,112Single-family mortgage warehouse
    
    
    699
    
    
    
    770
    
    
    
    757Single-family construction
    
    
    2,039
    
    
    
    1,572
    
    
    
    1,665Multifamily and senior housing
    
    
    1,367
    
    
    
    1,400
    
    
    
    1,469Total residential housing
    
    
    6,853
    
    
    
    7,189
    
    
    
    7,003Commercial real estate
    
    
    901
    
    
    
    731
    
    
    
    758Commercial and business
    
    
    881
    
    
    
    817
    
    
    
    843Energy lending
    
    
    758
    
    
    
    683
    
    
    
    756Asset-based lending and leasing
    
    
    93
    (a)
    
    
    419
    
    
    
    395Consumer and other
    
    
    155
    
    
    
    193
    
    
    
    164Total loans
    
    
    9,641
    
    
    
    10,032
    
    
    
    9,919Less allowance for loan losses
    
    
    (71
    )
    
    
    (78
    )
    
    
    (74
    )Loans receivable, net
    
    $
    9,570
    
    
    $
    9,954
    
    
    $
    9,845
 
 (a)
    
    Excludes $295 million of commercial loans held for sale. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
  Increase (Decrease) in Income Before Income TaxesSecond Quarter-End 2006
    
    Year-End 2005Parent
    
    Financial
    
    Parent
    
    FinancialCompany
    
    Services
    
    Company
    
    Services(In millions)Change in
Interest Rates+2%
    
    $
    (4
    )
    
    $
    (33
    )
    
    $
    
    
    
    $
    (31
    )+1%
    
    
    (2
    )
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )-1%
    
    
    2
    
    
    
    (12
    )
    
    
    
    
    
    
    (20
    )-2%
    
    
    4
    
    
    
    (39
    )
    
    
    
    
    
    
    (49
    )
   47




---



##### Table of Contents



Foreign Currency Risk
  Commodity Price Risk
  
 Item 4. Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 Item 1 . Legal Proceedings
  Tax-Exempt Bonds
  Bogalusa
  48




---



##### Table of Contents



Tax Litigation
  Other
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
 MaximumTotal Number
    
    Number ofof Shares
    
    Shares ThatPurchased as
    
    May Yet beAverage
    
    Part of Publicly
    
    PurchasedTotal Number
    
    Price
    
    Announced
    
    Under theof Shares
    
    Paid per
    
    Plans or
    
    PlansPeriod
    
    Purchased
    
    Share
    
    Programs
    
    or ProgramsMonth 1 (4/1/2006 4/30/2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,000Month 2 (5/1/2006  5/31/2006)
    
    
    1,088,000
    
    
    $
    44.10
    
    
    
    1,088,000
    
    
    
    912,000Month 3 (6/1/2006  6/30/2006)
    
    
    912,000
    
    
    $
    41.44
    
    
    
    912,000
    
    
    
    -0-Total
    
    
    2,000,000
    
    
    $
    42.89
    
    
    
    2,000,000
 
 (a)
    
    On August 5, 2005, we announced that our Board of Directors authorized the
repurchase of up to six million shares of our common stock. The plan had no expiration date.
Through first six months 2006, we had repurchased six million shares at an average price per share
of $42.87 under this authorization, which has now been completed. On August 4, 2006, we announced
that our Board of Directors authorized another repurchase of up to six million shares of our common
stock. This plan has no expiration date. Other than the August 2005 authorization, we have no
plans or programs that expired during the period covered by the table above and no plans or
programs that we intend to terminate prior to expiration or under which we no longer intend to make
further purchases. 
 Item 3. Defaults Upon Senior Securities
  49




---



##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  AbstentionsAgainst or
    
    and BrokerMatter
    
    For
    
    Withheld
    
    Non-votes1.
    
    Election of four directors(a) Cassandra C. Carr
    
    
    101,134,440
    
    
    
    834,813
    
    
    
    (b) James T. Hackett
    
    
    101,083,467
    
    
    
    885,786
    
    
    
    (c) Arthur Temple III
    
    
    100,510,960
    
    
    
    1,458,293
    
    
    
    (d) Larry Temple
    
    
    100,548,979
    
    
    
    1,420,274
    
    
    
    2.
    
    Ratification of appointment of Ernst & Young LLP
    
    
    100,687,954
    
    
    
    675,701
    
    
    
    605,598
 
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibits
 31.1  Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2  Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 50




---



##### Table of Contents



SIGNATURES
  TEMPLE-INLAND INC.
  (Registrant)Dated: August 7, 2006
    By
    /s/ Randall D. LevyRandall D. LevyChief Financial OfficerBy
    /s/ Troy L. HesterTroy L. HesterCorporate Controller and Principal Accounting Officer 51




---



##### Table of Contents



Exhibit No.
    
    Description
    
    Page No.31.1
    
    Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    5331.2
    
    Certification of Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a), as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    5532.1
    
    Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    
    5732.2
    
    Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    
    58
 52