**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**_____________________________________**

 

**FORM 10-Q**

(Mark One)

| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended              June 28,                            2008                                                     |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

OR

| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From ____________ to ____________ |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Commission File Number: 001-08634

 

**Temple-Inland Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | **75-1903917**                          |
|-----------------------------------------------------------------|-----------------------------------------|
| (State or other jurisdiction of

incorporation or organization) | (I.R.S. Employer Identification Number) |

 

**1300 MoPac Expressway South, 3rd Floor, Austin, Texas 78746**

(Address of Principal Executive Offices, including Zip code)

 

**(512) 434-5800**

(Registrant's telephone number, including area code)

 

**Not Applicable**

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90            days. x Yes      oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer x | Accelerated filero |
|---------------------------|--------------------|

| Non-accelerated filero(Do not check if a smaller reporting company) | Smaller reporting companyo |
|---------------------------------------------------------------------|----------------------------|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).oYes         xNo

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 

|  

Class                            | Number of common shares outstanding

as of June 28, 2008 |
|------------------------------------------|----------------------------------------------------------|
| Common Stock (par value $1.00 per share) | 106,321,325                                              |

 

| Page 1 of 35 | The Exhibit Index is page 29. |
|--------------|-------------------------------|

 

----

 

|                                                                                          | Page   |
|-----------------------------------------------------------------------------------------------|--------|
| PART I. FINANCIAL INFORMATION                                                                 |   |
|                                                                                          |   |
| Item 1. Financial Statements                                                                  |   |
|                                                                                          |   |
| Consolidated Balance Sheets                                                                   | 3      |
| Consolidated Statements of Income                                                             | 4      |
| Consolidated Statements of Cash Flows                                                         | 5      |
| Notes to the Consolidated Financial Statements                                                | 6      |
|                                                                                          |   |
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 13     |
|                                                                                          |   |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk                            | 24     |
|                                                                                          |   |
| Item 4. Controls and Procedures                                                               | 24     |
|                                                                                          |   |
| PART II. OTHER INFORMATION                                                                    |   |
|                                                                                          |   |
| Item 1. Legal Proceedings                                                                     | 26     |
|                                                                                          |   |
| Item 1A. Risk Factors                                                                         | 26     |
|                                                                                          |   |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           | 26     |
|                                                                                          |   |
| Item 3. Defaults Upon Senior Securities                                                       | 26     |
|                                                                                          |   |
| Item 4. Submission of Matters to a Vote of Security Holders                                   | 26     |
|                                                                                          |   |
| Item 5. Other Information                                                                     | 27     |
|                                                                                          |   |
| Item 6. Exhibits                                                                              | 27     |
|                                                                                          |   |
| SIGNATURES                                                                                    | 28     |

 

 

2

 

 

----

**PART I. FINANCIAL INFORMATION**

**Item 1.****Financial Statements**

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                         |   | **(Unaudited)Second**

**Quarter-End 2008** |   |   | **Year-End 2007** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------|-------------------|--------|
|                                                                                                                                                                         |   | **(In millions)**                           |   |
| **ASSETS**                                                                                                                                                                   |   |                                        |   |   |              |   |
| **Current Assets**                                                                                                                                                           |   |                                             |   |   |                   |   |
| Cash and cash equivalents                                                                                                                                                    | $      | 44                                          |   | $      | 227               |   |
| Trade receivables, net of allowance for doubtful accounts of $16 in 2008 and $14 in 2007                                                                                     |   | 480                                         |   |   | 433               |   |
| Inventories:                                                                                                                                                                 |   |                                        |   |   |                   |   |
| Work in process and finished goods                                                                                                                                           |   | 110                                         |   |   | 116               |   |
| Raw materials                                                                                                                                                                |   | 211                                         |   |   | 224               |   |
| Supplies and other                                                                                                                                                           |   | 127                                         |   |   | 121               |   |
| Total inventories                                                                                                                                                            |   | 448                                         |   |   | 461               |   |
| Deferred tax asset                                                                                                                                                           |   | 75                                          |   |   | 99                |   |
| Prepaid expenses and other                                                                                                                                                   |   | 72                                          |   |   | 57                |   |
| Total current assets                                                                                                                                                         |   | 1,119                                       |   |   | 1,277             |   |
| **Property and Equipment**                                                                                                                                                   |   |                                             |   |   |                   |   |
| Land and buildings                                                                                                                                                           |   | 652                                         |   |   | 641               |   |
| Machinery and equipment                                                                                                                                                      |   | 3,483                                       |   |   | 3,423             |   |
| Construction in progress                                                                                                                                                     |   | 77                                          |   |   | 120               |   |
| Less allowances for depreciation                                                                                                                                             |   | (2,601                                      | )      |   | (2,552            | )      |
| Total property and equipment                                                                                                                                                 |   | 1,611                                       |   |   | 1,632             |   |
| **Financial Assets of Special Purpose Entities**                                                                                                                             |   | 2,383                                       |   |   | 2,383             |   |
| **Goodwill**                                                                                                                                                                 |   | 365                                         |   |   | 365               |   |
| **Other Assets**                                                                                                                                                             |   | 280                                         |   |   | 285               |   |
| **TOTAL ASSETS**                                                                                                                                                             | $      | 5,758                                       |   | $      | 5,942             |   |
|                                                                                                                                                                         |   |                                             |   |   |                   |   |
| **LIABILITIES**                                                                                                                                                              |   |                                        |   |   |              |   |
| **Current Liabilities**                                                                                                                                                      |   |                                             |   |   |                   |   |
| Accounts payable                                                                                                                                                             | $      | 219                                         |   | $      | 244               |   |
| Accrued employee compensation and benefits                                                                                                                                   |   | 73                                          |   |   | 108               |   |
| Accrued interest                                                                                                                                                             |   | 31                                          |   |   | 31                |   |
| Accrued property taxes                                                                                                                                                       |   | 13                                          |   |   | 11                |   |
| Accrued income taxes                                                                                                                                                         |   | —                                     |   |   | 258               |   |
| Other accrued expenses                                                                                                                                                       |   | 164                                         |   |   | 173               |   |
| Current portion of long-term debt                                                                                                                                            |   | 1                                           |   |   | 3                 |   |
| Current portion of pension benefits                                                                                                                                          |   | 14                                          |   |   | 48                |   |
| Current portion of postretirement benefits                                                                                                                                   |   | 13                                          |   |   | 14                |   |
| Total current liabilities                                                                                                                                                    |   | 528                                         |   |   | 890               |   |
| **Long-Term Debt**                                                                                                                                                           |   | 1,073                                       |   |   | 852               |   |
| **Nonrecourse Financial Liabilities of Special Purpose Entities**                                                                                                            |   | 2,140                                       |   |   | 2,140             |   |
| **Deferred Tax Liability**                                                                                                                                                   |   | 746                                         |   |   | 762               |   |
| **Liability for Pension Benefits**                                                                                                                                           |   | 69                                          |   |   | 71                |   |
| **Liability for Postretirement Benefits**                                                                                                                                    |   | 119                                         |   |   | 123               |   |
| **Other Long-Term Liabilities**                                                                                                                                              |   | 307                                         |   |   | 324               |   |
| **TOTAL LIABILITIES**                                                                                                                                                        |   | 4,982                                       |   |   | 5,162             |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                               |   |                                             |   |   |                   |   |
| Preferred 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 in 2008 and 2007, including shares held in the treasury |   | 124                                         |   |   | 124               |   |
| Additional paid-in capital                                                                                                                                                   |   | 468                                         |   |   | 475               |   |
| Accumulated other comprehensive loss                                                                                                                                         |   | (121                                        | )      |   | (139              | )      |
| Retained earnings                                                                                                                                                            |   | 961                                         |   |   | 987               |   |
| Cost of shares held in the treasury: 17,284,019 shares in 2008 and 17,464,189 shares in 2007                                                                       |   | (656                                        | )      |   | (667)             |   |
| **TOTAL SHAREHOLDERS’ EQUITY**                                                                                                                                         |   | 776                                         |   |   | 780               |   |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                         | $      | 5,758                                       |   | $      | 5,942             |   |

 

 

 

3

 

Please read the notes to consolidated financial statements.

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 

|                                                                              |   | **Second Quarter**                  |   |   | **First Six Months** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------------|--------|--------|----------------------|--------|
|                                                                              |   | **2008**                            |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                                                                              |   | **(In millions, except per share)** |   |
|                                                                              |   |                                |   |   |                 |   |   |   |   |   |   |   |
| **NET REVENUES**                                                                  | $      | 991                                 |   | $      | 1,023                |   | $ | 1,935 |   | $ | 2,026 |   |
| **COSTS AND EXPENSES**                                                            |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Cost of sales                                                                     |   | (893                                | )      |   | (877                 | )      |   | (1,769 | ) |   | (1,736 | ) |
| Selling                                                                           |   | (28                                 | )      |   | (29                  | )      |   | (57 | ) |   | (58 | ) |
| General and administrative                                                        |   | (39                                 | )      |   | (53                  | )      |   | (72 | ) |   | (113 | ) |
| Other operating expense                                                           |   | (1                                  | )      |   | 5                    |   |   | (13 | ) |   | (9 | ) |
|                                                                              |   | (961                                | )      |   | (954                 | )      |   | (1,911 | ) |   | (1,916 | ) |
| **OPERATING INCOME**                                                              |   | 30                                  |   |   | 69                   |   |   | 24 |   |   | 110 |   |
| Other non-operating income                                                        |   | 1                                   |   |   | 1                    |   |   | 2 |   |   | 1 |   |
| Interest income on financial assets of special purpose entities                   |   | 18                                  |   |   | ––       |   |   | 42 |   |   | –– |   |
| Interest expense on nonrecourse financial liabilities of special purpose entities |   | (18                                 | )      |   | ––       |   |   | (45 | ) |   | –– |   |
| Interest expense on debt                                                          |   | (20                                 | )      |   | (28                  | )      |   | (37 | ) |   | (57 | ) |
| **INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES**                         |   | 11                                  |   |   | 42                   |   |   | (14 | ) |   | 54 |   |
| Income tax (expense) benefit                                                      |   | (3                                  | )      |   | (16)                 |   |   | 9 |   |   | (21 | ) |
| **INCOME (LOSS) FROM CONTINUING OPERATIONS**                                      |   | 8                                   |   |   | 26                   |   |   | (5 | ) |   | 33 |   |
| Discontinued operations                                                           |   | ––                      |   |   | 40                   |   |   | –– |   |   | 71 |   |
| **NET INCOME (LOSS)**                                                             | $      | 8                                   |   | $      | 66                   |   | $ | (5 | ) | $ | 104 |   |
|                                                                              |   |                                |   |   |                 |   |   |   |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES** **OUTSTANDING**                           |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Basic                                                                             |   | 106.6                               |   |   | 106.0                |   |   | 106.7 |   |   | 105.8 |   |
| Diluted                                                                           |   | 107.4                               |   |   | 108.1                |   |   | 107.6 |   |   | 107.8 |   |
|                                                                              |   |                                |   |   |                 |   |   |   |   |   |   |   |
| **EARNINGS PER SHARE**                                                            |   |                                |   |   |                 |   |   |   |   |   |   |   |
| **Basic:**                                                                        |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                                          | $      | 0.07                                |   | $      | 0.24                 |   | $ | (0.05 | ) | $ | 0.31 |   |
| Discontinued operations                                                           |   | ––                      |   |   | 0.39                 |   |   | –– |   |   | 0.68 |   |
| Net income (loss)                                                                 | $      | 0.07                                |   | $      | 0.63                 |   | $ | (0.05 | ) | $ | 0.99 |   |
| **Diluted:**                                                                      |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Income from continuing operations                                                 | $      | 0.07                                |   | $      | 0.24                 |   | $ | N/A |   | $ | 0.31 |   |
| Discontinued operations                                                           |   | ––                      |   |   | 0.38                 |   |   | N/A |   |   | 0.66 |   |
| Net income                                                                        | $      | 0.07                                |   | $      | 0.62                 |   | $ | N/A |   | $ | 0.97 |   |
|  

**DIVIDENDS PER SHARE**                                                   | $      | 0.10                                |   | $      | 0.28                 |   | $ | 0.20 |   | $ | 0.56 |   |

 

 

 

4

 

Please read the notes to consolidated financial statements.

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

|                                                         |                                                              |                                                  | **First Six Months** |           |
|--------------------------------------------------------------|-------------------------------------------------------------------|-------------------------------------------------------|----------------------|----------------|
|                                                         |                                                              |                                                  | **2008**             |           |   |   | **2007** |   |
| **CASH PROVIDED BY (USED FOR) OPERATIONS**                   |                                                              |                                                  | **(In millions)**    |           |
|                                                         |                                                              |                                                  |                 |           |
|                                                         | Net income (loss)                                            |                                                  | $                    | (5             | ) |   | $ | 104 |   |
|                                                         | Adjustments:                                                      |                                                  |                 |           |   |   |   |   |   |
|                                                         |                                                              | Depreciation and amortization                    |                 |           | 100 |   |   |   | 109 |   |
|                                                         |                                                              | Non-cash share-based compensation                     |                 |           | 6 |   |   |   | 34 |   |
|                                                         |                                                              | Non-cash pension and postretirement plans             |                 |           | 38 |   |   |   | 22 |   |
|                                                         |                                                              | Cash contribution to pension and postretirement plans |                 |           | (58 | ) |   |   | (39 | ) |
|                                                         |                                                              | Deferred income taxes                                 |                 |           | –– |   |   |   | 4 |   |
|                                                         |                                                              | Earnings of joint ventures                            |                 |           | (5 | ) |   |   | (2 | ) |
|                                                         |                                                              | Dividends from joint ventures                         |                 |           | 7 |   |   |   | 1 |   |
|                                                         |                                                              | Other                                                 |                 |           | (7 | ) |   |   | –– |   |
|                                                         | Changes in:                                                       |                                                  |                 |           |   |   |   |   |   |
|                                                         |                                                              | Receivables                                           |                 |           | (45 | ) |   |   | (19 | ) |
|                                                         |                                                              | Inventories                                           |                 |           | 14 |   |   |   | 16 |   |
|                                                         |                                                              | Accounts payable and accrued expenses            |                 |           | (319 | ) |   |   | (30 | ) |
|                                                         |                                                              | Prepaid expenses and other                            |                 |           | (15 | ) |   |   | 3 |   |
|                                                         |                                                              |                                                  | (289                 | )              |   |   | 203 |   |
| **CASH PROVIDED BY (USED FOR) INVESTING**                    |                                                              |                                                  |                 |           |   |   |   |   |
|                                                         | Capital expenditures                                         |                                                  |                 | (76            | ) |   |   | (87 | ) |
|                                                         | Sale of non-strategic assets and operations                       |                                                  |                 | 4              |   |   |   | 14 |   |
|                                                         | Investment in joint ventures                                 |                                                  |                 | (3             | ) |   |   | (1 | ) |
|                                                         | Other                                                             |                                                  |                 | (5             | ) |   |   | (9 | ) |
|                                                         |                                                              |                                                  | (80                  | )              |   |   | (83 | ) |
| **CASH PROVIDED BY (USED FOR) FINANCING**                    |                                                              |                                                  |                 |           |   |   |   |   |
|                                                         | Payments of debt                                             |                                                  |                 | (10            | ) |   |   | (6 | ) |
|                                                         | Borrowings under accounts receivable securitization facility, net |                                                  |                 | 229            |   |   |   | 16 |   |
|                                                         | Borrowings under revolving credit facility, net                   |                                                  |                 | –– |   |   |   | (13 | ) |
|                                                         | Changes in book overdrafts                                        |                                                  |                 | (13            | ) |   |   | (5 | ) |
|                                                         | Other additions to debt                                           |                                                  |                 | –– |   |   |   | 1 |   |
|                                                         | Cash dividends paid to shareholders                          |                                                  |                 | (21            | ) |   |   | (59 | ) |
|                                                         | Repurchase of common stock                                        |                                                  |                 | –– |   |   |   | (24 | ) |
|                                                         | Exercise of stock options                                         |                                                  |                 | –– |   |   |   | 17 |   |
|                                                         | Tax benefit on share-based compensation                           |                                                  |                 | –– |   |   |   | 8 |   |
|                                                         |                                                              |                                                  | 185                  |           |   |   | (65 | ) |
| **CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS**      |                                                              |                                                  |                 |           |   |   |   |   |
|                                                         | Net cash provided by operating activities                         |                                                  |                 | –– |   |   |   | 31 |   |
|                                                         | Net cash provided by investing activities                         |                                                  |                 | –– |   |   |   | 465 |   |
|                                                         | Net cash used for financing activities                            |                                                  |                 | –– |   |   |   | (562 | ) |
|                                                         |                                                              |                                                  | ––       |           |   |   | (66 | ) |
| Effect of exchange rate changes on cash and cash equivalents |                                                              |                                                  | 1                    |           |   |   | –– |   |
| Net decrease in cash and cash equivalents          |                                                              |                                                  | (183                 | )              |   |   | (11 | ) |
| Cash and cash equivalents at beginning of period        |                                                              |                                                  | 227                  |           |   |   | 30 |   |
| Cash and cash equivalents at end of period              |                                                              | $                                                     | 44                   |           |   | $ | 19 |   |

 

 

 

5

 

Please read the notes to consolidated financial statements.

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**Note 1 – Basis of Presentation**

 

Our consolidated financial statements include the accounts of Temple-Inland Inc. and its subsidiaries and special purpose and variable interest entities of which we are the primary beneficiary. We account for our investment in other entities in which we have significant influence over operations and financial policies using the equity method. On December 28, 2007, we spun off our            real estate and our financial services segments into separate public companies, Forestar Real Estate Group and Guaranty Financial Group, respectively. The operations and cash flows of these segments are reflected as discontinued operations. Please read Note 10 for additional information.

 

We prepare our unaudited interim financial statements in accordance with generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. However, in our opinion,            all adjustments considered necessary for a fair presentation have been included. These adjustments are normal recurring accruals, except as noted. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2007.

 

**Note 2 – New Accounting Pronouncements**

 

Beginning January 2008, we adopted two new accounting pronouncements:

 

|   | **•** | Statement of Financial Accounting Standard (SFAS) No. 157,*Fair Value Measurements –*This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The adoption of this statement did not have a significant effect on our                            earnings or financial position. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | SFAS No. 159,*The Fair Value Option for Financial Assets and Financial Liabilities –*This standard permits the election of fair value as the initial and subsequent measurement method for many financial assets and liabilities. Subsequent changes in the fair value would be recognized in earnings as                            they occur. We did not elect the fair value option. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In addition, there are three new accounting pronouncements that we will be required to adopt in 2009. Based on our current understanding, we do not expect that adoption of any of these pronouncements will have a significant effect on our earnings or financial position.

 

|   | **•** | SFAS No. 141(R),*Business Combinations –*This new standard requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value, and is effective for business combinations occurring after our year-end 2008. The                            new standard also changes the approach to determining the purchase price; the accounting for acquisition cost; and the accounting practices for acquired contingencies, restructuring costs, long-lived assets, share-based payment awards, indemnification costs, and tax benefits. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | SFAS No. 160,*Noncontrolling Interest in Consolidated Financial Statements –*This new standard specifies that noncontrolling interest be reported as a part of equity, not as a liability or other item outside of equity, and is effective for our first quarter 2009. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | SFAS No. 161,*Disclosures about Derivative Instruments and Hedging Activities –*This new standard requires enhanced disclosures about how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; how derivative instruments and related                            hedged items affect an entity’s financial position, financial performance, and cash flows; and is effective for our first quarter 2009. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

6

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

**Note 3 – Employee Benefit Plans**

 

Defined benefit and postretirement benefit expense consists of:

 

|                                                    |   | **Defined Benefits** |   | **Postretirement Benefits** |   |
|---------------------------------------------------------|--------|----------------------|--------|-----------------------------|--------|
|                                                    |   | **Qualified**        |   | **Supplemental**            |   | **Total** |   |   |
|                                                    |   | **2008**             |   | **2007**                    |   | **2008** |   | **2007** |   | **2008** |   | **2007** |   | **2008** |   | **2007** |   |
| **Second Quarter**                                      |   | **(In millions)**    |   |
| Service costs – benefits earned during the period | $      | 7                    | $      | 7                           | $      | –– | $ | –– | $ | 7 | $ | 7 | $ | 1 | $ | –– |   |
| Interest cost on projected benefit obligation           |   | 20                   |   | 19                          |   | –– |   | 1 |   | 20 |   | 20 |   | 2 |   | 2 |   |
| Expected return on plan assets                          |   | (21                  | )      | (21                         | )      | –– |   | –– |   | (21 | ) | (21 | ) | –– |   | –– |   |
| Amortization of prior service costs                     |   | 1                    |   | ––              |   | 1 |   | –– |   | 2 |   | –– |   | (1 | ) | –– |   |
| Amortization of actuarial net loss                      |   | ––       |   | 3                           |   | 1 |   | 1 |   | 1 |   | 4 |   | –– |   | –– |   |
| Defined benefit expense                                 | $      | 7                    | $      | 8                           | $      | 2 | $ | 2 | $ | 9 | $ | 10 | $ | 2 | $ | 2 |   |
|                                                    |   |                 |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **First Six Months:**                                   |   |                 |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service costs – benefits earned during the period | $      | 14                   | $      | 14                          | $      | –– | $ | –– | $ | 14 | $ | 14 | $ | 1 | $ | –– |   |
| Interest cost on projected benefit obligation           |   | 40                   |   | 38                          |   | 1 |   | 1 |   | 41 |   | 39 |   | 4 |   | 4 |   |
| Expected return on plan assets                          |   | (42                  | )      | (42                         | )      | –– |   | –– |   | (42 | ) | (42 | ) | –– |   | –– |   |
| Amortization of prior service costs                     |   | 2                    |   | ––              |   | 2 |   | –– |   | 4 |   | –– |   | (1 | ) | –– |   |
| Amortization of actuarial net loss                      |   | 1                    |   | 6                           |   | 1 |   | 2 |   | 2 |   | 8 |   | –– |   | –– |   |
| Defined benefit expense                                 | $      | 15                   | $      | 16                          | $      | 4 | $ | 3 | $ | 19 | $ | 19 | $ | 4 | $ | 4 |   |

 

In first six months 2008, we recognized $15 million of expense as a result of the $34 million lump-sum cash settlements of supplemental benefits made as part of our transformation plan. We made a $15 million voluntary, discretionary contribution to our qualified defined benefit plan in first six months 2008. We made a $30 million voluntary, discretionary contribution in first six            months 2007.

 

**Note 4 – Share-Based Compensation**

 

We have shareholder approved share-based compensation plans that permit awards to key employees and non-employee directors in the form of restricted or performance units, restricted stock, or options to purchase shares of our common stock. We generally grant awards annually in February, and we use treasury stock to fulfill awards settled in common stock and stock option            exercises.

 

Share-based compensation expense consists of:

|                                   |   | **Second Quarter** |   | **First Six Months** |     |
|----------------------------------------|--------|--------------------|--------|----------------------|----------|
|                                   |   | **2008**           |   |                 | **2007** |   |   | **2008** |   |   | **2007** |   |
|                                   |   | **(In millions)**  |   |
| Restricted or performance units        | $      | (1                 | )      | $                    | 12       |   | $ | (1 | ) | $ | 26 |   |
| Restricted stock                       |   | ––     |   |                 | (1       | ) |   | 1 |   |   | (1 | ) |
| Stock options                          |   | 3                  |   |                 | 2        |   |   | 6 |   |   | 7 |   |
| Total share-based compensation expense | $      | 2                  |   | $                    | 13       |   | $ | 6 |   | $ | 32 |   |

 

The fair value of share-based compensation awards granted to retirement-eligible employees and expensed at the date of grant was $6 million in first six months 2008 and $3 million in first six months 2007.

 

 

7

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

Share-based compensation expense is included in:

|                                   |   | **Second Quarter** |   | **First Six Months** |     |
|----------------------------------------|--------|--------------------|--------|----------------------|----------|
|                                   |   | **2008**           |   |                 | **2007** |   |   | **2008** |   |   | **2007** |   |
|                                   |   | **(In millions)**  |   |
| Cost of sales                          | $      | 1                  |   | $                    | 2        |   | $ | 4 |   | $ | 5 |   |
| Selling expense                        |   | 1                  |   |                 | 1        |   |   | 1 |   |   | 2 |   |
| General and administrative             |   | ––     |   |                 | 10       |   |   | 1 |   |   | 25 |   |
| Total share-based compensation expense | $      | 2                  |   | $                    | 13       |   | $ | 6 |   | $ | 32 |   |

 

**Restricted or performance units**

 

Restricted or performance units generally have a three-year term; vest after three years from the date of grant or the attainment of stated ROI based performance goals, generally measured over a three-year period; and are settled in cash.

 

A summary of activity for first six months 2008 follows:

|                                  |               | **Shares** |              | **Weighted Average Grant Date Fair Value Per Share** |   | **Aggregate Current Value** |
|---------------------------------------|--------------------|------------|-------------------|------------------------------------------------------|--------|-----------------------------|
|                                  | **(In thousands)** |       | **(In millions)** |
| Not vested beginning of the year      |               | 1,416      |              | $                                                    | 48     |                        |   |
| Granted                               |               | 794        |              |                                                 | 20     |                        |   |
| Vested and settled                    |               | (240       | )                 |                                                 | 39     |                        |   |
| Forfeited                             |               | (6         | )                 |                                                 | 42     |                        |   |
| Not vested end of second quarter 2008 |               | 1,964      |              |                                                 | 38     | $                           | 23 |
|                                       |                    |            |                   |                                                      |        |                             |  |  |

 

Unrecognized share-based compensation expense related to non-vested restricted or performance units was $12 million at current share price of $12 per share. It is likely that this cost will be recognized over the next 2 years. The fair value of awards settled in cash in first six months 2008 was $6 million.

 

**Restricted stock**

 

Restricted stock awards generally vest after three to six years and provide for accelerated vesting upon retirement, death, disability, or a change in control. There were no restricted stock awards granted in first six months 2008 or first six months 2007. There were 174,767 restricted stock awards outstanding at second quarter-end 2008 with a weighted average grant date fair value            of $27 per share and an aggregate current value of $2 million or $12 per share. There were 260,733 restricted stock awards that vested in first six months 2008.

 

**Stock options**

 

Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability, or if there is a change in control. Options are granted with an exercise price equal to the market value of our common stock on the date of grant.

 

 

 

 

 

 

 

 

8

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

A summary of activity for first six months 2008 follows:

|                                   |   | **Shares**         |   | **Weighted Average Exercise Price Per Share** |                                       | **Weighted Average Remaining Contractual Term** |   | **Aggregate Intrinsic Value (Current value less exercise price)** |   |
|----------------------------------------|--------|--------------------|--------|-----------------------------------------------|--------------------------------------------|-------------------------------------------------|--------|-------------------------------------------------------------------|--------|
|                                   |   | **(In thousands)** |   |                                          |                                       | **(In years)**                                  |   | **(In millions)**                                                 |   |
| Outstanding beginning of the year      |   | 4,711              | $      | 15                                            |         |                                            |   |                                                              |   |
| Granted                                |   | 2,355              |   | 20                                            |                                       |                                            |   |                                                              |   |
| Exercised                              |   | (59                | )      | 11                                            |                                       |                                            |   |                                                              |   |
| Forfeited                              |   | (96                | )      | 15                                            |                                       |                                            |   |                                                              |   |
| Outstanding end of second quarter 2008 |   | 6,911              |   | 17                                            |                                       | 7                                               |   | $  4                                                         |   |
|                                   |   |               |   |                                          |                                       |                                            |   |                                                              |   |
| Exercisable end of second quarter 2008 |   | 3,688              |   | 13                                            |                                       | 5                                               |   | $  4                                                         |   |
|                                        |        |                    |        |                                               |                                            |                                                 |        |                                                                   |        |  |  |  |  |  |  |  |

 

Unrecognized share-based compensation expense related to non-vested stock options awards was $9 million at second quarter-end 2008. It is likely that this cost will be recognized over the next 2 years.

 

We estimated the fair value of our options using the Black-Scholes-Merton option-pricing model and the following assumptions:

 

|                                                                    | **First Six Months** |   |
|-------------------------------------------------------------------------|----------------------|--------|
|                                                                    | **2008**             |   |   | **2007** |   |
| Expected life of options (in years)                                     | 8                    |   |   | 6 |   |
| Expected stock price volatility                                         | 28.2                 | %      |   | 22.8 | % |
| Expected dividend yield                                                 | 2.1                  | %      |   | 2.3 | % |
| Risk-free interest rate                                                 | 3.3                  | %      |   | 4.9 | % |
|                                                                    |                 |   |   |   |   |
| Weighted average estimated fair value of options granted:(a)            |                 |   |   |   |   |
| Temple-Inland options                                                   | $  2.02    |   |   | $    7.39 |   |
| Forestar options                                                        | N/A                  |   |   | 3.09 |   |
| Guaranty options                                                        | N/A                  |   |   | 1.99 |   |
| Weighted average estimated fair value of options at original grant date | $  2.02    |   |   | $  12.47 |   |

 

(a)The weighted average estimated fair value of options granted prior to 2008 has been adjusted to reflect the spin-off of Forestar and Guaranty. The share-based compensation expense on options held by employees of Temple-Inland will be based on the original grant date Black-Scholes-Merton value.

 

**Note 5 – Other Operating Income (Expense)**

 

|                                        |   | **Second Quarter** |   |   |           | **First Six Months** |   |
|---------------------------------------------|--------|--------------------|--------|--------|----------------|----------------------|--------|
|                                        |   | **2008**           |   |   | **2007**       |                 |   |   | **2008** |   |   | **2007** |   |
|                                        |   | **(In millions)**  |   |
| Equity in earnings of joint ventures        | $      | 2                  |   | $      | 1              |                 |   | $ | 5 |   | $ | 2 |   |
| Loss on sale of property and equipment      |   | (3                 | )      |   | –– |                 |   |   | (3 | ) |   | (1 | ) |
| Litigation                                  |   | ––     |   |   | –– |                 |   |   | 5 |   |   | (10 | ) |
| Transformation costs                        |   | ––     |   |   | (4             | )                    |   |   | (20 | ) |   | (8 | ) |
| Gain on sale of non-strategic timber leases |   | ––     |   |   | 8              |                 |   |   | –– |   |   | 8 |   |
|                                        | $      | (1                 | )      | $      | 5              |                 |   | $ | (13 | ) | $ | (9 | ) |
|                                             |        |                    |        |        |                |                      |        |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 6 – Contingencies**

 

We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. Expenses related to litigation are included in operating income. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial            position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.

 

 

9

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

In first six months 2008, we settled and paid our one remaining state court claim related to alleged civil violations of Section 1 of the Sherman Act for $5 million, which had been fully reserved. As a result, all matters related to these alleged violations have been resolved.

 

We continue to defend two remaining cases in California state court alleging violations of that state’s on duty meal break laws. We believe we have established adequate reserves for these cases. Settlements we have reached in the other meal break cases have been within established reserves.

 

**Note 7 – Earnings Per Share**

 

Diluted earnings per share for first six months 2008 is not applicable due to our loss from continuing operations.

 

We computed earnings per share by dividing income by weighted average shares outstanding using the following:

|                                                                     |   | **Second Quarter** |   |   |           | **First Six Months** |   |
|--------------------------------------------------------------------------|--------|--------------------|--------|--------|----------------|----------------------|--------|
|                                                                     |   | **2008**           |   |   | **2007**       |                 |   |   | **2008** |   |   | **2007** |   |
|                                                                     |   | **(In millions)**  |   |
| Weighted average common shares outstanding - basic                       |   | 106.6              |   |   | 106.0          |                 |   |   | 106.7 |   |   | 105.8 |   |
| Dilutive effect of stock options held by our employees                   |   | 0.7                |   |   | 2.1            |                 |   |   | 0.8 |   |   | 2.0 |   |
| Dilutive effect of stock options held by Forestar and Guaranty employees |   | 0.1                |   |   | –– |                 |   |   | 0.1 |   |   | –– |   |
| Weighted average shares outstanding - diluted                            |   | 107.4              |   |   | 108.1          |                 |   |   | 107.6 |   |   | 107.8 |   |
|                                                                          |        |                    |        |        |                |                      |        |  |  |  |  |  |  |  |  |  |  |  |

 

At second quarter-end 2008, there were 1,203,816 stock options outstanding held by employees of Forestar and Guaranty. These options were granted prior to the spin-offs of Forestar and Guaranty on December 28, 2007. These stock options will be considered in our dilution calculation until they are exercised, cancelled or expire.

 

At second quarter-end 2008, 5,151,441 stock options outstanding held by our employees and 864,160 stock options outstanding held by employees of Forestar and Guaranty were not included in the computation of diluted earnings per share because they were antidilutive.

 

**Note 8 – Comprehensive Income (Loss)**

 

Comprehensive income (loss) consists of:

|                                             |   | **Second Quarter** |   |   |     | **First Six Months** |   |
|--------------------------------------------------|--------|--------------------|--------|--------|----------|----------------------|--------|
|                                             |   | **2008**           |   |   | **2007** |                 |   |   | **2008** |   |   | **2007** |   |
|                                             |   | **(In millions)**  |   |
| Net income (loss)                                | $      | 8                  |   | $      | 66       |                 |   | $ | (5 | ) | $ | 104 |   |
| Other comprehensive income (loss), net of taxes: |   |               |   |   |     |                 |   |   |   |   |   |   |   |
| Foreign currency translation adjustment          |   | 5                  |   |   | 2        |                 |   |   | 6 |   |   | 1 |   |
| Defined benefit plans                            |   | 1                  |   |   | 2        |                 |   |   | 12 |   |   | 6 |   |
| Other comprehensive income (loss)                |   | 6                  |   |   | 4        |                 |   |   | 18 |   |   | 7 |   |
| Comprehensive income (loss)                      | $      | 14                 |   | $      | 70       |                 |   | $ | 13 |   | $ | 111 |   |
|                                                  |        |                    |        |        |          |                      |        |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 9 – Segment Information**

 

We have two business segments: corrugated packaging and building products. Corrugated packaging manufactures containerboard and corrugated packaging. Building products manufactures a variety of building products. We no longer have a timber and timberland segment as a result of the fourth quarter 2007 sale of our timberlands.

 

We evaluate performance based on operating income before items not included in segments and income taxes. Items not included in segments represent income and expenses managed on a company-wide basis and include corporate general and administrative expense, share-based compensation, other operating and non-operating income

 

 

10

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

(expense), and interest income and expense. Other operating income (expense) includes gain or loss on sale of assets, asset impairments, and unusual income and expense items. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Intersegment sales are recorded at market prices. Intersegment sales and shared service expense            allocations are netted in costs and expenses.

 

|                                                     |   | **Corrugated Packaging**                             |   | **Building Products**  |   | **Timber and Timberland** |   | **Items Not Included in Segments and Eliminations**       |   | **Total**    |   |
|----------------------------------------------------------|--------|------------------------------------------------------|--------|------------------------|--------|---------------------------|--------|-----------------------------------------------------------|--------|--------------|--------|
|                                                     |   | **(In millions)**                                    |   |
| **Second Quarter 2008:**                                 |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| Revenues from external customers                         |   | $        798 |   | $   193 |   | N/A                       |   | $      ––  |   | $ 991   |   |
| Depreciation and amortization                            |   | 36                                                   |   | 12                     |   | N/A                       |   | 2                                                         |   | 50           |   |
| Equity income from joint ventures                        |   | 2                                                    |   | ––         |   | N/A                       |   | ––                                            |   | 2            |   |
| Income (loss) from continuing operations before taxes    |   | 52                                                   |   | 1                      |   | N/A                       |   | (42                                                       | )(a)   | 11           |   |
| Capital expenditures                                     |   | 36                                                   |   | 4                      |   | N/A                       |   | 2                                                         |   | 42           |   |
|                                                     |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| **First Six Months 2008 or at Second Quarter-End 2008:** |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| Revenues from external customers                         |   | $     1,574                 |   | $   361 |   | N/A                       |   | $       –– |   | $ 1,935 |   |
| Depreciation and amortization                            |   | 71                                                   |   | 24                     |   | N/A                       |   | 5                                                         |   | 100          |   |
| Equity income from joint ventures                        |   | 4                                                    |   | 1                      |   | N/A                       |   | ––                                            |   | 5            |   |
| Income (loss) from continuing operations before taxes    |   | 107                                                  |   | (20                    | )      | N/A                       |   | (101                                                      | ) (a)  | (14          | )      |
| Total assets                                             |   | 2,324                                                |   | 616                    |   | N/A                       |   | 2,818                                                     |   | 5,758        |   |
| Investment in equity method investees and joint ventures |   | 12                                                   |   | 24                     |   | N/A                       |   | ––                                            |   | 36           |   |
| Goodwill                                                 |   | 236                                                  |   | 129                    |   | N/A                       |   | ––                                            |   | 365          |   |
| Capital expenditures                                     |   | 63                                                   |   | 10                     |   | N/A                       |   | 3                                                         |   | 76           |   |
|                                                     |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| **Second Quarter 2007:**                                 |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| Revenues from external customers                         |   | $        779 |   | $   224 |   | $   20     |   | $       –– |   | $ 1,023 |   |
| Depreciation and amortization                            |   | 35                                                   |   | 11                     |   | 4                         |   | 4                                                         |   | 54           |   |
| Equity income from joint ventures                        |   | ––                                       |   | 1                      |   | ––            |   | ––                                            |   | 1            |   |
| Income (loss) from continuing operations before taxes    |   | 78                                                   |   | 11                     |   | 16                        |   | (63                                                       | ) (a)  | 42           |   |
| Capital expenditures and reforestation                   |   | 34                                                   |   | 10                     |   | 4                         |   | 3                                                         |   | 51           |   |
|                                                     |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| **First Six Months 2007 or at Second Quarter-End 2007:** |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |
| Revenues from external customers                         |   | $     1,540                 |   | $   447 |   | $   39     |   | $       –– |   | $ 2,026 |   |
| Depreciation and amortization                            |   | 72                                                   |   | 23                     |   | 7                         |   | 7                                                         |   | 109          |   |
| Equity income from joint ventures                        |   | 1                                                    |   | 1                      |   | ––            |   | ––                                            |   | 2            |   |
| Income (loss) from continuing operations before taxes    |   | 142                                                  |   | 27                     |   | 35                        |   | (150                                                      | ) (a)  | 54           |   |
| Total assets                                             |   | 2,265                                                |   | 626                    |   | 335                       |   | 360                                                       |   | 3,586        | (b)    |
| Investment in equity method investees and joint ventures |   | 13                                                   |   | 22                     |   | ––            |   | ––                                            |   | 35           |   |
| Goodwill                                                 |   | 236                                                  |   | 129                    |   | ––            |   | ––                                            |   | 365          |   |
| Capital expenditures and reforestation                   |   | 59                                                   |   | 20                     |   | 6                         |   | 8                                                         |   | 93           |   |
|                                                     |   |                                                 |   |                   |   |                      |   |                                                      |   |         |   |

 

 

 

 

11

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

(a) Items not included in segments consist of:

|                                                                                                                |   | **Second Quarter** |   |   | **First Six Months** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|----------------------|--------|
|                                                                                                                |   | **2008**           |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                                                                                                                |   | **(In millions)**  |   |
| General and administrative expense                                                                                  | $      | (21                | )      | $      | (27                  | )      | $ | (42 | ) | $ | (52 | ) |
| Share-based compensation                                                                                            |   | (2                 | )      |   | (13                  | )      |   | (6 | ) |   | (32 | ) |
| Other operating income (expense)                                                                                    |   | ––     |   |   | 4                    |   |   | (15 | ) |   | (10 | ) |
| Other non-operating income (expense)                                                                                |   | 1                  |   |   | 1                    |   |   | 2 |   |   | 1 |   |
| Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities |   | ––     |   |   | ––       |   |   | (3 | ) |   | –– |   |
| Interest expense on debt                                                                                            |   | (20                | )      |   | (28                  | )      |   | (37 | ) |   | (57 | ) |
|                                                                                                                | $      | (42                | )      | $      | (63                  | )      | $ | (101 | ) | $ | (150 | ) |
|                                                                                                                |   |               |   |   |                 |   |   |   |   |   |   |   |
| Other operating income (expense) applies to:                                                                        |   |               |   |   |                 |   |   |   |   |   |   |   |
| Corrugated packaging                                                                                                | $      | ––     |   | $      | ––       |   | $ | 6 |   | $ | (10 | ) |
| Building products                                                                                                   |   | ––     |   |   | 8                    |   |   | (1 | ) |   | 8 |   |
| Unallocated                                                                                                         |   | ––     |   |   | (4                   | )      |   | (20 | ) |   | (8 | ) |
|                                                                                                                | $      | ––     |   | $      | 4                    |   | $ | (15 | ) | $ | (10 | ) |

 

(b) Excludes assets of discontinued operations of $16,309 million.

 

**Note 10 – Discontinued Operations**

 

On December 28, 2007, we spun off to our shareholders in tax-free distributions, our real estate segment, Forestar, which included certain real estate and minerals activities in our timber and timberland segment, and our financial services segment, Guaranty. In addition, on August 31, 2007 we sold our chemical operations. A summary of earnings from our discontinued operations            follows:

 

|                                             |   | **Second Quarter**

**2007** |   |   | **First Six Months**

**2007** |   |
|--------------------------------------------------|--------|------------------------------|--------|--------|--------------------------------|--------|
|                                             |   | **(In millions)**            |   |
| Real estate income before taxes                  | $      | 21                           |   | $      | 24                             |   |
| Financial services income before taxes           |   | 42                           |   |   | 88                             |   |
| Chemical operations and other                    |   | ––               |   |   | ––                 |   |
| Income from discontinued operations before taxes |   | 63                           |   |   | 112                            |   |
| Income tax expense                               |   | (23                          | )      |   | (41                            | )      |
| Discontinued operations                          | $      | 40                           |   | $      | 71                             |   |

 

**Note 11 – Subsequent Event**

 

In July 2008, we purchased the remaining 50 percent interest in Premier Boxboard Limited LLC for $62 million, which we borrowed under our existing credit agreements. The joint venture has $50 million in debt, of which $25 million was related to the purchased interest. We will include the financial position, results of operations and cash flows of Premier Boxboard in our consolidated            financial statements beginning third quarter 2008. Previously we had accounted for our interest in Premier Boxboard using the equity method. The unaudited pro forma results of operations, assuming this acquisition had been effective at the beginning of the year, would not have been materially different from those reported.

 

 

12

 

 

 

----

**TEMPLE-INLAND INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)**

 

 

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

 

***Forward-Looking Statements***

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,”            “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. A variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that            might cause such differences include, but are not limited to:

 

|   | **•** | general economic, market or business conditions; |
|--------|------------|--------------------------------------------------|

|   | **•** | the opportunities (or lack thereof) that may be presented to us and that we may pursue; |
|--------|------------|-----------------------------------------------------------------------------------------|

|   | **•** | fluctuations in costs and expenses including the costs of raw materials, purchased energy, and freight; |
|--------|------------|---------------------------------------------------------------------------------------------------------|

|   | **•** | changes in interest rates; |
|--------|------------|----------------------------|

|   | **•** | demand for new housing; |
|--------|------------|-------------------------|

|   | **•** | accuracy of accounting assumptions related to impaired assets, pension and postretirement costs, and contingency reserves; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

|   | **•** | competitive actions by other companies; |
|--------|------------|-----------------------------------------|

|   | **•** | changes in laws or regulations; |
|--------|------------|---------------------------------|

|   | **•** | our ability to execute certain strategic and business improvement initiatives; and |
|--------|------------|------------------------------------------------------------------------------------|

|   | **•** | other factors, many of which are beyond our control. |
|--------|------------|------------------------------------------------------|

 

Our actual results, performance, or achievement probably will differ from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our results of operations or financial condition.            In view of these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we expressly disclaim any obligation to publicly revise any forward-looking statements contained in this report to reflect the occurrence of events after the date of this report.

 

***Non-GAAP Financial Measures***

 

Return on investment (ROI) is an important internal measure for us because it is a key component of our evaluation of overall performance and the performance of our business segments. Studies have shown that there is a direct correlation between shareholder value and ROI and that shareholder value is created when ROI exceeds the cost of capital. ROI allows us to evaluate our            performance on a consistent basis as the amount we earn relative to the amount invested in our business segments. A significant portion of senior management’s compensation is based on achieving ROI targets.

 

In evaluating overall performance, we define ROI as total segment operating income, less general and administrative expenses and share-based compensation not included in segments, divided by total assets, less certain assets and certain current liabilities. We do not believe there is a comparable GAAP financial measure to our definition of ROI. The reconciliation of our ROI            calculation to amounts reported under GAAP is included in a later section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Despite its importance to us, ROI is a non-GAAP financial measure that has no standardized definition and as a result may not be comparable with other companies’ measures using the same or similar terms. Also there may be limits in the usefulness of ROI to investors. As a result, we encourage you to read our consolidated financial statements in their entirety and not to rely on            any single financial measure.

 

 

13

 

 

 

----

***Accounting Policies***

 

*Critical Accounting Estimates*

 

In first six months 2008, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for the year 2007.

 

*New and Pending Accounting Pronouncements*

 

Beginning January 2008, we adopted two new accounting pronouncements neither of which had a significant effect on our earnings or financial position. In addition, there are three new accounting pronouncements that we will be required to adopt in 2009 none of which are expected to have a significant effect on our earnings or financial position.

 

Please read**Note 2 to the Consolidated Financial Statements**for further information.

 

***Results of Operations for Second Quarter and First Six Months 2008 and 2007***

 

*Summary*

 

We manage our operations through two business segments: corrugated packaging and building products. Timber and timberland is no longer an active segment as a result of the sale of our timberland in fourth quarter 2007. A summary of the results of operations by business segment follows:

 

|                                                                                                                |   | **Second Quarter**                  |   |   | **First Six Months** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|--------|----------------------|--------|
|                                                                                                                |   | **2008**                            |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                                                                                                                |   | **(In millions, except per share)** |   |
| Revenues                                                                                                            |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Corrugated packaging                                                                                                | $      | 798                                 |   | $      | 779                  |   | $ | 1,574 |   | $ | 1,540 |   |
| Building products                                                                                                   |   | 193                                 |   |   | 224                  |   |   | 361 |   |   | 447 |   |
| Timber and timberland                                                                                               |   | ––                      |   |   | 20                   |   |   | –– |   |   | 39 |   |
| Total revenues                                                                                                      | $      | 991                                 |   | $      | 1,023                |   | $ | 1,935 |   | $ | 2,026 |   |
| Segment operating income                                                                                            |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Corrugated packaging                                                                                                | $      | 52                                  |   | $      | 78                   |   | $ | 107 |   | $ | 142 |   |
| Building products                                                                                                   |   | 1                                   |   |   | 11                   |   |   | (20 | ) |   | 27 |   |
| Timber and timberland                                                                                               |   | ––                      |   |   | 16                   |   |   | –– |   |   | 35 |   |
| Total segment operating income                                                                                      |   | 53                                  |   |   | 105                  |   |   | 87 |   |   | 204 |   |
| Items not included in segments                                                                                      |   |                                |   |   |                 |   |   |   |   |   |   |   |
| General and administrative expense                                                                                  |   | (21                                 | )      |   | (27                  | )      |   | (42 | ) |   | (52 | ) |
| Share-based compensation                                                                                            |   | (2                                  | )      |   | (13                  | )      |   | (6 | ) |   | (32 | ) |
| Other operating income (expense)                                                                                    |   | ––                      |   |   | 4                    |   |   | (15 | ) |   | (10 | ) |
| Other non-operating income (expense)                                                                                |   | 1                                   |   |   | 1                    |   |   | 2 |   |   | 1 |   |
| Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities |   | ––                      |   |   | ––       |   |   | (3 | ) |   | –– |   |
| Interest expense on debt                                                                                            |   | (20                                 | )      |   | (28                  | )      |   | (37 | ) |   | (57 | ) |
| Income (loss) before taxes                                                                                          |   | 11                                  |   |   | 42                   |   |   | (14 | ) |   | 54 |   |
| Income tax (expense) benefit                                                                                        |   | (3                                  | )      |   | (16                  | )      |   | 9 |   |   | (21 | ) |
| Income (loss) from continuing operations                                                                            |   | 8                                   |   |   | 26                   |   |   | (5 | ) |   | 33 |   |
| Discontinued operations                                                                                             |   | ––                      |   |   | 40                   |   |   | –– |   |   | 71 |   |
| Net income (loss)                                                                                                   | $      | 8                                   |   | $      | 66                   |   | $ | (5 | ) | $ | 104 |   |
|                                                                                                                |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Average basic shares outstanding                                                                                    |   | 106.6                               |   |   | 106.0                |   |   | 106.7 |   |   | 105.8 |   |
| Average diluted shares outstanding                                                                                  |   | 107.4                               |   |   | 108.1                |   |   | 107.6 |   |   | 107.8 |   |
|                                                                                                                |   |                                |   |   |                 |   |   |   |   |   |   |   |
| Income (loss) from continuing operations, per basic share                                                           | $      | 0.07                                |   | $      | 0.24                 |   | $ | (0.05 | ) | $ | 0.31 |   |
| Income from continuing operations, per diluted share (a)                                                            | $      | 0.07                                |   | $      | 0.24                 |   | $ | N/A |   | $ | 0.31 |   |
|                                                                                                                |   |                                |   |   |                 |   |   |   |   |   |   |   |
| ROI, annualized                                                                                                     |   |                                |   |   |                 |   |   | 3.1 | % |   | 8.3 | % |

 

(a) Income per diluted share is not applicable for first six months 2008 due to our loss from continuing operations.

 

 

14

 

 

 

----

 

In first six months 2008, significant items affecting income (loss) from continuing operations included:

 

|   | **•** | We experienced higher prices and slightly higher volumes for our corrugated packaging products. |
|--------|------------|-------------------------------------------------------------------------------------------------|

|   | **•** | We continued to experience lower prices and volumes for most of our building products. Building products benefited from significant cost reduction activities. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | While we continued to see the benefits in our manufacturing operations from our initiative to lower costs, improve asset utilization, and increase operating efficiencies, the increased cost of energy, freight, chemicals, and fiber more than offset these benefits. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Share-based compensation decreased due to the effect of the lower share price on our cash-settled awards. |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

|   | **•** | We incurred $20 million of costs associated with our transformation plan, of which $15 million is related to the settlement of supplemental retirement benefits. We also decreased litigation reserves by $5 million due to the settlement of the remaining claim related to our antitrust litigation. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Interest expense decreased primarily due to the December 2007 early pay-off of $286 million of 6.75% notes and $213 million of 7.875% notes. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | In July 2008, we purchased the remaining 50 percent interest in Premier Boxboard Limited LLC. |
|--------|------------|-----------------------------------------------------------------------------------------------|

 

In first six months 2007, significant items affecting income from continuing operations included:

 

|   | **•** | We experienced higher prices for our corrugated packaging products and lower prices and volumes for our building products, principally lumber and gypsum wallboard. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | While we continued to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies, the cost of recycled fiber, energy and freight offset some of the benefits. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We recognized $4 million in business interruption insurance proceeds from a prior year claim related to one of our paper mills and an $8 million gain on sale of non-strategic timber leases. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Share-based compensation increased due to the effect of the higher share price on our cash-settled awards. |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | We incurred $8 million of costs associated with our transformation plan, primarily legal and advisory fees. |
|--------|------------|-------------------------------------------------------------------------------------------------------------|

|   | **•** | We recognized a one-time tax benefit of $3 million related to Texas tax legislation enacted in May 2007. |
|--------|------------|----------------------------------------------------------------------------------------------------------|

 

Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in energy costs, interest rates, new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar. Given the commodity nature of our manufactured products, we have little control over market pricing or market demand.

 

**Corrugated Packaging**

 

We manufacture linerboard and corrugating medium (collectively referred to as containerboard) that we convert into corrugated packaging and sell in the open market. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging products and, to a lesser degree, from the sale of linerboard in the domestic and export markets. We also own a 50            percent interest in Premier Boxboard Limited LLC, a joint venture that produces light-weight gypsum facing paper and containerboard at a mill in Newport, Indiana. In July 2008, we acquired the remaining 50 percent interest in this venture.

 

 

15

 

 

 

----

A summary of our corrugated packaging results follows:

 

 

|                     |   | **Second Quarter**        |   |   | **First Six Months** |   |
|--------------------------|--------|---------------------------|--------|--------|----------------------|--------|
|                     |   | **2008**                  |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                     |   | **(Dollars in millions)** |   |
| Revenues                 | $      | 798                       |   | $      | 779                  |   | $ | 1,574 |   | $ | 1,540 |   |
| Costs and expenses       |   | (746                      | )      |   | (701                 | )      |   | (1,467 | ) |   | (1,398 | ) |
| Segment operating income | $      | 52                        |   | $      | 78                   |   | $ | 107 |   | $ | 142 |   |
|                     |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Segment ROI              |   |                      |   |   |                 |   |   | 10.8 | % |   | 14.2 | % |

 

Fluctuations in corrugated packaging pricing (which includes freight and is net of discounts) and shipments follow:

 

|                                | **Second Quarter 2008**

**versus**

**Second Quarter 2007** |   | **First Six Months 2008**

**versus**

**First Six Months 2007** |
|-------------------------------------|--------------------------------------------------------------|--------|------------------------------------------------------------------|
|                                | **Increase/(Decrease)**                                      |
| Corrugated packaging                |                                                         |   |                                                             |   |   |
| Average prices                      | 2                                                            | %      |                                                             | 3 | % |
| Shipments, average week             | (2                                                           | )%     |                                                             | 1 | % |
| Industry shipments, average week(a) | (4                                                           | )%     |                                                             | (2 | )% |
|                                |                                                         |   |                                                             |   |   |
| Linerboard                          |                                                         |   |                                                             |   |   |
| Average prices                      | 0                                                            | %      |                                                             | 3 | % |
| Shipments, in thousand tons         | (4                                                           | )      |                                                             | (22 | ) |

 

|   | (a) | Source: Fibre Box Association |
|--------|-----|-------------------------------|

 

Compared with first quarter 2008, average corrugated packaging prices were down one percent and shipments were up two percent, principally due to normal seasonal fluctuations, while average linerboard prices were down three percent and shipments were down 10,000 tons. We announced a $55 per ton increase in the price of containerboard effective July 1, 2008.

 

Costs and expenses were up six percent in second quarter 2008 compared with second quarter 2007 and up five percent in first six months 2008 compared with first six months 2007. These increased costs were primarily the result of higher prices for wood and recycled fiber, energy, chemicals, and freight.

 

Fluctuations in our significant cost and expense components included:

 

|                            | **Second Quarter 2008**

**versus**

**Second Quarter 2007** |   |   | **First Six Months 2008**

**versus**

**First Six Months 2007** |
|---------------------------------|--------------------------------------------------------------|--------|--------|------------------------------------------------------------------|
|                            | **Increase/(Decrease)**

**(In millions)**                   |
| Wood fiber                      | $                                                            | 5      |   | $                                                                | 6 |   |
| Recycled fiber                  |                                                         | 7      |   |                                                             | 17 |   |
| Energy, principally natural gas |                                                         | 15     |   |                                                             | 21 |   |
| Chemicals                       |                                                         | 6      |   |                                                             | 9 |   |
| Freight                         |                                                         | 9      |   |                                                             | 13 |   |
|                                 |                                                              |        |        |                                                                  |  |  |  |  |  |

 

The costs of our wood and recycled fiber, energy, chemicals, and freight fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate for the remainder of 2008.

 

Information about our converting facilities and mills follows:

 

 

 

16

 

 

 

----

 

|                                                                                           |   | **Second Quarter** |   |   | **First Six Months** |   |
|------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|----------------------|--------|
|                                                                                           |   | **2008**           |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
| Number of converting facilities (at quarter-end)                                               |   | 64                 |   |   | 64                   |   |   | 64 |   |   | 64 |   |
| Corrugated packaging shipments, in thousand tons                                               |   | 867                |   |   | 866                  |   |   | 1,694 |   |   | 1,696 |   |
| Mill production, in thousand tons                                                              |   | 914                |   |   | 906                  |   |   | 1,828 |   |   | 1,803 |   |
| Percent mill production used internally                                                        |   | 92                 | %      |   | 92                   | %      |   | 92 | % |   | 90 | % |
| Percent of total fiber requirements sourced from recycled fiber                                |   | 36                 | %      |   | 36                   | %      |   | 36 | % |   | 37 | % |
| Containerboard purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons |   | 15                 |   |   | 15                   |   |   | 28 |   |   | 35 |   |

 

**Building Products**

 

We manufacture lumber, gypsum wallboard, particleboard, medium density fiberboard (MDF), and fiberboard. Our building products segment revenues are principally derived from sales of these products. We also own a 50 percent interest in Del-Tin Fiber LLC, a joint venture that produces MDF at a facility in El Dorado, Arkansas.

 

A summary of our building products results follows:

 

|                            |   | **Second Quarter**        |   |   | **First Six Months** |   |
|---------------------------------|--------|---------------------------|--------|--------|----------------------|--------|
|                            |   | **2008**                  |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                            |   | **(Dollars in millions)** |   |
| Revenues                        | $      | 193                       |   | $      | 224                  |   | $ | 361 |   | $ | 447 |   |
| Costs and expenses              |   | (192                      | )      |   | (213                 | )      |   | (381 | ) |   | (420 | ) |
| Segment operating income (loss) | $      | 1                         |   | $      | 11                   |   | $ | (20 | ) | $ | 27 |   |
|                            |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Segment ROI                     |   |                      |   |   |                 |   |   | (7.1 | )% |   | 9.6 | % |

 

Fluctuations in product pricing (which includes freight and is net of discounts) and shipments follow:

 

|              | **Second Quarter 2008**

**versus**

**Second Quarter 2007** |   |   | **First Six Months 2008**

**versus**

**First Six Months 2007** |
|-------------------|--------------------------------------------------------------|--------|--------|------------------------------------------------------------------|
|              | **Increase/(Decrease)**                                      |
| Lumber:           |                                                         |   |   |                                                             |   |   |
| Average prices    |                                                         | 4      | %      |                                                             | (2 | )% |
| Shipments         |                                                         | (8     | )%     |                                                             | (5 | )% |
| Gypsum wallboard: |                                                         |   |   |                                                             |   |   |
| Average prices    |                                                         | (24    | )%     |                                                             | (30 | )% |
| Shipments         |                                                         | (33    | )%     |                                                             | (30 | )% |
| Particleboard:    |                                                         |   |   |                                                             |   |   |
| Average prices    |                                                         | 0      | %      |                                                             | (1 | )% |
| Shipments         |                                                         | 1      | %      |                                                             | (8 | )% |
| MDF:              |                                                         |   |   |                                                             |   |   |
| Average prices    |                                                         | 9      | %      |                                                             | 7 | % |
| Shipments         |                                                         | 3      | %      |                                                             | 3 | % |
|                   |                                                              |        |        |                                                                  |  |  |  |  |  |

 

Pricing and demand for lumber, gypsum wallboard and particleboard were down compared with first six months 2007 due to deteriorating conditions in the housing industry. It is likely these conditions will continue for the remainder of 2008.

 

Compared with first quarter 2008, average prices were up 17 percent for lumber, three percent for MDF, two percent for particleboard and two percent for gypsum wallboard. Shipments were up 13 percent for particleboard, two percent for lumber and flat for MDF. These improvements are primarily the result of a normal seasonal increase in construction activities.

 

 

17

 

 

 

----

 

Costs and expenses were down nine percent in first six months 2008 compared with first six months 2007. The decrease in costs is primarily attributable to curtailment of production to match demand for our products and headcount reductions. In first six months 2008, we incurred $2 million in severance charges for headcount reductions.

 

Fluctuations in our significant cost and expense components included:

 

|                            | **Second Quarter 2008**

**versus**

**Second Quarter 2007** |           |   | **First Six Months 2008**

**versus**

**First Six Months 2007** |
|---------------------------------|--------------------------------------------------------------|----------------|--------|------------------------------------------------------------------|
|                            | **Increase/(Decrease)**

**(In millions)**                   |
| Wood fiber                      | $                                                            | (9             | )      | $                                                                | (18 | ) |
| Energy, principally natural gas |                                                         | 1              |   |                                                             | –– |   |
| Chemicals                       |                                                         | 4              |   |                                                             | 6 |   |
| Freight                         |                                                         | –– |   |                                                             | (3 | ) |
|                                 |                                                              |                |        |                                                                  |  |  |  |  |  |

 

The costs of our fiber, energy, chemicals, and freight fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate for the remainder of 2008.

 

Information about our converting and manufacturing facilities follows:

 

|                                                                                                |   | **Second Quarter** |   |   | **First Six Months** |   |
|-----------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|----------------------|--------|
|                                                                                                |   | **2008**           |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
| Number of converting and manufacturing facilities (at quarter-end)                                  |   | 16                 |   |   | 17                   |   |   | 16 |   |   | 17 |   |
| Average operating rates for all product lines excluding sold or closed facilities:                  |   |               |   |   |                 |   |   |   |   |   |   |   |
| High                                                                                                |   | 109                | %      |   | 110                  | %      |   | 98 | % |   | 100 | % |
| Low                                                                                                 |   | 46                 | %      |   | 62                   | %      |   | 47 | % |   | 65 | % |
| Average                                                                                             |   | 73                 | %      |   | 85                   | %      |   | 70 | % |   | 82 | % |
| Gypsum facing paper purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons |   | 6                  |   |   | 12                   |   |   | 14 |   |   | 24 |   |
| Percent of gypsum facing paper supplied by our Premier Boxboard Limited LLC joint venture           |   |               |   |   |                 |   |   | 59 | % |   | 71 | % |

 

The lower average operating rates in first six months 2008 resulted from the curtailment of production to match demand for our products. In December 2007, we permanently ceased production at our Mt. Jewett particleboard plant.

 

**Items Not Included in Segments**

 

Items not included in segments are income and expenses that are managed on a company-wide basis and include corporate general and administrative expense, share-based compensation, other operating and non-operating income (expense), and interest income and expense.

 

The change in share-based compensation was principally due to the effect of a lower share price on our cash-based awards. A significant portion of our share-based awards are cash-settled awards. As a result, changes in our share price have a direct impact on our share-based compensation expense. Please read**Note 4 to the Consolidated Financial            Statements**for further information. Based on our current expectations, it is likely that share-based compensation expense for the year 2008 will be in the range of $15 to $30 million.

 

Other operating income (expense) not included in business segments totaled $15 million in first six months 2008, principally related to the lump-sum settlements of supplemental pension benefits made as part of our 2007 transformation plan.

 

 

18

 

 

 

----

We are continuing our efforts to enhance return on investment by lowering costs, improving operating efficiencies and increasing asset utilization. As a result, we will continue to review operations that are unable to meet return objectives and determine appropriate courses of action, including possibly consolidating and closing converting facilities.

 

Net interest income (expense) on financial assets and nonrecourse liabilities of special purpose entities relates to interest income on the $2.38 billion of notes received from the sale of our timberland in 2007 and interest expense on the $2.14 billion of borrowings secured by a pledge of the notes received. The notes receivable were contributed to and the borrowings were made by            two wholly-owned, bankruptcy-remote special purpose entities, which we consolidate. The borrowings are nonrecourse beyond these two entities. At second quarter-end 2008, the interest rate on our financial assets was 2.94 percent and the interest rate on our nonrecourse financial liabilities was 3.24 percent. These interest rates reset quarterly based on different indices and may not always reflect the same net interest spread.

 

The change in interest expense in first six months 2008 was primarily due to the December 2007 pay-off of our $286 million of 6.75% Notes payable in 2009 and $213 million of 7.875% Senior Notes payable in 2012.

 

**Income Taxes**

 

Our effective tax rate was 27 percent in second quarter 2008 and a benefit of 64 percent in first six months 2008. Our effective tax rate was 38 percent in second quarter 2007 and 39 percent in first six months 2007. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, and deferred taxes on unremitted foreign            income.

 

**Average Shares Outstanding**

 

The increase in average basic shares outstanding was principally due to the issuance of shares related to stock-based compensation plans. The decrease in average diluted shares outstanding was due to the decrease in the dilutive effect of stock options as a result of our lower share price.

 

**Capital Resources and Liquidity for First Six Months 2008**

 

**Sources and Uses of Cash**

 

We operate in cyclical industries and our operating cash flows vary accordingly. Our principal operating cash requirements are for compensation, wood and recycled fiber, energy, interest, and taxes. Pricing and shipments for our corrugated packaging products improved in first six months 2008, while pricing and shipments of most of our building products continued to decline. Working            capital is subject to cyclical operating needs, the timing of collection of receivables and the payment of payables and expenses and, to a lesser extent, to seasonal fluctuations in our operations.

 

 

19

 

 

 

----

 

|                                                                                                 |           | **First Six Months** |   |
|------------------------------------------------------------------------------------------------------|----------------|----------------------|--------|
|                                                                                                 |           | **2008**             |   |   | **2007** |   |
|                                                                                                 |           | **(In millions)**    |   |
| Cash received from:                                                                                  |           |                 |   |   |   |   |
| Operations (including payments in 2008 related to our 2007 transformation plan of $39 million)       |  

$      | 76                   | (a)    |  

$ | 233 | (a) |
| Working capital (including payments in 2008 related to our 2007 transformation plan of $277 million) |  

  | (365                 | )      |  

  | (30 | ) |
| Cash from operations                                                                                 |           | (289                 | )      |   | 203 |   |
| Exercise of options and related tax benefits                                                         |           | ––       |   |   | 25 |   |
| Sale of non-strategic assets and other                                                               |           | 4                    |   |   | 14 |   |
| Borrowing, net                                                                                       |           | 206                  |   |   | (7 | ) |
| Total sources                                                                                        |           | (79                  | )      |   | 235 |   |
|                                                                                                 |           |                 |   |   |   |   |
| Cash used to:                                                                                        |           |                 |   |   |   |   |
| Return to shareholders through:                                                                      |           |                 |   |   |   |   |
| Dividends                                                                                            |           | (21                  | )      |   | (59 | ) |
| Repurchase of common stock                                                                           |           | ––       |   |   | (24 | ) |
| Reinvest in the business through:                                                                    |           |                 |   |   |   |   |
| Capital expenditures                                                                                 |           | (76                  | )      |   | (87 | ) |
| Joint ventures and other                                                                             |           | (8                   | )      |   | (10 | ) |
| Total uses                                                                                           |           | (105                 | )      |   | (180 | ) |
| Effect of exchange rate changes on cash and cash equivalents                                         |           | 1                    |   |   | –– |   |
| Discontinued operations, net                                                                         |           | ––       |   |   | (66 | ) |
| Change in cash and cash equivalents                                                                  | $              | (183                 | )      | $ | (11 | ) |

 

(a) Includes voluntary, discretionary contributions to our qualified defined benefit plan of $15 million in 2008 and $30 million in 2007.

 

In first six months 2008, our cash from operations included payments of about $316 million related to the completion of our 2007 transformation plan. In third quarter 2008, we expect to pay the remaining $31 million of 2007 transformation plan liabilities.

 

We issued 180,270 shares of common stock in first six months 2008 and 841,700 shares of common stock in first six months 2007 to employees exercising options. We paid cash dividends to shareholders of $0.20 per share in first six months 2008 and $0.56 per share in first six months 2007. On August 1, 2008, our Board of Directors declared a regular dividend of $0.10 per share payable            on September 15, 2008.

 

We initiated no purchases under our share repurchase authorizations in first six months 2008. The maximum number of shares available to be purchased under our repurchase plans is 6.6 million shares at second quarter-end 2008.

 

Capital expenditures are expected to approximate $170 to $175 million in 2008 or about 85 percent of expected 2008 depreciation and amortization. Most of the expected 2008 expenditures relate to initiatives to increase efficiency in our corrugated packaging operations.

 

**Liquidity**

 

Our sources of short-term funding are our operating cash flows and borrowings under our credit agreements and accounts receivable securitization facility. At second quarter-end 2008, we had $836 million of unused borrowing capacity under our committed credit agreements and accounts receivable securitization facility.

 

 

 

20

 

 

 

----

 

|                                                 |   | **Committed Credit Agreements** |   |   | **Accounts Receivable Securitization Facility** |   |   | **Total** |
|------------------------------------------------------|--------|---------------------------------|--------|--------|-------------------------------------------------|--------|--------|-----------|
|                                                 |   | **(In millions)**               |
| Committed                                            | $      | 835                             |   |   | $                                               | 250    |   |      | $ | 1,085 |   |
| Less: borrowings and commitments                     |   | (19                             | )      |   |                                            | (230   | )      |      |   | (249 | ) |
| Unused borrowing capacity at second quarter-end 2008 | $      | 816                             |   |   | $                                               | 20     |   |      | $ | 836 |   |

 

Our committed credit agreements include a $750 million revolving credit facility that expires in 2011. The remaining $85 million of our committed credit agreements expire between 2008 and 2009, of which $60 million contain provisions that allow for any outstanding borrowings to be repaid in 2010 or 2011. Our accounts receivable securitization facility expires in 2010.

 

Our debt agreements, accounts receivable securitization facility, and credit agreements contain terms, conditions, and financial covenants customary for such agreements, including minimum levels of interest coverage and limitations on leverage. In second quarter 2008, we amended our borrowing agreements to revise limits imposed by certain covenants and definitions. As a result, at            second quarter-end 2008, our unused borrowing capacity is no longer limited. We believe the amount available under these credit facilities along with our existing cash and cash equivalents and expected cash flows from operations will provide us sufficient funds to meet our operating needs for the foreseeable future.

 

In third quarter 2008, we will borrow $112 million under our existing credit facilities to fund the purchase of the remaining 50 percent interest in Premier Boxboard Limited LLC and to refinance the joint venture’s $50 million of debt, which we had previously guaranteed.

 

**Off-Balance Sheet Arrangements**

 

At second quarter-end 2008, there were no significant changes in off-balance sheet arrangements from that disclosed in our Annual Report on Form 10-K for the year 2007.

 

**Pension and Postretirement Matters**

 

We made a $15 million voluntary, discretionary contribution to our qualified defined benefit pension plan in first six months 2008. We expect our 2008 voluntary, discretionary contributions to our qualified defined benefit pension plan to approximate 2008 service cost, about $30 million.

 

**Energy**

 

Energy costs were $177 million in first six months 2008 compared with $157 million in first six months 2007. Our energy costs fluctuate based on the market prices we pay for these commodities and on the amount and mix of fuels we may use. We continue to reduce our dependency on natural gas by utilizing biomass fuels. We hedge very little of our energy needs. It is likely that these            costs will continue to fluctuate for the remainder of 2008.

 

**Litigation and Related Matters**

 

We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business, and we believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a material adverse effect on our financial position or long-term results of operations or cash flows. It is            possible, however, that charges related to these matters could be significant to results of operations or cash flows in any single accounting period.

 

During second quarter 2008, there were no material developments in pending legal proceedings other than as disclosed in Part II, Item 1 of this report.

 

 

21

 

 

 

----

**Calculation of Non-GAAP Financial Measure**

 

|                           |                                                                                | **Consolidated**          |    |   | **Corrugated Packaging** |   |   | **Building Products** |   |   | **Timber and Timberland** |   |
|--------------------------------|-------------------------------------------------------------------------------------|---------------------------|---------|--------|--------------------------|--------|--------|-----------------------|--------|--------|---------------------------|--------|
|                           |                                                                                | **(Dollars in millions)** |    |
| **RETURN ON INVESTMENT (ROI)** |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |
| **First Six Months 2008**      |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |
|                           | Return:                                                                             |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Segment operating income determined in accordance with GAAP                         | $                         | 87      |   | $                        | 107    |   | $                     | (20    | )      | $                         | N/A    |   |
|                           | Items not included in segments:                                                     |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | General and administrative                                                          |                      | (42     | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           | Share-based compensation                                                            |                      | (6      | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           |                                                                                | $                         | 39      |   | $                        | 107    |   | $                     | (20    | )      | $                         | N/A    |   |
|                           |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Investment:                                                                         |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Beginning of year total assets or segment assets determined in accordance with GAAP | $                         | 5,942   |   | $                        | 2,301  |   | $                     | 623    |   | $                         | N/A    |   |
|                           | Adjustments:                                                                        |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Current liabilities (excluding current portion of long-term debt)                   |                      | (887    | )      |                     | (311   | )      |                  | (63    | )      |                      | N/A    |   |
|                           | Financial assets of special purpose entities                                        |                      | (2,383  | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           | Municipal bonds related to capital leases included in other assets                  |                      | (188    | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           |                                                                                | $                         | 2,484   |   | $                        | 1,990  |   | $                     | 560    |   | $                         | N/A    |   |
|                           |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | ROI, annualized                                                                     |                      | 3.1     | %      |                     | 10.8   | %      |                  | (7.1   | )%     |                      | N/A    |   |
|                           |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
| **First Six Months 2007**      |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |
|                           | Return:                                                                             |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Segment operating income determined in accordance with GAAP                         | $                         | 204     |   | $                        | 142    |   | $                     | 27     |   | $                         | 35     |   |
|                           | Items not included in segments:                                                     |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | General and administrative                                                          |                      | (52     | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           | Share-based compensation                                                            |                      | (32     | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           |                                                                                | $                         | 120     |   | $                        | 142    |   | $                     | 27     |   | $                         | 35     |   |
|                           |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Investment:                                                                         |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Beginning of year total assets or segment assets determined in accordance with GAAP | $                         | 20,474  |   | $                        | 2,275  |   | $                     | 638    |   | $                         | 330    |   |
|                           | Adjustments:                                                                        |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | Current liabilities (excluding current portion of long-term debt)                   |                      | (550    | )      |                     | (271   | )      |                  | (76    | )      |                      | (11    | ) |
|                           | Assets of discontinued operations                                                   |                      | (16,847 | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           | Municipal bonds related to capital leases included in other assets                  |                      | (188    | )      |                     | N/A    |   |                  | N/A    |   |                      | N/A    |   |
|                           |                                                                                | $                         | 2,889   |   | $                        | 2,004  |   | $                     | 562    |   | $                         | 319    |   |
|                           |                                                                                |                      |    |   |                     |   |   |                  |   |   |                      |   |   |
|                           | ROI, annualized                                                                     |                      | 8.3     | %      |                     | 14.2   | %      |                  | 9.6    | %      |                      | 21.9   | % |
|                                |                                                                                     |                           |         |        |                          |        |        |                       |        |        |                           |        |  |  |  |  |  |  |  |  |  |

 

ROI annualized is not necessarily indicative of the ROI that may be expected for the entire year.

 

 

 

22

 

 

 

----

**STATISTICAL AND OTHER DATA**

 

Revenues and unit sales, excluding joint venture operations, follows:

 

|                                           |   | **Second Quarter**        |   |   | **First Six Months** |   |
|------------------------------------------------|--------|---------------------------|--------|--------|----------------------|--------|
|                                           |   | **2008**                  |   |   | **2007**             |   |   | **2008** |   |   | **2007** |   |
|                                           |   | **(Dollars in millions)** |   |
| *Revenues*                                     |   |                      |   |   |                 |   |   |   |   |   |   |   |
| **Corrugated Packaging**                       |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Corrugated Packaging                           | $      | 765                       |   | $      | 744                  |   | $ | 1,502 |   | $ | 1,461 |   |
| Containerboard                                 |   | 33                        |   |   | 35                   |   |   | 72 |   |   | 79 |   |
|                                           | $      | 798                       |   | $      | 779                  |   | $ | 1,574 |   |   | 1,540 |   |
|                                           |   |                      |   |   |                 |   |   |   |   |   |   |   |
| **Building Products**                          |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Pine lumber                                    | $      | 64                        |   | $      | 67                   |   | $ | 117 |   | $ | 126 |   |
| Particleboard                                  |   | 49                        |   |   | 49                   |   |   | 92 |   |   | 101 |   |
| Gypsum wallboard                               |   | 34                        |   |   | 67                   |   |   | 68 |   |   | 137 |   |
| Medium density fiberboard                      |   | 19                        |   |   | 17                   |   |   | 38 |   |   | 34 |   |
| Fiberboard                                     |   | 13                        |   |   | 14                   |   |   | 22 |   |   | 28 |   |
| Other                                          |   | 14                        |   |   | 10                   |   |   | 24 |   |   | 21 |   |
|                                           | $      | 193                       |   | $      | 224                  |   | $ | 361 |   | $ | 447 |   |
|                                           |   |                      |   |   |                 |   |   |   |   |   |   |   |
| **Timber and timberland**(a)                   |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Fiber and other                                |   | N/A                       |   | $      | 20                   |   |   | N/A |   | $ | 39 |   |
|                                           |   |                      |   |   |                 |   |   |   |   |   |   |   |
|                                           |   |                      |   |   |                 |   |   |   |   |   |   |   |
| *Unit sales*                                   |   |                      |   |   |                 |   |   |   |   |   |   |   |
| **Corrugated Packaging**                       |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Corrugated packaging, thousands of tons        |   | 867                       |   |   | 866                  |   |   | 1,694 |   |   | 1,696 |   |
| Containerboard, thousands of tons              |   | 72                        |   |   | 76                   |   |   | 154 |   |   | 176 |   |
|                                           |   | 939                       |   |   | 942                  |   |   | 1,848 |   |   | 1,872 |   |
|                                           |   |                      |   |   |                 |   |   |   |   |   |   |   |
| **Building Products**                          |   |                      |   |   |                 |   |   |   |   |   |   |   |
| Pine lumber, million board feet                |   | 204                       |   |   | 222                  |   |   | 404 |   |   | 425 |   |
| Particleboard, million square feet             |   | 135                       |   |   | 134                  |   |   | 255 |   |   | 277 |   |
| Gypsum wallboard, million square feet          |   | 278                       |   |   | 414                  |   |   | 558 |   |   | 796 |   |
| Medium density fiberboard, million square feet |   | 38                        |   |   | 37                   |   |   | 76 |   |   | 74 |   |
| Fiberboard, million square feet                |   | 68                        |   |   | 79                   |   |   | 118 |   |   | 153 |   |

 

(a) We no longer have a timber and timberlands segment as a result of the fourth quarter 2007 sale of our timberlands.

 

 

23

 

 

 

----

**Item 3.****Quantitative and Qualitative Disclosures About Market Risk**

 

*Interest Rate Risk*

 

Our interest rate exposure is primarily related to our variable-rate, long-term debt and to the financial assets and nonrecourse financial liabilities of special purpose entities. This exposure is the result of changes in interest rates and also the use of different base rates and the timing of the quarterly interest rate resets on the financial assets and nonrecourse financial            liabilities of special purpose entities.

 

Our variable-rate debt was $230 million at second quarter-end 2008 and $1 million at year-end 2007. A one percent change in interest rates on $230 million of variable-rate debt would change our annual interest expense by $2 million.

 

Our $2.38 billion of financial assets of special purpose entities require quarterly interest payments based on variable rates that reset quarterly. A one percent change in interest rates on these notes will change our annual interest income by $24 million.

 

Our $2.14 billion of nonrecourse financial liabilities of special purpose entities require quarterly interest payments based on variable interest rates. The interest rates on these liabilities reflect the lenders’ pooled commercial paper issuance rates plus a margin. A one percent change in interest rates on these borrowings will change our annual interest expense by $22            million.

 

The following table illustrates the estimated effect on our pre-tax income of immediate, parallel, and sustained shifts in interest rates for the next 12 months at second quarter-end 2008 on our variable-rate debt and our net financial assets and nonrecourse financial liabilities of special purpose entities, with comparative year-end 2007 information.

 

|                      |   | **Increase (Decrease)**      |
|---------------------------|--------|------------------------------|
|                      |   | **Second Quarter-End 2008**  |   | **Year-End 2007** |
|                      |   | **Variable Rate Debt**       |   | **Special Purpose Entities - Net** |   | **Total** |   | **Variable Rate Debt** |   | **Special Purpose Entities - Net** |   | **Total** |
|                      |   | **(In millions)**            |
| Change in

Interest Rates |   |                         |   |   |   |   |   |   |   |   |   |   |
| +2%                       |   | $    (5) |   | $    5 |   | $  –– |   | $    (1) |   | $    5 |   | $    4 |
| +1%                       |   | (2)                          |   | 2 |   | –– |   | –– |   | 2 |   | 2 |
| -1%                       |   | 2                            |   | (2) |   | –– |   | –– |   | (2) |   | (2) |
| -2%                       |   | 5                            |   | (5) |   | –– |   | 1 |   | (5) |   | (4) |

 

 

*Foreign Currency Risk*

 

In first six months 2008, there were no significant changes in foreign currency risk from that disclosed in our Annual Report on Form 10-K for the year 2007.

 

*Commodity Price Risk*

 

In first six months 2008, there were no significant changes in commodity price risk from that disclosed in our Annual Report on Form 10-K for the year 2007.

 

**Item 4.****Controls and Procedures**

 

(a) Evaluation of disclosure controls and procedures

 

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation,            our Chief Executive Officer and Chief Financial Officer have

 

 

24

 

 

 

----

concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the            Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

25

 

 

 

----

**PART II. OTHER INFORMATION**

 

| **Item 1****.** | **Legal Proceedings** |
|-----------------|-----------------------|

 

During second quarter 2008, there were no material developments in pending legal proceedings.

 

**Item 1A.****Risk Factors**

 

There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year 2007.

 

| **Item 2****.** | **Unregistered Sales of Equity Securities and Use of Proceeds** |
|-----------------|-----------------------------------------------------------------|

 

Issuer Purchases of Equity Securities

 

| **Period**                           |   | **Total Number of Shares**

**Purchased** |   | **Average Price Paid per Share** |   |   | **Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs** |   | **Maximum Number of Shares That May Yet be Purchased Under the Plans**

**or Programs** |
|--------------------------------------|--------|-------------------------------------------|--------|----------------------------------|--------|--------|--------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
| Month 1 (4/1/2008 – 4/30/2008) |   | ––                            |   | $ ––                 |   |   | ––                                                                       |   | 6,650,000                                                                               |   |
| Month 2 (5/1/2008 – 5/31/2008) |   | ––                            |   | $ ––                 |   |   | ––                                                                       |   | 6,650,000                                                                               |   |
| Month 3 (6/1/2008 – 6/30/2008) |   | ––                            |   | $ ––                 |   |   | ––                                                                       |   | 6,650,000                                                                               |   |
| Total                                |   | ––                            |   | $ ––                 |   |   | ––                                                                       |   | 6,650,000                                                                               |   |
|                                      |        |                                           |        |                                  |        |        |                                                                                      |        |                                                                                         |  |  |  |  |  |  |

 

On August 4, 2006, we announced that our Board of Directors authorized the repurchase of up to 6,000,000 shares of our common stock, of which 1,650,000 remain to be purchased. On February 2, 2007, we announced that our Board of Directors authorized the purchase of up to an additional 5,000,000 shares of our common stock, increasing the maximum number of shares yet to be purchased            under our repurchase plans to 6,650,000 shares. The August 4, 2006 and February 2, 2007 plans have no expiration dates. We have no plans or programs that expired in 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** |
|-----------------|-------------------------------------|

 

None.

 

| **Item 4****.** | **Submission of Matters to a Vote of Security Holders** |
|-----------------|---------------------------------------------------------|

 

We held our annual meeting of stockholders on May 2, 2008, at which a quorum was present. The table below sets forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes for each matter voted that meeting, as certified by the independent inspector of elections.

 

|   | **Matter**                                           | **For**    | **Against or Withheld** | **Abstentions and Broker Non-Votes** |
|--------|------------------------------------------------------|------------|-------------------------|--------------------------------------|
| 1.     | Election of five directors                           |       |                    |                                 |
|   | (a) Larry R. Faulkner                                | 82,455,852 | 11,873,983              | 34,882                               |
|   | (b) Jeffrey M. Heller                                | 80,076,830 | 14,254,172              | 33,715                               |
|   | (c) W. Allen Reed                                    | 82,443,675 | 11,887,351              | 33,691                               |
|   | (d) Doyle R. Simons                                  | 82,336,197 | 11,992,767              | 35,753                               |
|   | (e) J. Patrick Maley III                             | 86,602,768 | 7,727,430               | 34,519                               |
| 2.     | Approve adoption of 2008 Incentive Plan              | 62,297,516 | 11,437,331              | 20,629,870                           |
| 3.     | Ratification of appointment of Ernst & Young LLP | 87,843,350 | 511,273                 | 6,010,094                            |

 

 

 

26

 

 

 

----

| **Item 5****.** | **Other Information** |
|-----------------|-----------------------|

 

|   | None. |
|--------|-------|

 

| **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.

 

 

27

 

 

 

----

**SIGNATURES**

 

 

 

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

 

 

|   | TEMPLE-INLAND INC. |
|--------|--------------------|

|   | (Registrant) |
|--------|--------------|

 

 

 

| Dated: August 4, 2008 | By | /s/ Randall D. Levy |
|-----------------------|----|---------------------|

|   | Randall D. Levy |
|--------|-----------------|

|   | Chief Financial Officer |
|--------|-------------------------|

 

 

|   | By | /s/ Troy L. Hester |
|--------|----|--------------------|

|   | Troy L. Hester |
|--------|----------------|

|   | Corporate Controller and |
|--------|--------------------------|

Principal Accounting Officer

 

 

 

 

28

 

 

 

----

INDEX TO EXHIBITS

 

 

| 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

  |  

30 |
|  

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 |
|  

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              |  

34 |
|  

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              |  

35 |

 

 

 

 

 

29