**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-K**

**Annual Report Pursuant to Sections 13 or 15(d)of the Securities Exchange Act of 1934**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transitionperiod from                            to                            **

**Commission File Number: 1-5057**

**OFFICEMAX INCORPORATED**

(Exact name of registrant asspecified in its charter)
| **Delaware**                                                    | ** ** | **82-0100960**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **263 Shuman Boulevard, Naperville, Illinois**                  | ** ** | **60563**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(630) 438-7800**

(Registrant’s telephone number,including area code)

Securities registered pursuant toSection 12(b) of the Act:
| **Title of each class**                                                              | ** ** | **Name of each exchange on which registered** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------|
| ** **                                                                           | ** ** | ** **                                    |
| Common Stock, $2.50  par value                                                       |       | New York Stock Exchange                       |
| American &  Foreign Power Company Inc.  Debentures, 5% Series due 2030 |       | New York Stock Exchange                       |
| Common Stock Purchase  Rights                                                        |       | New York Stock Exchange                       |

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes x No o

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or anyamendment to this Form 10-K. o                .

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large accelerated filer x  Acceleratedfiler o Non-accelerated filer o

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theAct.) Yes o No x

The aggregate market value ofthe voting common stock held by nonaffiliates of the registrant, computed byreference to the price at which the common stock was sold as of the close ofbusiness on July 1, 2006, was $3,016,166,385. Registrant does not have anynonvoting common equities.

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock as of thelatest practicable date.
| **Class******Common Stock,  $2.50 par value | ** ** | **Shares  Outstanding  as of February 24, 2007**74,979,946 |
|---------------------------------------------|------------|-----------------------------------------------------------------|

 

**Documentincorporated by reference**

Portionsof the registrant’s proxy statement relating to its 2007 annual meeting ofshareholders to be held on April 25, 2007 (“OfficeMax Incorporated’s proxystatement”) are incorporated by reference into Part III of this Form 10-K.

 

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**Table ofContents**

| **PART I**   |   |
|-------------------|--------|
| Item  1.          |   | Business |   | 1 |   |
| Item  1A.         |   | Risk  Factors |   | 5 |   |
| Item 1B.          |   | Unresolved Staff  Comments |   | 8 |   |
| Item  2.          |   | Properties |   | 8 |   |
| Item  3.          |   | Legal  Proceedings |   | 10 |   |
| Item 4.           |   | Submission of  Matters to a Vote of Security Holders |   | 11 |   |
| **PART II**  |   |
| Item 5.           |   | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 12 |   |
| Item 6.           |   | Selected Financial  Data |   | 15 |   |
| Item 7.           |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 17 |   |
| Item 7A.          |   | Quantitative  and Qualitative Disclosures About Market Risk |   | 44 |   |
| Item 8.           |   | Financial  Statements and Supplementary Data |   | 45 |   |
| Item 9.           |   | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosure |   | 97 |   |
| Item 9A.          |   | Controls and  Procedures |   | 97 |   |
| Item 9B.          |   | Other Information |   | 97 |   |
| **PART III** |   |
| Item 10.          |   | Directors and  Executive Officers of the Registrant |   | 98 |   |
| Item 11.          |   | Executive  Compensation |   | 99 |   |
| Item 12.          |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   | 99 |   |
| Item 13.          |   | Certain  Relationships and Related Transactions, and Director Independence |   | 100 |   |
| Item 14.          |   | Principal  Accountant Fees and Services |   | 100 |   |
| **PART IV**  |   |
| Item 15.          |   | Exhibits and  Financial Statement Schedules |   | 101 |   |
|              |   | Signatures |   | 102 |   |
|              |   | Index to  Exhibits |   | 104 |   |

 

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**PART I**

***ITEM 1.***   BUSINESS

As used in this 2006 AnnualReport on Form 10-K, the terms “OfficeMax,” the “Company,” and “we”include OfficeMax Incorporated and its consolidated subsidiaries andpredecessors. Our Securities and Exchange Commission (“SEC”) filings, whichinclude this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and all related amendments, areavailable free of charge on our website at www.officemax.com and can be foundby clicking on “About us,” “Investors” and then “SEC filings.” Our SEC filingsare available as soon as reasonably practicable after we electronically filesuch material with, or furnish it to, the SEC. Last year, we filed our annualChief Executive Officer certification dated May 18, 2006, with the NewYork Stock Exchange. Attached as exhibits to this Form 10-K you willfind certifications of our Chief Executive Officer and Chief Financial Officerrequired under Sections 302 and 906 of the Sarbanes-Oxley Act of2002.

***General Overview***

OfficeMax is a leader in bothbusiness-to-business and retail office products distribution. We provide officesupplies and paper, print and document services, technology products andsolutions and furniture to large, medium and small businesses, government offices,and consumers. OfficeMax customers are served by more than 36,000 associatesthrough direct sales, catalogs, the Internet and retail stores. Our commonstock trades on the New York Stock Exchange under the ticker symbol OMX, andour corporate headquarters is in Naperville, Illinois.

OfficeMax Incorporated(formerly Boise Cascade Corporation) was organized as Boise Payette LumberCompany, a Delaware corporation, in 1931 as a successor to an Idaho corporationformed in 1913. In 1957, the company’s name was changed to Boise CascadeCorporation. On December 9, 2003, Boise Cascade Corporation acquired 100%of the voting securities of OfficeMax, Inc. That acquisition more thandoubled the size of our office products distribution business and expanded thatbusiness into the U.S. retail channel. In connection with the sale of ourpaper, forest products and timberland assets described below, the Company’sname was changed from Boise Cascade Corporation to OfficeMax Incorporated, andthe names of our office products segments were changed from Boise OfficeSolutions, Contract and Boise Office Solutions, Retail to OfficeMax, Contractand OfficeMax, Retail. The Boise Cascade Corporation and Boise Office Solutionsnames were used in documents furnished to or filed with the SEC prior to thesale of our paper, forest products and timberland assets.

References made to theOfficeMax, Inc. acquisition and the OfficeMax, Inc. integration inthis Form 10-K refer to Boise Cascade Corporation’s acquisition ofOfficeMax, Inc. in December 2003, and the related integrationactivities. (For more information about our integration activities, seeNote 4, Integration and Facility Closures, of the Notes to ConsolidatedFinancial Statements in “Item 8. Financial Statements and Supplementary Data”of this Form 10-K.)

On October 29, 2004, wesold our paper, forest products and timberland assets to affiliates of BoiseCascade, L.L.C., a new company formed by Madison Dearborn Partners LLC (the “Sale”).The Sale did not include our facility near Elma, Washington. (See Note 3,Discontinued Operations, of the Notes to Consolidated Financial Statements in “Item8. Financial Statements and Supplementary Data” of this Form 10-Kfor more information about the Elma facility.) With the Sale, we completed theCompany’s transition, begun in the mid-1990s, from a predominatelymanufacturing-based company to an independent office productsdistribution company. On October 29, 2004, as part of the Sale, weinvested $175 million in the securities of affiliates of Boise Cascade,L.L.C. This investment represents 

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continuinginvolvement as defined in Statement of Financial Accounting Standards (“SFAS”) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly,we do not show the historical results of the sold paper, forest products andtimberland assets as discontinued operations. (For more information about theSale, see Note 2, Sale of Paper, Forest Products and Timberland Assets, ofthe Notes to Consolidated Financial Statements in “Item 8. FinancialStatements and Supplementary Data” of this Form 10-K.)

Effective with the firstquarter of 2005, we began reporting our results using three reportablesegments: OfficeMax, Contract; OfficeMax, Retail; and Corporate and Other. Theresults of our paper, forest products and timberland assets prior to the Salewere included in the Boise Building Solutions and Boise Paper Solutionssegments. We present information pertaining to each of our segments and thegeographic areas in which they operate in Note 17, Segment Information, ofthe Notes to Consolidated Financial Statements in “Item 8. FinancialStatements and Supplementary Data” of this Form 10-K.

***Change in Fiscal Year End***

Effective March 11, 2005,the Company amended its bylaws to make its fiscal year-end the last Saturday inDecember. Prior to this change, all of the Company’s businesses except for ourU.S. retail operations had a December 31 fiscal year-end. The U.S. retailoperations maintained a fiscal year that ended on the last Saturday inDecember. Due primarily to statutory requirements, the Company’s internationalbusinesses have maintained their December 31 year-ends. Fiscal year2005 ended on December 31, 2005 for all reportable segments andbusinesses, and included 53 weeks for the Retail segment. Fiscal year 2006ended on December 30, 2006 and included 52 weeks for all reportablesegments and businesses.

***OfficeMax, Contract***

We distribute a broad line ofitems for the office, including office supplies and paper, technology productsand solutions and office furniture through our OfficeMax, Contract segment.OfficeMax, Contract sells directly to large corporate and government offices,as well as to small and medium-sized offices in the United States,Canada, Australia and New Zealand. This segment markets and sells through fieldsalespeople, outbound telesales, catalogs, the Internet and in some foreignmarkets through office products stores. Substantially all products sold by thissegment are purchased from outside manufacturers or from industry wholesalers,except office papers. We purchase office papers primarily from the paperoperations of Boise Cascade, L.L.C., under a 12-year paper supplycontract entered into at the time of the Sale. (See Note 18, Commitmentsand Guarantees, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of this Form 10-K foradditional information related to the paper supply contract.)

As of January 27, 2007,OfficeMax Contract operated 52 distribution centers and 6 customer serviceand outbound telesales centers. OfficeMax, Contract also operated 82 stores inCanada, Hawaii, Australia and New Zealand.

OfficeMax, Contract sales for2006, 2005 and 2004 were $4.7 billion, $4.6 billion and $4.4 billion,respectively.

***OfficeMax, Retail***

OfficeMax, Retail is a retaildistributor of office supplies and paper, print and document services,technology products and solutions and office furniture. Our retail segment hasoperations in the United States, Puerto Rico and the U.S. Virgin Islands. Ourretail office supply stores feature OfficeMax ImPress, an in-store moduledevoted to print-for-pay and related services. Our retail segmentalso 

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operatesoffice products stores in Mexico through a 51%-owned joint venture.Substantially all products sold by this segment are purchased from outsidemanufacturers or from industry wholesalers, except office papers. As describedabove, we purchase office papers primarily from the paper operations of BoiseCascade, L.L.C., under a 12-year paper supply contract we entered into atthe time of the Sale.

As of January 27, 2007,our Retail segment operated 914 stores in the U.S. and Mexico, three largedistribution centers in the U.S., and two small distribution centers in Mexico.Each store offers approximately 10,000 stock keeping units (SKUs) of name-brandand OfficeMax private-branded merchandise and a variety of businessservices targeted at serving the small business customer, including OfficeMaxImPress. As of January 27, 2007, our Retail segment operated six OfficeMaxImPress print on demand facilities with enhanced fulfillment capabilities.These 8,000 square foot operations are located within some of our contractdistribution centers, and serve the print and document needs of our largecontract customers in addition to supporting our retail stores by providingservices that cannot be deployed at every retail store.

OfficeMax, Retail sales for2006, 2005 and 2004 were $4.3 billion, $4.5 billion and $4.5 billion,respectively.

***Boise Building Solutions***

Substantially all of theassets of this segment were included in the Sale. Boise Building Solutions wasa major producer of plywood, lumber and particleboard. This segment alsomanufactured engineered wood products, including laminated veneer lumber, woodI-joists and laminated beams. Most of the production was sold to independentwholesalers and dealers or through the segment’s building materialsdistribution outlets for use in housing, industrial construction and a varietyof manufactured products.

Boise Building Solutionsoperated 28 building materials distribution facilities as of October 28,2004 that marketed a wide range of building materials. These products weredistributed to retail lumber dealers, home centers specializing in thedo-it-yourself market and industrial customers. Through October 28, 2004,approximately 25% of the lumber, panels and engineered wood products purchasedby the distribution operations were provided by this segment’s manufacturingfacilities, with the balance purchased from outside sources. Segment sales forthe period from January 1 through October 28, 2004, were$3.3 billion.

***Boise Paper Solutions***

Substantially all of theassets of this segment were included in the Sale. Boise Paper Solutionsmanufactured and sold uncoated free sheet papers, containerboard, corrugatedcontainers, newsprint and market pulp. Boise Paper Solutions sales for theperiod from January 1 through October 28, 2004, were $1.7 billion.

About 46% of this segment’suncoated free sheet paper, including about 83% of its office papers, was soldthrough the OfficeMax, Contract and OfficeMax, Retail segments during theperiod from January 1 through October 28, 2004.

***Timber Resources***

On October 29, 2004, wesold substantially all of our timberland assets, including approximately2.3 million acres of timberland in the United States, 35,000 acres ofeucalyptus plantation land in Brazil and a 16,000-acre cottonwood fiberfarm near Wallula, Washington, to affiliates of Boise Cascade, L.L.C.

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***Competition***

Domestic and internationaloffice products markets are highly and increasingly competitive. Customers havemany options when purchasing office supplies and paper, print and documentservices, technology products and solutions and office furniture. We competewith worldwide contract stationers, office supply superstores, massmerchandisers, wholesale clubs, computer and electronics superstores, Internetmerchandisers, direct-mail distributors, discount retailers, drugstores,supermarkets and thousands of local and regional contract stationers. Inaddition, an increasing number of manufacturers of computer hardware, softwareand peripherals, including some of our suppliers, have expanded their owndirect marketing efforts. The other large office supply superstores haveincreased their presence in our markets in recent years and are expected tocontinue to do so in the future. In addition, many of our competitors haveexpanded their office products assortment, and we expect they will continue todo so. In recent years, two package delivery companies have established retailstores that compete directly with us for copy, printing, packaging and shippingbusiness, and offer a limited assortment of office products and services similarto the ones we offer. We anticipate increasing competition from our two domesticoffice supply superstore competitors and various other providers, including thetwo package delivery companies, for print-for-pay and related services.Print-for-pay and related services have historically been a key point ofdifference for OfficeMax stores and are expected to become an increasingly moreimportant part of our future strategies. Any or all of our competitors maybecome even more aggressive in the future. 

Increased competition in theoffice products markets, together with increased advertising, has heightenedprice awareness among end-users. Such heightened price awareness has led tomargin pressure on office products and impacted the results of both our Retailand Contract segments. In addition to price, competition is also based oncustomer service, the quality and breadth of product selection, and convenientlocations. Some of our competitors are larger than us and have greaterfinancial resources, which affords them greater purchasing power, increasedfinancial flexibility and more capital resources for expansion and improvement,which may enable them to compete more effectively than we can.

We believe our excellentcustomer service and the efficiency and convenience for our customers of ourcombined contract and retail distribution channels gives our OfficeMax,Contract segment a competitive advantage among business-to-business officeproducts distributors. Our ability to network our distribution centers into anintegrated system enables us to serve large national accounts that rely on usto deliver consistent products, prices and services to multiple locations aswell as medium and small businesses at a competitive cost.

We believe our OfficeMax,Retail segment competes favorably based on the quality of our customer service,our innovative store formats, the breadth and depth of our merchandise offeringand our everyday low prices, along with our specialized service offerings,including OfficeMax ImPress.

***Inflationary and Seasonal Influences***

We believe that neitherinflation nor deflation has had a material effect on our financial condition orresults of operations; however, there can be no assurance that we will not beaffected by inflation or deflation in the future. 

The Company’s business isseasonal, with OfficeMax, Retail showing a more pronounced seasonal trend thanOfficeMax, Contract. Sales in the second quarter and summer months arehistorically the slowest of the year. Sales are stronger during the first,third and fourth quarters that include the important new-year office supplyrestocking month of January, the back-to-school period and the holiday sellingseason, respectively.

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***Environmental Matters***

Our discussion of environmentalmatters is presented under the caption “Environmental” in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of this Form 10-K. In addition, certain environmentalmatters are discussed under “Item 3. Legal Proceedings” of this Form 10-K.

***Capital Investment***

Information concerning ourcapital expenditures is presented under the caption “Investment Activities” andin the table entitled “2006 Capital Investment by Segment” in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of this Form 10-K.

***Acquisitions and Divestitures***

We engage in acquisition anddivestiture discussions with other companies and make acquisitions anddivestitures from time to time. It is our policy to review our operationsperiodically and to dispose of assets that do not meet our criteria for returnon investment, or cease to warrant retention for other reasons. SeeNote 2, Sale of Paper, Forest Products and Timberland Assets; and Note 6,Other Operating, Net, of the Notes to Consolidated Financial Statements in “Item8. Financial Statements and Supplementary Data” of this Form 10-Kfor a description of significant acquisitions, divestitures and asset salescompleted during 2006, 2005 and 2004.

***Geographic Areas***

Our discussion of financialinformation by geographic area is presented in Note 17, SegmentInformation, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of this Form 10-K.

***Identification of Executive Officers***

Information with respect toour executive officers is set forth in “Item 10. Directors and ExecutiveOfficers of the Registrant” of this Form 10-K.

***Employees***

On December 30, 2006, wehad approximately 36,000 employees, including approximately 11,000 part-timeemployees.

***ITEM 1A.***   RISKFACTORS

***Cautionary and Forward-LookingStatements***

This Annual Report onForm 10-K contains forward-looking statements. Statements thatare not historical or current facts, including statements about ourexpectations, anticipated financial results and future business prospects, areforward-looking statements. You can identify these statements by our useof words such as “may,” “will,” “expect,” “believe,” “should,” “plan,”“anticipate” and other similar expressions. You can find examples of thesestatements throughout this report, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations. We cannot guaranteethat our actual results will be consistent with the forward-lookingstatements we make in this report. We have listed below some of the inherentrisks and uncertainties that could cause our actual results to differmaterially from those we project. We do not assume an obligation to update anyforward-looking statement.

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***Intense competition in our markets could harm ourability to maintain profitability.  ***Domesticand international office products markets are highly and increasinglycompetitive. Customers have many options when purchasing office supplies andpaper, print and document services, technology products and solutions andoffice furniture. We compete with worldwide contract stationers, office supplysuperstores, mass merchandisers, wholesale clubs, computer and electronicssuperstores, Internet merchandisers, direct-mail distributors, discountretailers, drugstores, supermarkets and thousands of local and regionalcontract stationers. In addition, an increasing number of manufacturers ofcomputer hardware, software and peripherals, including some of our suppliers,have expanded their own direct marketing efforts. The other large office supplysuperstores have increased their presence in our markets in recent years andare expected to continue to do so in the future. In addition, many of ourcompetitors have expanded their office products assortment, and we expect theywill continue to do so. In recent years, two package delivery companies haveestablished retail stores that compete directly with us for copy, printing,packaging and shipping business, and offer a limited assortment of officeproducts and services similar to the ones we offer. We anticipate increasingcompetition from our two domestic office supply superstore competitors andvarious other providers, including the two package delivery companies, forprint-for-pay and related services. Print-for-pay and related services havehistorically been a key point of difference for OfficeMax stores and areexpected to become an increasingly more important part of our futurestrategies. Any or all of our competitors may become even more aggressive inthe future. Increased competition in the office products markets, together withincreased advertising, has heightened price awareness among end-users. Such heightenedprice awareness has led to margin pressure on office products and impacted theresults of both our Retail and Contract segments. In addition to price,competition is also based on customer service, the quality and breadth ofproduct selection, and convenient locations. Some of our competitors are largerthan us and have greater financial resources, which affords them greaterpurchasing power, increased financial flexibility and more capital resourcesfor expansion and improvement, which may enable them to compete moreeffectively than we can.

***We may be unable to open and remodel storessuccessfully.******  ***Our business plans include the openingand remodeling of a significant number of retail stores. For these plans to besuccessful, we must identify and lease favorable store sites, developremodeling plans, hire and train associates and adapt management and systems tomeet the needs of these operations. These tasks are difficult to managesuccessfully. If we are not able to open and remodel stores as quickly as wehave planned, our future financial performance could be materially andadversely affected. Further, we cannot ensure that the new or remodeled storeswill achieve the sales or profit levels that we anticipate. This isparticularly true as we introduce different store designs, formats and sizes orenter into new market areas. In particular, the “Advantage” prototype storeformat we intend to utilize for new and remodeled stores is new and there canbe no assurance as to whether or to what extent that format will be successful.

***Economic conditions directly influence our operatingresults.******  ***Economic conditions, both domesticallyand abroad, directly influence our operating results. Current and futureeconomic conditions, including the level of unemployment, energy costs and thefinancial condition and growth prospects of our Contract customers mayadversely affect our business and the results of our operations.

***Our quarterly operating results are subject tofluctuation.******  ***Our quarterly operating results havefluctuated in the past and are likely to do so in the future. Factors that maycontribute to these quarter-to-quarter fluctuations could include the effectsof seasonality, our level of advertising and marketing, new store openings,changes in product mix and competitors’ pricing. These quarterly fluctuationscould have an adverse effect on both our operating results and the price of ourcommon stock.

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***We may be unable to attract and retain qualifiedassociates.  ******We attempt to attract and retainan appropriate level of personnel in both field operations and corporatefunctions. As a retailer, we face the challenge of filling many positions atwage scales that are low, although appropriate for our industry and in light ofcompetitive factors. As a result, we face many external risks and internalfactors in meeting our labor needs, including competition for qualifiedpersonnel, overall unemployment levels, prevailing wage rates, as well asrising employee benefit costs, including insurance costs and compensationprograms. Changes in any of these factors, including especially a shortage ofavailable workforce in the areas in which we operate, could interfere with ourability to adequately provide services to customers and result in increasingour labor costs, which could have an adverse effect on our business and resultsof our operations.***

***We cannot assure that new associates will performeffectively.******  ***In conjunction with ourheadquarters consolidation, we have hired approximately 600 new employees toreplace existing associates who did not relocate to the new headquarters. As aresult, we now have a significant number of associates with limited experiencewith OfficeMax performing key functions. Although we have carefully selectedand trained these associates, there is still a risk that institutionalknowledge may be lost and operations may be conducted less efficiently oreffectively. Also, if we are unable to continue to attract and retain qualifiedassociates for our remaining open positions, as well as train new associatesand transition them smoothly into their roles, it could adversely affect ouroperating results.

***Our expanded offering of proprietary branded productsmay not improve our financial performance and may expose us to productliability claims.******  ******Our product offering includes manyproprietary branded products. While we have focused on the quality of ourproprietary branded products, we rely on third-party manufacturers for theseproducts. Such third party manufacturers may prove to be unreliable, or thequality of our globally sourced products may not meet our expectations. Furthermore,economic and political conditions in areas of the world where we source suchproducts may adversely affect the availability and cost of such products. Inaddition, our proprietary branded products compete with other manufacturers’branded items that we offer. As we continue to increase the number and types ofproprietary branded products that we sell, we may adversely affect ourrelationships with our vendors, who may decide to reduce their productofferings through OfficeMax and increase their product offerings through ourcompetitors. Finally, if any of our customers are harmed by our proprietarybranded products, they may bring product liability and other claims against us.Any of these circumstances could have an adverse effect on our business andfinancial performance.***

***We are more leveraged than some of our competitors,which could adversely affect our business plans.******  ******A relatively*********greater portion of our cash flow is used to service debtand other financial obligations including leases. This reduces the funds wehave available for working capital, capital expenditures, acquisitions, newstores, store remodels and other purposes. Similarly, our relatively greaterleverage increases our vulnerability to, and limits our flexibility in planningfor, adverse economic and industry conditions and creates other competitivedisadvantages compared with other companies with relatively less leverage.

***We cannot ensure new systems and technology will beimplemented successfully.******  ***Ouracquisition of OfficeMax, Inc., in December 2003, required theintegration and coordination of our existing contract stationer systems withthe retail systems of the acquired company. Integrating and coordinating thesesystems has been complex and still requires ***a number of system enhancementsand conversions that, if not done properly, could divert the attention of ourworkforce during development and implementation and constrain for some time ourability to provide the level of service our customers demand. Also, whenimplemented, the systems and technology enhancements may not provide thebenefits anticipated and could add costs and complications to our ongoingoperations. A failure to effectively implement changes to to these systems orto realize the intended efficiencies could have an adverse effect on ourbusiness and results of our operations.***

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***We retained responsibility for certain liabilities ofthe paper, forest products and timberland businesses we sold.***   Theseobligations include liabilities related to environmental, tax, litigation andemployee benefit matters. Some of these retained liabilities could turn out tobe significant, which could have an adverse effect on our results ofoperations. Our exposure to these liabilities could harm our ability to competewith other office products distributors, who would not typically be subject tosimilar liabilities.

***Our business may be adversely affected by the actionsof and risks associated with our third-party vendors.  ******We are a reseller of othermanufacturer’s branded items and are thereby dependent on the availability andpricing of key products including ink, toner, paper and technology products. Asa reseller, we cannot control the supply, design, function or cost of many ofthe products we offer for sale. Disruptions in the availability of theseproducts may adversely affect our sales and result in customer dissatisfaction.Further, we cannot control the cost of manufacturer’s products and costincreases must either be passed along to our customers or will result inerosion of our earnings. Failure to identify desirable products and make themavailable to our customers when desired and at attractive prices could have anadverse effect on our business and results of operations.***

***Our investment in Boise Cascade, L.L.C. subjectsus to the risks associated with the paper and forest products industry.******  ***When we soldour paper, forest products and timberland assets, we purchased an equityinterest in affiliates of Boise Cascade, L.L.C. In addition, we have anongoing obligation to purchase paper from an affiliate of BoiseCascade, L.L.C. These continuing interests subject us to market risksassociated with the paper and forest products industry. These industries aresubject to cyclical market pressures. Historical prices for products have beenvolatile, and industry participants have limited influence over the timing andextent of price changes. The relationship between supply and demand in theseindustries significantly affects product pricing. Demand for building productsis driven mainly by factors such as new construction and remodeling rates,interest rates and weather. The supply of paper and building productsfluctuates based on manufacturing capacity, and excess capacity, bothdomestically and abroad, can result in significant variations in productprices. The level of supply and demand for forest products will affect theprice we pay for paper. Our ability to realize the carrying value of our equityinterest in affiliates of Boise Cascade, L.L.C. is dependent upon manyfactors, including the operating performance of Boise Cascade, L.L.C. andother market factors that may not be specific to Boise Cascade, L.L.C.,due in part to the fact that there is not a liquid market for our equityinterest. Our exposure to these risks could decrease our ability to competeeffectively with our competitors, who typically are not subject to such risks.

***Compromises of customer debit and credit card data in2004, regardless of the source of the breach, may damage the OfficeMax brandand our reputation.***   Compromises of customer debit and credit card data in 2004 were latertied to fraudulent transactions outside the U.S. While we have no knowledge ofa security breach at OfficeMax, it is possible that information securitycompromises that involved OfficeMax customer data, including breaches thatoccurred at third party processors, may damage our reputation. Such damage toour reputation could adversely affect our operating results.

***ITEM 1B.   UNRESOLVEDSTAFF COMMENTS***

None.

***ITEM 2.   PROPERTIES***

The majority of OfficeMaxfacilities are rented under operating leases. (For more information about ouroperating leases, see Note 8, Leases, of the Notes to ConsolidatedFinancial Statements in “Item 8. Financial Statements and Supplementary Data”of this Form 10-K.) Our properties are in good operating conditionand are suitable and adequate for the operations for which they are used.

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Presented below is a list ofour facilities by segment. During 2006, we consolidated our corporateheadquarters from Itasca, Illinois, and our retail operations from ShakerHeights, Ohio, to a single headquarters facility located in Naperville,Illinois.

***OfficeMax, Contract***

As of January 27,2007, OfficeMax, Contract operated 52 distribution centers in 26 states, PuertoRico, Canada, Australia and New Zealand. The following table sets forth thelocations of these facilities.

| Arizona    |   | 1 |   | Maryland       |   | 1 |   | Tennessee   |   | 1 |
|------------|--------|---|--------|----------------|--------|---|--------|-------------|--------|---|
| California |   | 1 |   | Massachusetts  |   | 1 |   | Texas       |   | 2 |
| Colorado   |   | 1 |   | Michigan       |   | 1 |   | Utah        |   | 1 |
| Florida    |   | 1 |   | Minnesota      |   | 1 |   | Virginia    |   | 1 |
| Georgia    |   | 1 |   | New Jersey     |   | 1 |   | Washington  |   | 1 |
| Hawaii     |   | 4 |   | New York       |   | 1 |   | Wisconsin   |   | 1 |
| Idaho      |   | 1 |   | North Carolina |   | 1 |   | Puerto Rico |   | 1 |
| Illinois   |   | 1 |   | Ohio           |   | 1 |   | Canada      |   | 7 |
| Kansas     |   | 1 |   | Oregon         |   | 1 |   | Australia   |   | 9 |
| Maine      |   | 1 |   | Pennsylvania   |   | 2 |   | New Zealand |   | 4 |

 

OfficeMax, Contract alsooperated 82 office products stores in Hawaii (2), Canada (51), Australia (8) andNew Zealand (21) and six customer service and outbound telesales centers inIllinois (2), Ohio, Oklahoma, Virginia and Wyoming.

***OfficeMax, Retail***

As of January 27,2007, OfficeMax, Retail operated 914 stores in 48 states, Puerto Rico, the U.S.Virgin Islands and Mexico. The following table sets forth the locations ofthese facilities.

| Alabama     |   | 11 |   | Louisiana      |   | 2  |   | Ohio                |   | 51 |
|-------------|--------|----|--------|----------------|--------|----|--------|---------------------|--------|----|
| Alaska      |   | 3  |   | Maine          |   | 1  |   | Oklahoma            |   | 1  |
| Arizona     |   | 37 |   | Maryland       |   | 1  |   | Pennsylvania        |   | 28 |
| Arkansas    |   | 2  |   | Massachusetts  |   | 9  |   | Rhode Island        |   | 1  |
| California  |   | 76 |   | Michigan       |   | 41 |   | South Carolina      |   | 6  |
| Colorado    |   | 28 |   | Minnesota      |   | 37 |   | South Dakota        |   | 4  |
| Connecticut |   | 3  |   | Mississippi    |   | 5  |   | Tennessee           |   | 18 |
| Delaware    |   | 1  |   | Missouri       |   | 25 |   | Texas               |   | 64 |
| Florida     |   | 58 |   | Montana        |   | 3  |   | Utah                |   | 13 |
| Georgia     |   | 28 |   | Nebraska       |   | 8  |   | Virginia            |   | 22 |
| Hawaii      |   | 6  |   | Nevada         |   | 12 |   | Washington          |   | 20 |
| Idaho       |   | 6  |   | New Jersey     |   | 4  |   | West Virginia       |   | 2  |
| Illinois    |   | 58 |   | New Mexico     |   | 9  |   | Wisconsin           |   | 31 |
| Indiana     |   | 14 |   | New York       |   | 30 |   | Wyoming             |   | 2  |
| Iowa        |   | 8  |   | North Carolina |   | 28 |   | Puerto Rico         |   | 10 |
| Kansas      |   | 10 |   | North Dakota   |   | 3  |   | U.S. Virgin Islands |   | 2  |
| Kentucky    |   | 6  |   | Oregon         |   | 11 |   | Mexico(a)           |   | 55 |

 

OfficeMax, Retail alsooperated three large distribution centers in Alabama, Nevada and Pennsylvania; andtwo small distribution centers in Mexico through our joint venture.

(a)             Represents thelocations operated by our 51%-owned joint venture in Mexico, OfficeMax deMexico.

9

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***ITEM 3.***   LEGALPROCEEDINGS

OfficeMax Incorporated and certain of its subsidiariesare named as defendants in a number of lawsuits, claims and proceedings arisingout of the operation of the paper and forest products assets prior to the closingof the Sale, for which OfficeMax agreed to retain responsibility. Also, as partof the Sale, we agreed to retain responsibility for all pending or threatenedproceedings and future proceedings alleging asbestos-related injuriesarising out of the operation of the paper and forest products assets prior tothe closing of the Sale. We do not believe any of these retained proceedingsare material to our business.

We have been notified that we are a “potentiallyresponsible party” under the Comprehensive Environmental Response Compensationand Liability Act (“CERCLA”) or similar federal and state laws, or havereceived a claim from a private party, with respect to 15 active sites wherehazardous substances or other contaminants are or may be located. The number ofactive sites is now 12. All 12 active sites relate to operations either nolonger owned by the Company or unrelated to its ongoing operations. In mostcases, we are one of many potentially responsible parties, and our allegedcontribution to these sites is relatively minor. For sites where a range ofpotential liability can be determined, we have established appropriatereserves. We believe we have minimal or no responsibility with regard toseveral other sites. We cannot predict with certainty the total response andremedial costs, our share of the total costs, the extent to which contributionswill be available from other parties or the amount of time necessary tocomplete the cleanups. Based on our investigations; our experience with respectto cleanup of hazardous substances; the fact that expenditures will, in manycases, be incurred over extended periods of time; and the number of solventpotentially responsible parties, we do not believe that the known actual andpotential response costs will, in the aggregate, materially affect ourfinancial position or results of operations.

Over the past several years and continuing into 2006,we have been named a defendant in a number of cases where the plaintiffs allegeasbestos-related injuries from exposure to asbestos products or exposureto asbestos while working at job sites. The claims vary widely and often arenot specific about the plaintiffs’ contacts with the Company. None of theclaimants seeks damages from us individually, and we are generally one ofnumerous defendants. Many of the cases filed against us have been voluntarilydismissed, although we have settled some cases. The settlements we have paidhave been covered mostly by insurance, and we believe any future settlements orjudgments in these cases would be similarly covered. To date, no asbestos caseagainst us has gone to trial, and the nature of these cases makes anyprediction as to the outcome of pending litigation inherently subjective. Atthis time, however, we believe our involvement in asbestos litigation is notmaterial to either our financial position or our results of operations.

The Company and several former officers and/ordirectors of the Company or its predecessor are defendants in a consolidated,putative class action proceeding *(Roth v.OfficeMax Inc., et. al,* U.S. District Court, Northern Districtof Illinois) alleging violations of the Securities Exchange Act of 1934. TheComplaint alleges, in summary, that the Company failed to disclose (a) thatvendor income had been improperly recorded, (b) that the Company lackedinternal controls necessary to ensure the proper reporting of revenue andcompliance with generally accepted accounting principles, and (c) that theCompany’s 2004 and later results would be adversely affected by the Company’sallegedly improper practices. The relief sought includes unspecifiedcompensatory damages, interest and costs, including attorneys’ fees. OnSeptember 21, 2005, the defendants filed a motion to dismiss the consolidatedamended complaint. On September 12, 2006, the court granted the defendantgroup’s joint motion to dismiss the consolidated amended complaint. OnNovember 9, 2006, the plaintiffs filed a purported amended complaint. OnJanuary 19, 2007, the defendants filed a motion to dismiss the amendedcomplaint, which is pending. The Company believes there are valid factual andlegal defenses to these claims and intends to vigorously defend against them.

10

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In June 2005, the Company announced that the SECissued a formal order of investigation arising from the Company’s previously announcedinternal investigation into its accounting for vendor income. The Companylaunched its internal investigation in December 2004 when the Companyreceived claims by a vendor to its retail business that certain employees actedinappropriately in requesting promotional payments and in falsifying supportingdocumentation. The internal investigation was conducted under the direction ofthe Company’s audit committee and was completed in March 2005. The Companycooperated fully with the SEC. The Company has had no communication with theSEC since August 2005.

Putative derivative actionshave been filed in the Circuit Courts of Cook County (*Homstrom v. Harad, et al.*) and DuPage County,Illinois (*Bryan v. Anderson, et al.)*against a number of current and former officers and/or directors of the Companyor its predecessor in connection with alleged misrepresentation of financialresults (and, in the case of one former director and officer, for allegedlyselling Company common stock while in possession of material, non-publicinformation concerning the Company’s financial position and future prospects).Both derivative actions assert claims for breach of fiduciary duty and unjustenrichment, and the *Homstrom*complaint also includes claims for alleged abuse of control, mismanagement, andwaste of corporate assets. The relief sought from the defendants includesrecovery of costs incurred by the Company in its internal investigation and restatement,the disgorgement of compensation and, in the *Homstrom*case, the attorneys’ fees incurred by the Company in defending the *Roth* putative class action and the Company’sasserted exposure to a potentially substantial settlement or adverse judgment inthe *Roth* case. The Company is anominal defendant in the putative derivative actions and no monetary relief issought from the Company. However, the Company has exposure in such cases foramounts it may be required to advance or incur on behalf of the individualdefendants under its indemnification obligations. On February 21, 2007,the Bryan case was dismissed without prejudice.

***ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS***

None.

11

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**PART II**

***ITEM 5.***      MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

Our common stock is listed on the New York StockExchange (the “Exchange”). The Exchange requires each listed company todistribute an annual report to its shareholders. We are distributing this Form 10-Kto our shareholders in lieu of a separate annual report. The reported high andlow sales prices for our common stock, as well as the frequency and amount ofdividends paid on such stock, are included in Note 20, Quarterly Resultsof Operations (unaudited), of the Notes to Consolidated Financial Statements in“Item 8. Financial Statements and Supplementary Data” of this Form 10-K.We expect to continue the practice of paying regular cash dividends in 2007.Information concerning restrictions on the payment of dividends is included inNote 13, Debt, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” and in Liquidity and Capital Resourcesin “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” of this Form 10-K. The approximate numberof common shareholders, based upon actual record holders on February 24,2007, was 19,899.

We maintain a corporate governance page on ourwebsite that includes key information about our corporate governanceinitiatives. That information includes our Corporate Governance Guidelines,Code of Ethics and charters for our Audit, Executive Compensation and Governanceand Nominating Committees, as well as our Committee of Outside Directors. Thecorporate governance page can be found at www.officemax.com, by clickingon “About us,” “Investors” and then “Corporate Governance.” You also may obtaincopies of these policies and codes by contacting our Investor RelationsDepartment, 263 Shuman Boulevard, Naperville, Illinois 60563, or by calling(630) 864-6800.

Information concerningsecurities authorized for issuance under our equity compensation plans isincluded in “Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters” of this Form 10-K.

***ShareholderRights Plan***

We have had a shareholderrights plan since January 1986. Our current plan, as amended and restated,took effect in December 1998. At that time, the rights under the previousplan expired, and we distributed to our common stockholders one new right foreach common share held. The rights become exercisable ten days after a personor group acquires 15% of our outstanding voting securities or ten business daysafter a person or group commences or announces an intention to commence atender or exchange offer that could result in the acquisition of 15% of thesesecurities. Each full right, if it becomes exercisable, entitles the holder topurchase one share of common stock at a purchase price of $175 per share,subject to adjustment. Upon payment of the purchase price, the rights may “flipin” and entitle holders to buy common stock or “flip over” and entitle holdersto buy common stock in an acquiring entity in such amount that the market valueis equal to twice the purchase price. The rights are nonvoting and may beredeemed by the Company for one cent per right at any time prior to the tenthday after an individual or group acquires 15% of our voting stock, unlessextended. The rights expire in 2008. On January 18, 2006, the Companyannounced that the board of directors voted not to seek an extension of theshareholder rights plan when it expires in 2008. Additional details are setforth in the Renewed Rights Agreement which is an exhibit to this Form 10-K.

12

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***StockRepurchases***

Informationconcerning our stock repurchases during the fourth quarter of 2006 is asfollows:

| **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(a)** | ** ** |
|------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| October    |       |       | 0          |                                             |       |                                             |       |                                                                                                                         | 0          |                                                                                                                                       |       |   | 4,249,423 |   |   |
| November   |       |       | 0          |                                             |       |                                             |       |                                                                                                                         | 0          |                                                                                                                                       |       |   | 4,249,423 |   |   |
| December   |       |       | 0          |                                             |       |                                             |       |                                                                                                                         | 0          |                                                                                                                                       |       |   | 0 | (b) |   |

 

(a)             InSeptember 1995, our board of directors authorized the purchase of up to4.3 million shares of our common stock. As part of this authorization, werepurchased odd-lot shares (fewer than 100 shares) from shareholders wishing toexit their holdings in our common stock. We retired the shares that werepurchased under this program.

(b)            This program wasterminated in the 4th quarter of 2006.

13

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**PerformanceGraph**

Thefollowing graph compares the five-year cumulative total return (assumingdividend reinvestment) for the Standard & Poor’s 500 Index, theStandard & Poor’s 500 Specialty Stores Index, the Standard &Poor’s 500 Specialty Retail Index and OfficeMax. In 2005, we provided acomparison only to the Standard & Poor’s 500 Specialty StoresIndex and not to the Standard & Poor’s 500 Specialty RetailIndex. The group of companies now included in the Specialty Stores Index issmall, while the group of companies now included in the Specialty Retail Indexapproximates the group of companies included in previous years in the SpecialtyStores Index. We believe that adding the Specialty Retail Index results in acomparison that is consistent with our presentations in previous years.

**ANNUAL RETURN PERCENTAGE Years Ending**

| **Company\Index Name**              | ** ** | ** ** | ** ** | **Dec 02** | ** ** | **Dec 03** | ** ** | **Dec 04** | ** ** | **Dec 05** | ** ** | **Dec 06** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| OfficeMax  Incorporated                  |       |       | -24.28     |            |       |            | 33.33      |            |       |            | -2.81      |            |       |   | -17.54 |   |   |   | 98.80 |   |   |
| S&P 500  Index                  |       |       | -22.10     |            |       |            | 28.68      |            |       |            | 10.88      |            |       |   | 4.91 |   |   |   | 15.79 |   |   |
| S&P 500  Specialty Stores Index |       |       | -11.11     |            |       |            | 34.66      |            |       |            | 5.20       |            |       |   | 18.11 |   |   |   | 21.56 |   |   |
| S&P 500 Specialty  Retail Index |       |       | -33.52     |            |       |            | 45.77      |            |       |            | 12.28      |            |       |   | 2.86 |   |   |   | 6.64 |   |   |

 

**INDEXED RETURNSYears Ending**

| **Company\Index Name**              | ** ** | ** ** | ** ** | **Base Period  Dec 01** | ** ** | **Dec 02** | ** ** | **Dec 03** | ** ** | **Dec 04** | ** ** | **Dec 05** | ** ** | **Dec 06** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| OfficeMax  Incorporated                  |       |       | $          | 100                               |       |            |       | $               | 75.72      |            |       | $               | 100.97     |            | $          | 98.13 |   | $ | 80.91 |   | $ | 160.86 |   |
| S&P 500  Index                  |       |       | 100        |                              |       |            | 77.90      |            |       | 100.25          |       | 111.15          |       | 116.61          |       | 135.03 |   |
| S&P 500 Specialty  Stores            |       |       | 100        |                              |       |            | 88.89      |            |       | 119.69          |       | 125.92          |       | 148.72          |       | 180.78 |   |
| S&P 500 Specialty  Retail Index |       |       | 100        |                              |       |            | 66.48      |            |       | 96.92           |       | 108.82          |       | 111.94          |       | 119.37 |   |
|                                          |            |            |            |                                   |            |                 |            |                 |            |                 |            |                 |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

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***ITEM 6.   SELECTEDFINANCIAL DATA***

Thefollowing table sets forth our selected financial data for the years indicatedand should be read in conjunction with the disclosures in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Item 8. Financial Statements and Supplementary Data” ofthis Form 10-K.

| ** **                                                  | ** ** | **2006(a)**                                             | ** ** | **2005(b)** | ** ** | **2004(c)** | ** ** | **2003(d)** | ** ** | **2002(e)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                  | ** ** | **(millions, except per-share amounts)** | ** ** |
| **Assets**                                                  |       |                                                    |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |
| Current assets                                              |       |                                                    | $          | 2,097       |       |        |       | $           | 1,942      |        |       | $ | 3,241 |   |   | $ | 2,597 |   |   |   | $ | 1,387 |   |   |
| Property and  equipment, net                                |       |                                                    | 580        |        |       |        | 535        |        |       | 541         |       |   | 2,730 |   |   |   | 2,451 |   |   |
| Timber, timberlands  and timber deposits                    |       |                                                    | —     |        |       |        | —     |        |       | —      |       |   | 331 |   |   |   | 329 |   |   |
| Goodwill                                                    |       |                                                    | 1,216      |        |       |        | 1,218      |        |       | 1,165       |       |   | 1,107 |   |   |   | 401 |   |   |
| Timber notes  receivable                                    |       |                                                    | 1,635      |        |       |        | 1,635      |        |       | 1,635       |       |   | — |   |   |   | — |   |   |
| Other                                                       |       |                                                    | 688        |        |       |        | 942        |        |       | 1,055       |       |   | 611 |   |   |   | 379 |   |   |
|                                                        | ** ** | ** **                                              | **$**      | **6,216**   |       | ** **  | ** ** | **$**       | **6,272**  | ** **  | ** ** | **$** | **7,637** | ** ** | ** ** | **$** | **7,376** | ** ** | ** ** | ** ** | **$** | **4,947** | ** ** | ** ** |
| **Liabilities  and shareholders’ equity**              |       |                                                    |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |
| Current liabilities                                         |       |                                                    | $          | 1,529       |       |        |       | $           | 1,588      |        |       | $ | 1,857 |   |   | $ | 1,986 |   |   |   | $ | 1,056 |   |   |
| Long-term debt,  less current portion                       |       |                                                    | 384        |        |       |        | 407        |        |       | 585         |       |   | 2,000 |   |   |   | 1,387 |   |   |
| Timber notes  securitized                                   |       |                                                    | 1,470      |        |       |        | 1,470      |        |       | 1,470       |       |   | — |   |   |   | — |   |   |
| Other                                                       |       |                                                    | 817        |        |       |        | 1,044      |        |       | 1,091       |       |   | 1,046 |   |   |   | 1,104 |   |   |
| Minority interest                                           |       |                                                    | 30         |        |       |        | 27         |        |       | 23          |       |   | 20 |   |   |   | — |   |   |
| Shareholders’ equity                                   |       |                                                    | 1,986      |        |       |        | 1,736      |        |       | 2,611       |       |   | 2,324 |   |   |   | 1,400 |   |   |
|                                                        | ** ** | ** **                                              | **$**      | **6,216**   |       | ** **  | ** ** | **$**       | **6,272**  | ** **  | ** ** | **$** | **7,637** | ** ** | ** ** | **$** | **7,376** | ** ** | ** ** | ** ** | **$** | **4,947** | ** ** | ** ** |
| **Net sales**                                               | ** ** | ** **                                              | **$**      | **8,966**   |       | ** **  | ** ** | **$**       | **9,158**  | ** **  | ** ** | **$** | **13,270** | ** ** | ** ** | **$** | **8,245** | ** ** | ** ** | ** ** | **$** | **7,412** | ** ** | ** ** |
| **Income  (loss) from:**                                    |       |                                                    |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |
| Continuing operations                                       |       |                                                    | $          | 99          |       |        |       | $           | (41        | )           |       | $ | 234 |   |   | $ | 35 |   |   |   | $ | 19 |   |   |
| Discontinued  operations                                    |       |                                                    | (7         | )           |       |        | (33        | )           |       | (61         | )          |   | (18 | ) |   |   | (8 | ) |   |
| Cumulative effect of  accounting changes, net of income tax |       |                                                    | —     |        |       |        | —     |        |       | —      |       |   | (9 | ) |   |   | — |   |   |
| Net income (loss)                                           | ** ** | ** **                                              | **$**      | **92**      |       | ** **  | ** ** | **$**       | **(74**    | **)**       | ** ** | **$** | **173** | ** ** | ** ** | **$** | **8** | ** ** | ** ** | ** ** | **$** | **11** | ** ** | ** ** |
| **Basic income (loss) per common  share:**                  |       |                                                    |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |
| Continuing operations                                       |       |                                                    | $          | 1.30        |       |        |       | $           | (0.58      | )           |       | $ | 2.55 |   |   | $ | 0.37 |   |   |   | $ | 0.11 |   |   |
| Discontinued  operations                                    |       |                                                    | (0.10      | )           |       |        | (0.41      | )           |       | (0.70       | )          |   | (0.30 | ) |   |   | (0.14 | ) |   |
| Cumulative effect of  accounting changes, net of income tax |       |                                                    | —     |        |       |        | —     |        |       | —      |       |   | (0.15 | ) |   |   | — |   |   |
| Basic income (loss) per common share(f)                     | ** ** | ** **                                              | **$**      | **1.20**    |       | ** **  | ** ** | **$**       | **(0.99**  | **)**       | ** ** | **$** | **1.85** | ** ** | ** ** | **$** | **(0.08** | **)** | ** ** | ** ** | **$** | **(0.03** | **)** | ** ** |
| **Diluted income (loss) per  common share:**                |       |                                                    |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |
| Continuing operations                                       |       |                                                    | $          | 1.29        |       |        |       | $           | (0.58      | )           |       | $ | 2.44 |   |   | $ | 0.37 |   |   |   | $ | 0.11 |   |   |
| Discontinued  operations                                    |       |                                                    | (0.10      | )           |       |        | (0.41      | )           |       | (0.67       | )          |   | (0.30 | ) |   |   | (0.14 | ) |   |
| Cumulative effect of  accounting changes, net of income tax |       |                                                    | —     |        |       |        | —     |        |       | —      |       |   | (0.15 | ) |   |   | — |   |   |
| Diluted income (loss) per common share(f)                   | ** ** | ** **                                              | **$**      | **1.19**    |       | ** **  | ** ** | **$**       | **(0.99**  | **)**       | ** ** | **$** | **1.77** | ** ** | ** ** | **$** | **(0.08** | **)** | ** ** | ** ** | **$** | **(0.03** | **)** | ** ** |
| Cash dividends declared per  common share                   | ** ** | ** **                                              | **$**      | **0.60**    |       | ** **  | ** ** | **$**       | **0.60**   | ** **  | ** ** | **$** | **0.60** | ** ** | ** ** | **$** | **0.60** | ** ** | ** ** | ** ** | **$** | **0.60** | ** ** | ** ** |

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See notes on following page.

15

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(a)             2006 included the following pre-tax charges:

·        $89.5 million related to the closingof 109 underperforming domestic retail stores.

·        $46.4 million related to therelocation and consolidation of our corporate headquarters.

·        $10.3 million primarily related to thereorganization in our Contract segment.

·        $18.0 million primarily for contracttermination and other costs related to the closure of our Elma, Washingtonmanufacturing facility, which is accounted for as a discontinued operation.

2006 also included $48.0million of pre-tax income from adjustments to the estimated fair value of theAdditional Consideration Agreement we entered into in connection with the Sale.

(b)            2005 included the following pre-tax charges:

·        $25.0 million related to therelocation and consolidation of our corporate headquarters.

·        $31.9 million primarily for one-timeseverance payments, professional fees and asset write-downs.

·        $17.9 million related to thewrite-down of impaired assets, primarily related to retail store closures.

·        $5.4 million related to the restructuringof our international operations.

·        $9.8 million for a legal settlement withthe Department of Justice in our Contract segment.

·        $14.4 million related to our earlyretirement of debt.

·        $28.2 million for the write-down ofimpaired assets at our Elma, Washington manufacturing facility, which isaccounted for as a discontinued operation.

2005 included 53 weeks for ourOfficeMax, Retail segment.

(c)             2004 included a $67.8 million pre-taxcharge for the write-down of impaired assets at our Elma, Washington,manufacturing facility, which is accounted for as a discontinued operation.

2004 included the results ofour Boise Building Solutions and Boise Paper Solutions segments through October 28,2004. On October 29, 2004, we completed the sale of our paper, forestproducts and timberland assets to affiliates of Boise Cascade, L.L.C., a newcompany formed by Madison Dearborn Partners LLC, and recorded a$280.6 million pre-tax gain. Part of the consideration we received inconnection with the Sale consisted of timber installment notes receivable. Wesecuritized the timber installment notes receivable for proceeds of$1.5 billion in December 2004. At the same time we entered intointerest rate swap contracts to hedge the interest rate risk associated withthe issuance of debt securities by special-purpose entities formed by theCompany, and in December 2004 recorded $19.0 million of relatedexpense in “Timber notes securitization.”

2004 included$137.1 million of costs related to our early retirement of debt.

2004 included a pre-tax gain of$59.9 million on the sale of approximately 79,000 acres of timberlandlocated in western Louisiana.

2004 included a pre-tax gain of$46.5 million on the sale of our 47% interest in Voyageur Panel.

2004 included$15.9 million of expense in our Corporate and Other segment for the costsof certain one-time benefits granted to employees.

(d)            2003 included a pre-tax charge of$10.1 million for employee-related costs incurred in connection withthe 2003 cost-reduction program.

2003 included a net$2.9 million one-time tax benefit related to a favorable tax ruling, netof changes in other tax items.

2003 included a$14.7 million pre-tax charge for the write-down of impaired assets at ourplywood and lumber operations in Yakima, Washington.

2003 included income from theOfficeMax, Inc. operations for the period from December 10, 2003through December 27, 2003, and costs, including incremental interestexpense, directly related to the acquisition. The net effect of these itemsreduced income by $4.1 million before taxes, or $2.5 million aftertaxes.

(e)             2002 included a pre-tax charge of$23.6 million related to the sale of all of the stock of our wholly ownedsubsidiary that held our investment in IdentityNow. We also recorded$27.6 million of tax benefits associated with this sale and the 2001 write-downof our equity investment.

(f)                The computation of diluted income (loss) percommon share was antidilutive in the years 2005, 2003 and 2002; therefore, theamounts reported for basic and diluted income (loss) per common share are the same.

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***ITEM 7.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS***

The following discussioncontains statements about our future financial performance. These statementsare only predictions. Our actual results may differ materially from thesepredictions. In evaluating these statements, you should review “Item 1A, RiskFactors” of this Form 10-K, including “Cautionary and Forward-LookingStatements.”

***ExecutiveSummary***

Sales for 2006 were $9.0 billion, compared to$9.2 billion for 2005 and $13.3 billion for 2004. Net income for 2006 was$91.7 million, or $1.19 per diluted share, compared to a net loss of $73.8million, or $(0.99) per diluted share, for 2005 and net income of $173.1million, or $1.77 per diluted share, for 2004.

We evaluate our resultsof operations both before and after certain gains and losses that managementbelieves are not indicative of our core operating activities, such as the itemsdescribed below. We believe our presentation of financial measures before, or excluding,these items, which are non-GAAP measures, enhances our investors’ overallunderstanding of our recurring operational performance and provides usefulinformation to both investors and management.

Results for the years of 2006, 2005 and 2004 includevarious items related to our transition from a predominately manufacturing-basedcompany to an independent office products distribution company and ourpreviously announced restructuring activities that are not expected to beongoing. Many of these items have been included in our integration activitiesand facility closures reserve. For more information about these reserves, seethe discussion of “Integration Activities and Facility Closures” below. Some ofthe more significant effects of these actions on our results include:

·       In 2006, we recordedpre-tax charges of $89.5 million related to the closing of 109 underperforming,domestic retail stores, $10.3 million primarily related to the reorganizationof our contract segment and $46.4 million primarily related to theconsolidation of our corporate headquarters. These charges were included inother operating, net in the Consolidated Statements of Income (Loss) and werereflected in the Retail segment (store closures), Contract segment(reorganization) and Corporate and Other segment (headquarters consolidation),respectively. During 2006, we reduced the liability related to the AdditionalConsideration Agreement that was entered into in connection with the sale ofthe paper, forest products and timberland assets, which resulted in a credit toOther Income (Expense), net (non-operating) of $48.0 million. We also recordedan $18.0 million pre-tax charge for the closure of our Elma, Washingtonmanufacturing facility which was reflected in Discontinued Operations in theConsolidated Statements of Income (Loss).

·       In 2005, we recorded pre-tax charges of$25.0 million related to the consolidation and relocation of our corporateheadquarters, $17.9 million related to the write-down of impaired assets,primarily as a result of retail store closures, $5.4 million related tothe restructuring of our international operations, and $31.9 million forone-time severance payments, professional fees and asset write-downs. Thesecharges were reflected in the Retail segment (retail store impairment), Contractsegment (international restructuring) and Corporate and Other segment (headquartersconsolidation, severance, professional fees and asset write-downs),respectively. In addition, we recognized a $9.8 million pre-tax charge inthe Contract segment for a legal settlement with the Department of Justicerelated to allegations that the company submitted false claims when it soldoffice supply products manufactured in countries not permitted by the TradeAgreements Act to U.S. government agencies. We incurred $14.4 million ofcosts related to our early retirement of debt, and recorded a$28.2 million pre-tax charge for the write-down of impaired assetsat our Elma, Washington manufacturing facility, which is accounted for as adiscontinued operation.

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·       In 2004, we completed thesale of our paper, forest products and timberland assets (the “Sale”) andrecorded a $280.6 million pre-tax gain. We monetized the timberinstallment notes we received in exchange for our timberlands for proceeds of$1.5 billion in December 2004, and recognized $19 million inexpenses related to the change in the fair value of interest rate swaps weentered into in anticipation of the securitization transaction. We used aportion of the proceeds from the Sale to reduce our debt, and recorded$137.1 million of costs related to the early retirement of debt. Ourresults for 2004 also include a pre-tax gain of $59.9 million on the saleof approximately 79,000 acres of timberland located in western Louisiana, and apre-tax gain of $46.5 million on the sale of our 47% interest in VoyageurPanel, as well as a $67.8 million pre-tax charge for the write-downof impaired assets at our Elma, Washington, manufacturing facility.

***Results ofOperations, Consolidated***

***($ in millions, exceptper share amounts)***

| ** **                                                                          | ** ** | **2006**              | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|-----------|------------|
| Sales                                                                               |       | $                     | 8,965.7    |       | $          | 9,157.7   |       | $ | 13,270.2 |   |
| Income (loss) from  continuing operations before income taxes and minority interest |       | $                     | 171.9      |       | $          | (37.6     | )          | $ | 379.4 |   |
| Net income (loss)                                                                   |       | $                     | 91.7       |       | $          | (73.8     | )          | $ | 173.1 |   |
| **Diluted  income (loss) per common share**                                         |       |                  |       |       |       |      |       |
| Continuing operations                                                               |       | $                     | 1.29       |       | $          | (0.58     | )          | $ | 2.44 |   |
| Discontinued operations                                                             |       | (0.10                 | )          | (0.41      | )          | (0.67     | )          |
| **Diluted  income (loss) per common share**                                         | ** ** | **$**                 | **1.19**   | ** ** | **$**      | **(0.99** | **)**      | **$** | **1.77** | ** ** |
|                                                                                |       | (percentage of sales) |       |
| Gross profit margin                                                                 |       | 25.8                  | %          | 24.0       | %          | 20.2      | %          |
| Operating and selling  expenses                                                     |       | 18.3                  | %          | 19.3       | %          | 15.2      | %          |
| General and  administrative expenses                                                |       | 4.0                   | %          | 4.0        | %          | 2.8       | %          |
| Other operating, net                                                                |       | 1.6                   | %          | 0.6        | %          | (2.9      | )%         |
| Operating profit margin                                                             |       | 1.9                   | %          | 0.1        | %          | 5.1       | %          |

 

***OperatingResults***

***2006 Compared with 2005***

Sales for 2006 decreased 2.1% to $8,965.7 million from$9,157.7 million for 2005. The year-over-year sales decrease was primarily dueto the impact of 109 strategic store closings in the first quarter of 2006 andthe 53rd week included in the 2005 Retail segmentresults. Comparable-store sales increased 1.0% year-over-year primarily as aresult of higher sales in our Contract segment. For more information about oursegment results, see the discussion of segment results below.

Gross profit margin improved 1.8% of sales to 25.8% ofsales in 2006 compared to 24.0% of sales in the previous year. The gross profitmargin increase was driven by gross margin improvement initiatives in both theContract and Retail segments.

Operating and selling expenses decreased by 1.0% ofsales to 18.3% of sales in 2006 from 19.3% of sales a year earlier. Theimprovement in operating and selling expenses as a percent of sales was theresult of targeted cost reduction programs, including lower promotion andmarketing costs, 

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payroll and integrationexpenses in the Contract segment, and reduced store labor and marketing costsin the Retail segment.

General and administrative expenses were 4.0% of salesfor 2006 and 2005. General and administrative expenses in 2005 included $24.2million of expenses for one-time severance payments and other expenses,primarily professional service fees, which are not expected to be ongoing. Excludingthe severance and other expenses, general and administrative expenses were 3.6%of sales for 2005. The year-over-year increase in general and administrativeexpenses, excluding the severance and other expenses, was due to increasedpayroll costs, primarily increased incentive compensation expense.

In 2006, we reported $140.3 million of expense in Otheroperating, net which included $89.5 million related to the 109 domestic storeclosures, $46.4 million primarily related to the headquarters consolidation and$10.3 million primarily related to the Contract segment reorganization. In2005, we reported $54.0 million of expense in Other operating, net. Otheroperating, net for 2005 included a $9.8 million charge for a legal settlementwith the Department of Justice and $25.0 million related to the corporateheadquarters consolidation. 2005 also included $23.2 million of expenses for the write-down of impaired assets atunderperforming retail stores and the restructuring of our Canadian operations.Other operating, net also includes dividends earned on our investment inaffiliates of Boise Cascade, L.L.C., which were $5.9 million for 2006 and $5.5million for 2005, respectively. SeeNote 6, Other Operating, Net, of the Notes to Consolidated FinancialStatements in “Item 8. Financial Statements and Supplementary Data” ofthis Form 10-K for additional information related to the componentsof Other Operating, net.

During 2005, we incurred costsrelated to the early retirement of debt of approximately $14.4 millionprimarily as a result of purchasing and cancelling $87.3 million of 7%senior notes originally due in 2013.

Interest expense was $123.1 million in 2006 versus$128.5 million in 2005. The year-over-year decrease in interest expense was aresult of lower average borrowings. Interest expense included interest relatedto the timber securitization notes of approximately $80.5 million for 2006and 2005. The interest expense associated with the timber securitization notesis offset by interest income earned on the timber notes receivable ofapproximately $82.5 million for both 2006 and 2005. The interest income onthe timber notes receivable is included in interest income and is not netted againstthe related interest expense in our Consolidated Statements of Income (Loss).

Excluding the interest income earned on the timbernotes receivable, interest income was $7.1 million and $15.0 million forthe years ended December 30, 2006 and December 31, 2005, respectively.The additional interest income in 2005 included interest earned on the cash andshort-term investments we held following the Sale. Approximately $800 millionof the Sale proceeds were used to repurchase 23.5 million shares of ourcommon stock during the second quarter of 2005.

Other income (expense), net was $39.3 million ofincome in 2006 compared to $1.7 million of expense in 2005. In 2006, we reducedthe liability related to the Additional Consideration Agreement that wasentered into in connection with the Sale. The reduction in the liabilityreflects the effect of changes in our expectations regarding paper prices overthe remaining term of the agreement, and resulted in the recognition of $48.0million of other non-operating income in 2006. See Note 14, FinancialInstruments, Derivatives and Hedging Activities, of the Notes to ConsolidatedFinancial Statements in “Item 8. Financial Statements and SupplementaryData” of the Form 10-K for additional information related to theAdditional Consideration Agreement.

Our effective tax rate attributable to continuingoperations for 2006 was 40.0%. In 2005, we reported $1.2 million of income taxexpense on a pre-tax loss of $37.6 million. Income taxes for both periods were affectedby the impact of state income taxes and non-deductible expenses and the mix 

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of domestic and foreignsources of income. Income tax expense in 2005 was also impacted by an increasein the valuation allowance for certain state net operating losses.

As a result of the foregoingfactors, we reported income from continuing operations of $99.1 million, or$1.29 per diluted share, for 2006, compared to a loss from continuingoperations of $41.2 million, or $(0.58) per diluted share, for 2005. Includingthe loss from discontinued operations, the net income for 2006 was $91.7 million,or $1.19 diluted share compared with a net loss of $73.8 million, or $0.99per diluted share in 2005. Excluding the effect of the Additional ConsiderationAgreement adjustment, the charges for store closures, contract segmentreorganization and our headquarters consolidation, income from continuingoperations was $159.2 million, or $2.10 per diluted share, for 2006. Excludingthe charges for the write-down of impaired assets of certain retail stores, ourlegal settlement with the Department of Justice, severance and professionalfees, international restructuring and our headquarters consolidation, werecognized income from continuing operations of $23.6 million, or$0.24 per diluted share, for 2005.

***2005 Compared with 2004***

In 2005, sales were $9,157.7 million, comparedwith $13,270.2 million in 2004. The sales decline in 2005 was primarilydue to the sale of our Boise Building Solutions and Boise Paper Solutionssegments that were included in 2004 but not in 2005. Substantially all of theassets of these segments, along with our timberland assets, were included inthe Sale.

Gross profit margin improved 3.8% of sales to 24.0% ofsales for 2005 compared to 20.2% of sales for the previous year. Theyear-over-year variance was largely attributable to the Sale. The Contract andRetail segments operate with higher gross margins than did the Boise BuildingSolutions and Boise Paper Solutions segments.

Operating and selling expenses increased by 4.1% ofsales to 19.3% of sales in 2005 from 15.2% of sales for the same period a yearearlier. The year-over-year variance was largely attributable to the Sale. The Contract and Retail segments operate withhigher operating and selling expenses than the Boise Building Solutions andBoise Paper Solutions segments.

General and administrativeexpenses as a percent of sales increased to 4.0% in 2005 from 2.8% in 2004. Generaland administrative expenses in 2005 included $24.2 million of expenses forone-time severance payments and other expenses, primarily professional servicefees, which are not expected to be ongoing. Excluding the severance and otherexpenses, general and administrative expenses were 3.6% of sales for 2005.

In 2005, we reported $54.0 million of expense in Otheroperating, net, including $25.0 million of expenses related to therelocation and consolidation of our corporate headquarters, $23.2 millionof expenses for the write-down of impaired assets at underperforming retailstores and the restructuring of our Canadian operations and a $9.8 millioncharge related to a legal settlement with the Department of Justice. In 2004,we reported $370.6 million of income in Other operating, net, including a$280.6 million gain on the Sale, a $46.5 million pre-tax gain on the saleof Voyageur Panel, a $75.0 million pre-tax gain on the sale oftimberlands, offset by approximately $18.9 million of costs related to theSale, $8.9 million of integration and facility closure costs, and$7.1 million of costs related to the sale of our Yakima, Washingtonplywood and lumber facilities. Other operating, net includes dividends receivedon our investment in affiliates of Boise Cascade L.L.C. and equity in netincome of affiliates which were $5.5 million in 2005 and $6.3 millionin 2004 including equity in the earnings of Voyageur Panel. We sold ourinterest in Voyageur Panel in May 2004. (See Note 6, Other Operating,Net, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of this Form 10-K foradditional information related to the components of Other Operating, net.) Anadditional $180 million gain on the Sale was deferred as a result of our 

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continuing involvement withBoise Cascade, L.L.C. We expect to recognize this gain as we reduce ourinvestment in affiliates of Boise Cascade, L.L.C.

During 2005 and 2004, we incurred costs related to theearly retirement of debt of approximately $14.4 million and$137.1 million, respectively.

Interest expense was $128.5 million and$151.9 million for the years ended December 31, 2005 and 2004,respectively. The decrease in interest expense was due to reduced debt levelsin 2005, which were a result of debt repurchases and retirements funded withproceeds from the Sale. In 2005, interest expense included interest related tothe timber securitization notes of approximately $80.5 million. The interestexpense associated with the timber securitization notes is offset by interestincome of approximately $82.5 million earned on the timber notesreceivable. The interest income on the timber notes receivable is included ininterest income and is not netted against the related interest expense in ourConsolidated Statements of Income (Loss).

Excluding the interest income earned on the timbernotes receivable, interest income was $15.0 million in 2005 compared with$14.1 million in 2004. The increase in interest income is due to theincrease in cash and short-term investments following the Sale.

In 2005, we reported an income tax expense of $1.2million on a pre-tax loss of $37.6 million. Our effective tax rate attributableto continuing operations for 2004 was 37.5%. The difference between the statutoryand the effective tax rates was due to the sensitivity of the rates to changingincome levels and the mix of domestic and foreign sources of income as well asthe increase in the valuation allowance for certain state net operating lossesand the non-deductible nature of certain severance costs and the legalsettlement recorded during 2005.

As a result of the foregoing factors, we reported aloss from continuing operations of $41.2 million, or $0.58 per diluted share,for 2005, compared to income from continuing operations of $234.1 million, or$2.44 per diluted share, for 2004. Includingthe loss from discontinued operations, the net loss for 2005 was$73.8 million, or $0.99 per diluted share, compared with net income of$173.1 million, or $1.77 per diluted share in 2004. In 2005, net lossincluded a $28.2 million pre-tax charge for the write-down ofimpaired assets at our Elma, Washington manufacturing facility, which isaccounted for as a discontinued operation. In 2004, net income included a$67.8 million pre-tax charge for the write-down of our Elma, Washington,manufacturing facility.

Excluding the charges for thewrite-down of impaired assets of certain retail stores, our legal settlementwith the Department of Justice, severance and professional fees, internationalrestructuring and our headquarters consolidation, we recognized income fromcontinuing operations of $23.6 million, or $0.24 per diluted share, for2005. Excluding the gain on the Sale, costs related to the early repayment ofdebt and the gains on the sales of our interest in Voyageur Panel andtimberland property, income from continuing operations was $102.8 million, or$1.00 per diluted share, for 2004.

***SegmentDiscussion***

Effective with the first quarter of 2005, we beganreporting our results using three reportable segments: OfficeMax, Contract;OfficeMax, Retail; and Corporate and Other. The Boise Building Solutions andBoise Paper Solutions segments include the results of our sold paper, forestproducts and timberland assets prior to the Sale.

OfficeMax, Contract distributes a broad line of itemsfor the office, including office supplies and paper, technology products andsolutions and office furniture. OfficeMax, Contract sells directly to largecorporate and government offices, as well as to small and medium-sizedoffices in the United States, Canada, Australia and New Zealand. This segmentmarkets and sells through field 

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salespeople, outboundtelesales, catalogs, the Internet and in some markets, including Canada,Hawaii, Australia and New Zealand, through office products stores.

OfficeMax, Retail is a retail distributor of officesupplies and paper, print and document services, technology products andsolutions and office furniture. Our retail segment has operations in the UnitedStates, Puerto Rico and the U.S. Virgin Islands. Our retail segment’s officesupply stores feature OfficeMax ImPress, an in-store module devoted toprint-for-pay and related services. Our retail segment alsooperates office products stores in Mexico through a 51%-owned jointventure.

Corporate and Other includes support staff servicesand the related assets and liabilities as well as certain other expenses notfully allocated to the segments.

Management evaluates thesegments based on operating profit before interest expense, income taxes andminority interest, extraordinary items and cumulative effect of accountingchanges. The income and expense related to certain assets and liabilities thatare reported in the Corporate and Other segment have been allocated to theContract and Retail segments. However, certain expenses that managementconsiders unusual or non-recurring are not allocated to the Contract andRetail segments.

***OfficeMax,Contract***

***($ in millions)***
|                                                                              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| Sales                                                                        |       | $                      | 4,714.5    |     | $          | 4,628.6  |       | $ | 4,370.8 |   |
| Segment income                                                               |       | $                      | 197.7      |     | $          | 100.3    |       | $ | 107.0 |   |
| **Sales  by Product Line**                                                   |       |                   |       |     |       |     |       |
| Office supplies and  paper                                                   |       | $                      | 2,568.9    |     | $          | 2,598.1  |       | $ | 2,463.2 |   |
| Technology products                                                          |       | 1,551.9                |       | 1,469.2  |       | 1,404.6  |       |
| Office furniture                                                             |       | 593.7                  |       | 561.3    |       | 503.0    |       |
| **Sales  by Geography**                                                      |       |                   |       |     |       |     |       |
| United States                                                                |       | $                      | 3,559.8    |     | $          | 3,519.7  |       | $ | 3,382.9 |   |
| International                                                                |       | 1,154.7                |       | 1,108.9  |       | 987.9    |       |
| Sales growth                                                                 |       | 2                      | %          | 6        | %          | 17       | %          |
| Same-location sales  growth                                                  |       | 2                      | %          | 5        | %          | 8        | %          |
|                                                                         |       | (percentage  of sales) |       |
| Gross profit margin                                                          |       | 22.5                   | %          | 21.9     | %          | 23.6     | %          |
| Operating expenses,  including allocated general and administrative expenses |       | 18.3                   | %          | 19.7     | %          | 21.2     | %          |
| Operating profit margin                                                      |       | 4.2                    | %          | 2.2      | %          | 2.4      | %          |

 

***2006 Compared With 2005***

For 2006, Contract segment sales were$4,714.5 million, up 1.9% from $4,628.6 million in 2005.Year-over-year same-location sales increased 2%.

Contract segment gross profit margin increased 0.6% ofsales to 22.5% of sales for 2006. The year-over-year increase resulted from acontinued focus on the middle-market and other higher margin salesopportunities.

Operating expenses for the Contract segment were 18.3%of sales for 2006, down from 19.7% of sales for 2005. Fiscal year 2006 includes$10.3 million of costs related to the Contract segment 

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reorganization. Fiscal year2005 includes a $9.8 million pre-tax charge for a legal settlement with theDepartment of Justice and a $5.4 million pre-tax charge related to therestructuring of international operations. Excluding the impact of thesecharges, operating expenses were 18.2% and 19.4% of sales for 2006 and 2005,respectively. The year-over-year improvement in operating expenses as apercentage of sales is due to lower promotion and marketing costs as well asreduced payroll and integration expenses.

Contract segment incomeincreased $97.4 million to $197.7 million for 2006, or 4.2% of sales, comparedto $100.3 million, or 2.2% of sales, for 2005. Excluding the $10.3 millionof costs related to the Contract segment reorganization, Contract segmentincome was $208.0 million, or 4.4% of sales, for 2006. Excluding the $9.8million legal settlement with the Department of Justice and the $5.4 million ofinternational restructuring charges, Contract segment income was $115.4million, or 2.5% of sales, for 2005.

***2005 Compared With 2004***

In 2005, our Contract segment had sales of$4,628.6 million, up 6% from $4,370.8 million in 2004. Year-over-yearsame-location sales increased 5%.

Our Contract segment gross profit margin for 2005 was21.9% of sales, a decrease of 1.7% of sales compared with 2004. The decrease ingross profit margin resulted from higher delivery costs and changes to productmix as our Contract segment sales shifted more towards technology and paperproducts which have lower gross margins than office supplies. The lower grossprofit margin in our Contract segment also reflected a more competitive pricingenvironment for large U.S. contract customers and weaker gross profit marginsin our international operations.

In 2005, operating expenses as a percentage of salesdecreased 1.5% of sales to 19.7% of sales. Included in operating expenses for2005 is the impact of a $9.8 million legal settlement with the Departmentof Justice and a $5.4 million charge related to the restructuring ofinternational operations. Excluding the impact of these charges, operatingexpenses improved as a percentage of sales due to lower promotion and marketingcosts, as well as reduced payroll and integration expenses due in part to theconsolidation of our delivery center network. These savings were partiallyoffset by our investment to expand our middle market sales force.

Contract segment operatingincome was $100.3 million, or 2.2% of sales, in 2005, down from$107.0 million, or 2.4% of sales, in 2004. Excluding the $9.8 millioncharge related to our settlement with the Department of Justice and the $5.4 millioncharge related to the restructuring of international operations, segment incomeincreased $8.5 million from the prior year. The increase was attributableto higher sales, lower promotion and marketing costs, and reduced payroll andintegration expenses, partially offset by weaker results in Canada, lower grossmargins in the U.S. and the impact of our investment to expand our middlemarket sales force.

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***OfficeMax,Retail***

***($ in millions)***
|                                                                              | ** ** | **2006**               | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| Sales                                                                        |       | $                      | 4,251.2    |     | $          | 4,529.1  |       | $ | 4,481.3 |   |
| Segment income                                                               |       | $                      | 86.3       |     | $          | 27.9     |       | $ | 22.7 |   |
| **Sales  by Product Line**                                                   |       |                   |       |     |       |     |       |
| Office supplies and  paper                                                   |       | $                      | 1,585.9    |     | $          | 1,639.6  |       | $ | 1,768.4 |   |
| Technology products                                                          |       | 2,210.8                |       | 2,363.5  |       | 2,308.0  |       |
| Office furniture                                                             |       | 454.5                  |       | 526.0    |       | 404.9    |       |
| **Sales  by Geography**                                                      |       |                   |       |     |       |     |       |
| United States(a)                                                             |       | $                      | 4,057.4    |     | $          | 4,358.9  |       | $ | 4,327.9 |   |
| International                                                                |       | 193.8                  |       | 170.2    |       | 153.4    |       |
| Sales growth (2004 is  pro-forma)                                            |       | (6.1                   | )%         | 1.1      | %          | (0.9     | )%         |
| Same-location sales  growth                                                  |       | 0.1                    | %          | (1.0     | )%         | 1.3      | %          |
|                                                                         |       | (percentage  of sales) |       |
| Gross profit margin                                                          |       | 29.3                   | %          | 26.2     | %          | 25.6     | %          |
| Operating expenses,  including allocated general and administrative expenses |       | 27.3                   | %          | 25.6     | %          | 25.1     | %          |
| Operating profit margin                                                      |       | 2.0                    | %          | 0.6      | %          | 0.5      | %          |

 

(a)             Includes ouroperations in the United States, Puerto Rico and the U.S. Virgin Islands.

***2006 Compared With 2005***

Retail segment sales were $4,251.2 million for 2006compared to $4,529.1 million for 2005. Retail segment sales were lower due tothe impact of the 109 strategic store closings during the first quarter of 2006and the 53rd week included in 2005 results. Retail segmentsame-location sales increased 0.1% year-over-year during 2006. During 2006, weopened 44 new retail stores in the U.S., ending the period with 859 retailstores in the U.S. Our majority owned joint-venture in Mexico opened 12 storesduring 2006, ending the year with 55 stores.

Retail segment gross margin increased 3.1% of sales to29.3% of sales for 2006, from 26.2% of sales for 2005. The gross marginimprovement was primarily due to the segment’s improved promotional andadvertising strategies and reduced inventory shrinkage and inventory clearance,year-over-year.

Retail segment operating expenses were 27.3% of salesfor 2006 compared to 25.6% for 2005. During 2006, the Retail segment incurredpre-tax charges of $89.5 million related to the closure of 109 underperformingretail stores. In 2005, the Retail segment incurred asset impairment charges of$17.9 million primarily related to the store closures. Excluding the impact ofthese charges, Retail segment operating expenses were 25.2% of sales for both 2006and 2005. Operating expenses for 2006 benefited from targeted cost reductions,including reduced store labor and marketing costs. These improvements wereoffset by an increase in allocated general and administrative expensesduring 2006.

For 2006, the Retail segmentreported operating income of $86.3 million, or 2.0% of sales, compared tooperating income of $27.9 million, or 0.6% of sales, in 2005. Excluding theimpact of the store closing related charges for both years, Retail segmentoperating income for 2006 was $175.8 million, or 4.1% of sales, compared to$45.8 million, or 1.0% of sales for 2005.

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***2005 Compared With 2004***

In 2005, Retail segment sales were$4,529.1 million, up 1.1% from sales of $4,481.3 million for 2004.During 2005, Retail segment sales decreased 1.0% year-over-year on asame-location basis. Retail segment sales in 2005 benefited from a 53rd week, which increased sales by approximately$75 million. Excluding this impact, Retail segment sales decreased as aresult of reduced promotional activity and advertising placements, primarilyduring the first half of 2005, a strategy used to reduce costs and shiftmarketing focus toward our small business customer, partially offset by anincrease in the average dollar amount per customer transaction. During 2005,our Retail segment opened 33 stores in the U.S. and 6 stores in Mexico andclosed 9 stores in the U.S.

Our Retail segment gross profit margin for 2005 was26.2% of sales, compared to 25.6% of sales in 2004. The increase in grossprofit margin was primarily due to a shift in mix to higher margin products andservices, a direct result of our new promotional and advertising strategy.

Retail segment operating expenses were 25.6% of salesin 2005 compared to 25.1% in 2004. In 2005, we recorded $17.9 million inasset impairment charges primarily related to the retail store closures.Excluding these charges, operating expenses were 25.2% of sales in 2005.

For 2005, the Retail segmenthad operating income of $27.9 million, compared to $22.7 million in2004. Operating margin for our Retail segment was 0.6% of sales in 2005,compared with 0.5% of sales in 2004. In 2005, we recorded $17.9 million inasset impairment charges primarily related to the retail store closures.Excluding these charges, operating margin in 2005 was 1.0% of sales. Thisincrease in operating margin is a result of increased sales due to theadditional selling week and improved gross profit margin due to a shift in mixto higher margin products and services.

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***Corporate andOther***

Corporate and Other expenseswere $118.1 million for 2006. We recorded expenses largely related to theheadquarters consolidation in the Corporate and Other segment totaling $46.4 millionduring 2006. Corporate and Other expenses were $118.5 million for 2005.During 2005 we recorded $56.9 million of expenses in the Corporate andOther segment for headquarters consolidation, one-time severance payments andother expenses, primarily professional service fees, which are not expected tobe ongoing. Excluding the expenses related to headquarters consolidation,one-time severance payments and other expenses, the year-over-year increase inour Corporate and Other expenses were primarily due to increased incentivecompensation expense. In 2004, our Corporateand Other segment realized income of $184.3 million, which included a$280.6 million gain from the Sale and $15.9 million of costs forone-time benefits granted to employees. Excluding these items, Corporate andOther expenses were $80.4 million in 2004.

***Boise BuildingSolutions***

***Operating Results***

For the period from January 1 to October 28,2004, sales and operating income for Boise Building Solutions was $3,257.7 millionand $319.2 million, respectively. On October 29, 2004, we completedthe Sale.

***Boise PaperSolutions***

***Operating Results***

For the period from January 1to October 28, 2004, sales and operating income for Boise Paper Solutionswas $1,670.4 million and $38.8 million, respectively. On October 29,2004, we completed the Sale.

***Sale of Paper, Forest Products and Timberland Assets***

On October 29, 2004, wecompleted the sale of our paper, forest products and timberland assets toaffiliates of Boise Cascade, L.L.C., a new company formed by Madison DearbornPartners LLC. The assets that we sold were included in our Boise BuildingSolutions and Boise Paper Solutions segments. The Sale completed the company’stransition, begun in the mid-1990s, from a predominantly manufacturing-basedcompany to an independent office products distribution company. Some assets ofthe businesses we sold, such as the facility near Elma, Washington and Company-ownedlife insurance, were retained by OfficeMax, as were some liabilities includingthose associated with retiree pension and benefits, litigation andenvironmental remediation at selected sites and facilities previously closed.

In connection with the Sale,we recorded a $280.6 million gain in our Corporate and Other segment. OnOctober 29, 2004, we invested $175 million in securities ofaffiliates of Boise Cascade, L.L.C. This investment represents continuinginvolvement as defined in Statement of Financial Accounting Standards (“SFAS”)144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”Accordingly, we do not show the historical results of the paper, forestproducts and timberland assets as discontinued operations. An additional$180 million of gain on the Sale was deferred as a result of ourcontinuing involvement with Boise Cascade, L.L.C. We expect to recognizethis gain as we reduce our investment in affiliates of BoiseCascade, L.L.C.

The consideration for thetimberlands portion of the Sale included $1.6 billion of timberinstallment notes. We monetized the timber installment notes inDecember 2004 for proceeds of $1.5 billion. We realized net cashproceeds from the Sale of $3.3 billion in 2004 after allowing for the 

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$175 millionreinvestment, transaction-related expenses and the monetization of thetimber installment notes. See Note 12, Timber Notes Receivable, andNote 13, Debt, of the Notes to Consolidated Financial Statements in“Item 8. Financial Statements and Supplementary Data” of this Form 10-Kfor additional information related to the timber notes.

Using a portion of the Saleproceeds, we reduced our debt by $1.8 billion during the fourth quarter of2004, incurred and paid $137.1 million of costs related to the earlyretirement of debt, and made a $45.8 million contribution to the pensionplans on behalf of active employees who became employees of BoiseCascade, L.L.C.

During 2004, we also announcedplans to return between $800 million and $1 billion of the Saleproceeds to shareholders via common or preferred stock buybacks, cash dividendsor a combination of these alternatives. As part of this commitment to returncash to equity holders, we redeemed $110 million of our Series Dpreferred stock and paid related accrued dividends of $3 million in thefourth quarter of 2004. In May 2005, we used substantially all of the remainingproceeds from the Sale to repurchase 23.5 million shares of our commonstock and associated common stock purchase rights through a modified Dutchauction tender offer at a purchase price of approximately $775.5 million,or $33.00 per share, plus transaction costs.

***Discontinued Operations***

In December 2004, ourboard of directors authorized management to pursue the divestiture of afacility near Elma, Washington that manufactured integrated wood-polymerbuilding materials. The board of directors and management concluded that theoperations of the facility were no longer consistent with the Company’sstrategic direction. As a result of that decision, the Company recorded thefacility’s assets as held for sale on the Consolidated Balance Sheets and reportedthe results of its operations as discontinued operations.

During 2005, the Companyexperienced unexpected difficulties in achieving anticipated levels ofproduction at the facility. These issues delayed the process of identifying andqualifying a buyer for the business. While management made substantial progressin addressing the manufacturing issues that caused production to fall belowplan, during the fourth quarter of 2005, we concluded that we would be unableto attract a buyer in the near term and elected to cease operations at thefacility during the first quarter of 2006.

In accordance with SFASNo. 144, we recorded pre-tax charges of $67.8 million in the fourthquarter of 2004 and $28.2 million in the fourth quarter of 2005 to reducethe carrying value of the long-lived assets of the Elma, Washington facility totheir estimated fair value. During the first quarter of 2006, we ceasedoperations at the facility and recorded pre-tax expenses of $18.0 millionfor contract termination and other closure costs. These charges and expenseswere reflected within discontinued operations in the Consolidated Statements ofIncome (Loss).

See Note 3, DiscontinuedOperations, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of this Form 10-K foradditional information related to the discontinued operation.

***Integration Activities and Facility Closures***

Increased scale as a result ofthe OfficeMax, Inc. acquisition has allowed management to evaluate the Company’scombined office products business and to identify opportunities forconsolidating operations. Costs associated with the planned closure andconsolidation of acquired OfficeMax, Inc. facilities were accounted forunder EITF Issue No. 95-3, “Recognition of Liabilities in Connectionwith a Purchase Business Combination,” and recognized as liabilities inconnection with the acquisition and charged to goodwill.

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Prior to its acquisition byBoise Cascade Corporation, OfficeMax, Inc. had identified and closedunderperforming facilities. As part of our purchase price allocation, werecorded $58.7 million of reserves for the estimated fair value of futureliabilities associated with these closures. These reserves related primarily tofuture lease termination costs, net of estimated sublease income. Most of theexpenditures for these facilities will be made over the remaining lives of theoperating leases. In addition to these store closures, at December 31,2003, we identified and closed 45 OfficeMax, Retail facilities that were nolonger strategically and economically viable and recorded a $69.4 millionliability in the Consolidated Balance Sheet. During 2004, we identified andclosed an additional 11 stores. These charges were accounted for as exitactivities in connection with the acquisition and were not recorded as a chargeto income.

Since the OfficeMax, Inc.acquisition, we have closed 18 of our U.S. distribution centers and 2 customerservice centers. In connection with these closures we recorded a charge toincome in our Consolidated Statement of Income (Loss) of $29.7 millionduring 2004.

In September 2005, theboard of directors approved a plan to relocate and consolidate our retailheadquarters in Shaker Heights, Ohio and existing corporate headquarters inItasca, Illinois into a new facility in Naperville, Illinois. We began theconsolidation and relocation process in the latter half of 2005. As ofDecember 30, 2006, we have expensed approximately $70.9 million ofcosts related to the headquarters consolidation in our Corporate and Othersegment, including $45.9 million recognized during 2006 and $25.0 millionrecognized during the second half of 2005. The consolidation and relocationprocess was completed during the second half of 2006 and we do not expect toincur any additional charges.

Also in 2005, we recordedcharges to income of $23.2 million for the write-down of impairedassets related to underperforming retail stores and the restructuring of ourCanadian operations.

During 2006, we announced thereorganization of our Contract segment and recorded a pre-tax charge of $7.3 millionfor employee severance related to the reorganization. The Contract segment alsorecorded an additional $3.0 million of costs during 2006, primarilyrelated to a facility closure and employee severance.

During 2006, we closed 109underperforming, domestic retail stores and recorded a pre-tax charge of $89.5 million,comprised of $11.3 million for employee severance, asset write-off andimpairment and other closure costs and $78.2 million of estimated futurelease obligations.

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TheCompany conducts regular reviews of its real estate portfolio to identifyunderperforming facilities, and closes those facilities that are no longerstrategically or economically viable. The Company records a liability for thecost associated with a facility closure at its fair value in the period inwhich the liability is incurred, which is either the date the lease terminationis communicated to the lessor or the location’s cease-use date. Upon closure,unrecoverable costs are included in facility closure reserves on theConsolidated Balance Sheets and include provisions for the present value offuture lease obligations, less contractual or estimated sublease income. Accretionexpense is recognized over the life of the payments. Integration and facilityclosure reserve account activity during 2006, 2005 and 2004, including activityrelated to the reorganization of our Contract segment, retail store closuresand headquarters consolidation, was as follows:

| ** **                                     | ** ** | **Lease\  Contract  Terminations** | ** ** | **Severance\  Retention** | ** ** | **Asset  Write-off &  Impairment** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                     | ** ** | **(thousands)**                    | ** ** |
| Balance at  December 31, 2003             |       |                               | $          | 126,922                   |       |                                        |       | $         | 3,094      |      |       |   | $ | — |   |   | $ | 412 |   | $ | 130,428 |   |
| Charges to income                              |       |                               | 1,043      |                      |       |                                        | 7,539      |      |       |      | 1,582      |   |   | 19,581 |   | 29,745 |   |
| Change in goodwill                             |       |                               | 11,245     |                      |       |                                        | 4,653      |      |       |      | —     |   |   | — |   | 15,898 |   |
| Changes to estimated  costs included in income |       |                               | —     |                      |       |                                        | (1,228     | )         |       |      | —     |   |   | — |   | (1,228 | ) |
| Cash payments                                  |       |                               | (26,503    | )                         |       |                                        | (7,416     | )         |       |      | —     |   |   | (19,584 | ) | (53,503 | ) |
| Non-cash  charges                              |       |                               | —     |                      |       |                                        | —     |      |       |      | (1,582     | ) |   | — |   | (1,582 | ) |
| Accretion                                      |       |                               | 3,683      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 3,683 |   |
| Balance at  December 31, 2004             |       |                               | $          | 116,390                   |       |                                        |       | $         | 6,642      |      |       |   | $ | — |   |   | $ | 409 |   | $ | 123,441 |   |
| Charges to income                              |       |                               | 547        |                      |       |                                        | 21,214     |      |       |      | 23,062     |   |   | 3,565 |   | 48,388 |   |
| Change in goodwill                             |       |                               | —     |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | — |   |
| Changes to estimated  costs included in income |       |                               | —     |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | — |   |
| Cash payments                                  |       |                               | (28,872    | )                         |       |                                        | (6,354     | )         |       |      | —     |   |   | (3,235 | ) | (38,461 | ) |
| Non-cash  charges                              |       |                               | —     |                      |       |                                        | —     |      |       |      | (23,062    | ) |   | — |   | (23,062 | ) |
| Accretion                                      |       |                               | 3,390      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 3,390 |   |
| Balance at  December 31, 2005             |       |                               | $          | 91,455                    |       |                                        |       | $         | 21,502     |      |       |   | $ | — |   |   | $ | 739 |   | $ | 113,696 |   |
| Charges to income                              |       |                               | 89,934     |                      |       |                                        | 19,407     |      |       |      | 9,543      |   |   | 27,332 |   | 146,216 |   |
| Change in goodwill                             |       |                               | (11,000    | )                         |       |                                        | —     |      |       |      | —     |   |   | — |   | (11,000 | ) |
| Changes to estimated  costs included in income |       |                               | —     |                      |       |                                        | (1,080     | )         |       |      | —     |   |   | — |   | (1,080 | ) |
| Cash payments                                  |       |                               | (68,596    | )                         |       |                                        | (28,991    | )         |       |      | —     |   |   | (18,951 | ) | (116,538 | ) |
| Non-cash  charges                              |       |                               | —     |                      |       |                                        | —     |      |       |      | (9,543     | ) |   | (5,978 | ) | (15,521 | ) |
| Accretion                                      |       |                               | 6,031      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 6,031 |   |
| Balance at December 30,  2006             |       |                               | $          | 107,824                   |       |                                        |       | $         | 10,838     |      |       |   | $ | — |   |   | $ | 3,142 |   | $ | 121,804 |   |

 

At December 30, 2006, approximately $44.7 millionof the integration and facility closure reserve liability was included inaccrued liabilities, other, and $77.1 million was included in otherlong-term liabilities. At December 30, 2006, the integration activitiesand facility closures reserve included approximately $108 million forestimated future lease obligations, which represents the estimated fair valueof the lease obligations and is net of anticipated sublease income ofapproximately $109 million.

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***Liquidity andCapital Resources***

As of December 30, 2006, we had$282.1 million of cash and cash equivalents and $409.9 million ofshort-term and long-term debt, excluding the $1.5 billion of timbersecuritization notes. We also had $22.3 million of restricted investmentson deposit which are pledged to secure a portion of the outstanding debt.During 2006, we reduced our net debt (total debt excluding the timbersecuritization notes less cash and restricted investments) by approximately $295 million.Since the end of 2003, we have paid down approximately $1.9 billion ofdebt, primarily with proceeds from the sale of the paper, forest products andtimberland assets, and expensed $151.5 million of costs related to theearly retirement of debt. During 2004, we announced plans to return between$800 million and $1 billion of the Sale proceeds to shareholders viacommon or preferred stock buybacks, cash dividends or a combination of these alternatives.As part of this commitment to return cash to equity-holders, we redeemed$110 million of our Series D preferred stock on November 1,2004. Additionally, during the second quarter of 2005, we repurchased23.5 million shares of our common stock and the associated common stockpurchase rights through a modified Dutch auction tender offer at a purchaseprice of $775.5 million, or $33.00 per share, plus transaction costs.

Our ratio of current assets to current liabilities was1.37:1 at December 30, 2006, compared with 1.22:1 at December 31,2005. The increase in our ratio of current assets to current liabilities at December 30,2006 resulted primarily from the increase in cash and cash equivalents in 2006.During 2006, we generated cash flow from operations of $375.7 million,which more than offset cash used for capital expenditures. In addition, wereceived proceeds from stock option exercises of approximately $130 millionduring 2006.

Our primary ongoing cashrequirements relate to working capital, expenditures for property andequipment, lease obligations and debt service. We expect to fund theserequirements through a combination of cash flow from operations and seasonalborrowings under our revolving credit facility. The sections that follow discussin more detail our operating, investing, and financing activities, as well asour financing arrangements.

***OperatingActivities***

Our operating activities generated $375.7 millionof cash in 2006 and used $57.7 million of cash in 2005 and $451.1 millionof cash in 2004. In 2006, items included in net income provided $270.1 millionof cash, and favorable changes in working capital items provided$105.6 million. Cash provided from working capital changes includes theeffects of reduced accounts receivable and improved accounts payable-to-inventoryleverage. In 2005, items included in net income (loss) provided$170.1 million of cash, and unfavorable changes in working capital itemsused $227.8 million. Included in net working capital changes during 2005 werenet income tax payments of $134.1 million primarily related to gainsrecognized in 2004. Other working capital changes in 2005 included a reductionin accounts payable and accrued liabilities partially offset by improvedaccounts receivable and inventory levels. In 2004, items included in net incomeprovided $280.9 million of cash and unfavorable changes in working capitalitems used $732.0 million of cash from operations.

We have sold fractional ownership interests in adefined pool of trade accounts receivable. At December 30, 2006,December 31, 2005 and December 31, 2004, $180.0 million,$163.0 million and $120.0 million, respectively, of sold accountsreceivable were excluded from Receivables in our Consolidated Balance Sheet.Cash flow from operations in 2006 and 2005 benefited from increases in theamount of receivables sold under this program by $17.0 million and $43.0 million,respectively. During the third quarter of 2004, in anticipation of the Sale, westopped selling the receivables related to the Boise Building Solutions andBoise Paper Solutions segments, reducing the receivables sold as 

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a part of this program by$130.0 million at the end of 2004. The decrease in sold accountsreceivable of $130.0 million used cash from operations in 2004.

Through October 28, 2004,some of our employees were covered by noncontributory defined benefit pensionplans. Effective July 31, 2004, we established separate mirror plans foractive employees in the paper and forest products businesses, and transferredthe associated assets and obligations to the new plans. Effective October 29,2004, under the terms of the Asset Purchase Agreement with affiliates of BoiseCascade, L.L.C., we transferred sponsorship of the plans covering activeemployees of the paper and forest products businesses to BoiseCascade, L.L.C. As a result, only those terminated, vested employees andretirees whose employment with us ended on or before July 31, 2004, andsome active OfficeMax, Contract employees were covered under the plans sponsoredby us. Pension expense was $13.7 million and $21.7 million in 2006and 2005, respectively. Pension expense for the year ended December 31,2004, was $169.7 million, including $94.9 million of curtailmentexpense related to the Sale. These are non-cash charges in our consolidatedfinancial statements. In 2006 and 2005, we made contributions to our pensionplans totaling $9.6 million and $2.8 million, respectively. In 2004,we made cash contributions to our pension plans totaling $279.8 million.The Asset Purchase Agreement with affiliates of Boise Cascade, L.L.C.,required us to fully fund the plans covering active employees of the paper andforest products businesses on an accumulated-benefit-obligationbasis using a 6.25% liability discount rate. Since our active employees who arecovered by the retained plans, as well as all of the inactive participants, areno longer accruing additional benefits, we expect our future contributions tothese plans to be greatly reduced. The minimum required contribution in 2007 isapproximately $11 million. However, we may elect to make additional voluntarycontributions. See “Critical Accounting Estimates” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations formore information.

***InvestmentActivities***

Our cash investing activities used cash of $163.9 millionin 2006 and $97.3 million in 2005 and provided $1.6 billion of cashin 2004. Cash from investing activities in 2004 was primarily due to the Sale.

Ourprincipal investing activities are related to capital expenditures andacquisitions. Investing activities during 2006 included capital expenditures of$176.3 million. Our capital spending in 2006 primarily related toleasehold improvements, new stores, quality and efficiency projects, replacementprojects and integration projects, including our previously announcedinfrastructure improvement initiatives in supply chain and information systems.Details of 2006 capital investment by segment are included in the table below:

| ** **          | ** ** | **2006 Capital Investment  by Segment** | ** ** |
|---------------------|------------|--------------------------------------------------------|------------|
| ** **          | ** ** | **Acquisitions**                                       | ** ** | **Property and Equipment** | ** ** | **Total** | ** ** |
| ** **          | ** ** | **(millions)**                                         | ** ** |
| OfficeMax, Contract |       |                                                   | $          | 1.5 |   |   |   | $ | 81.2 |   |   | $ | 82.7 |   |
| OfficeMax, Retail   |       |                                                   | —     |   |   |   | 93.6 |   |   | 93.6 |   |
|                |       |                                                   | 1.5        |   |   |   | 174.8 |   |   | 176.3 |   |
| Corporate and Other |       |                                                   | —     |   |   |   | — |   |   | — |   |
|                |       |                                                   | $          | 1.5 |   |   |   | $ | 174.8 |   |   | $ | 176.3 |   |

 

Investment activities during 2005 included $152.5 millionof expenditures for property and equipment and $34.8 million for theacquisitions of businesses by our Contract segment. These expenditures werepartially offset by $93.3 million of proceeds from the sale of restrictedinvestments.

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In 2004, cash investing activities included cashexpenditures of $298.2 million for property and equipment and timber andtimberlands, and $175 million for our investment in the securities ofaffiliates of Boise Cascade, L.L.C. These expenditures were offset by$2,038.7 million of proceeds from the Sale and $186.9 million ofproceeds from the sale of timberlands in Louisiana, the sale of our Yakima, Washington,plywood and lumber facilities and the sale of our Barwick, Ontario, Canada, OSBjoint venture.

We expect our capitalinvestments in 2007 to total between $180 million and $200 million,excluding acquisitions. Our capital spending in 2007 will be for leaseholdimprovements, new stores, quality and efficiency projects, replacement projectsand integration projects.

***FinancingActivities***

Our financing activities used cashof $1.9 million in 2006, $1,015.3 million in 2005 and $76.3 millionin 2004. Common and preferred dividend payments totaled $47.6 million in2006, $54.2 million in 2005, and $64.1 million in 2004. In all threeyears, our quarterly cash dividend was 15 cents per common share. During2006, we received $130.0 million in cash proceeds from stock optionexercises and used $84.3 million to reduce debt. In 2005, we used$780.4 million of cash for the repurchase of 23.5 million shares ofour common stock and used $198.7 million of cash to reduce short-termborrowings and long-term debt. During 2004, we repaid $1.6 billion of ourdebt, primarily with the proceeds of the Sale, which included $1.47 billionin cash received in connection with the securitization of the timber notes, andwe redeemed $110 million of our Series D preferred stock and paidrelated accrued dividends of $3 million. In addition, in 2004, we settledthe purchase contracts related to our adjustable conversion-rate equity unitsand received $172.5 million in cash proceeds. Our debt-to-equity ratio,excluding the securitized timber notes, was .21:1 and .28:1 at December 30,2006 and December 31, 2005, respectively.

***FinancingArrangements***

We lease our store space and certain other propertyand equipment under operating leases. These operating leases are not includedin debt; however, they represent a significant commitment. Obligations underoperating leases are shown in the “Contractual Obligations” section of thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

On September 23, 2005, Standard & Poor’sRating Services downgraded our corporate credit rating to B+. The downgradeincreased the reporting requirements under our receivable sale agreement andincreased the annual cost of that facility by less than $1 million.

Our debt structure consists ofcredit agreements, note agreements, and other borrowings as described below.For more information, see “Contractual Obligations” and “Disclosures ofFinancial Market Risks” in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

*Credit Agreements*

On June 24, 2005, we entered into a loan andsecurity agreement for a new revolving credit facility. The revolving creditfacility permits us to borrow up to the maximum aggregate borrowing amount,which is equal to the lesser of (i) a percentage of the value of certaineligible inventory less certain reserves or (ii) $500 million. In thesecond quarter of 2006, we amended the revolving credit facility to providegreater access to the borrowing base availability under the facility. Therewere no borrowings outstanding under the revolving credit agreement as of December 30,2006. There were $18.7 million in borrowings outstanding under therevolving credit facility as of December 31, 2005. The maximum amountoutstanding under the revolving credit facility was $122.0 million and 

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$101.0 million during2006 and 2005, respectively. The average amount outstanding under the revolvingcredit facility was $20.6 million during 2006 and $30.3 millionduring 2005. Letters of credit, which may be issued under the revolver up to amaximum of $100 million, reduce available borrowing capacity under therevolving credit facility. Letters of credit issued under the revolver totaled$75.5 million as of December 30, 2006. As of December 30, 2006,the maximum aggregate amount available under the revolver was$500.0 million and $424.5 million was available for borrowing.

Borrowings under the revolver bear interest at ratesbased on either the prime rate or the London Interbank Offered Rate (“LIBOR”).Margins are applied to the applicable borrowing rates and letter of credit feesunder the revolver depending on the level of average excess availability. Forborrowings outstanding under the revolver during 2006 and 2005, the weightedaverage interest rate was equal to 6.9% and 6.6%, respectively. Fees on lettersof credit issued under the revolver were charged at a weighted average rate of1.125%. We are also charged an unused line fee of 0.25% on the amount bywhich the maximum available credit of $500 million exceeds the averagedaily outstanding borrowings and letters of credit.

Borrowings under the revolverare secured by a lien on substantially all inventory and related proceeds. Therevolving loan and security agreement contains customary conditions toborrowing including a monthly calculation of excess borrowing availability andreporting compliance. Covenants in the revolver agreement restrict the amountof letters of credit that may be issued, dividend distributions and other usesof cash if excess availability is less than $75 million. At December 30,2006, the Company was in compliance with all covenants under the revolveragreement and excess availability was in excess of $75 million. Therevolver expires on June 24, 2010.

*Timber Notes*

In October 2004, we sold our timberlands as partof the Sale and received credit-enhanced timber installment notes receivable inthe amount of $1,635 million. In December 2004, we completed asecuritization transaction in which our interests in the timber installmentnotes receivable and related guarantees were transferred to wholly-ownedbankruptcy remote subsidiaries that were designated to be qualifying specialpurpose entities (the “OMXQ’s”). The OMXQ’s pledged the timber installmentnotes receivable and related guarantees and issued securitization notes in theamount of $1,470 million. Recourse on the securitization notes is limitedto the pledged timber installment notes receivable. The securitization notesare 15-year non-amortizing, and were issued in two equal$735 million tranches paying interest of 5.42% and 5.54%, respectively.

As a result of these transactions, we received$1,470 million in cash from the OMXQ’s, and over 15 years will earnapproximately $82.5 million per year in interest income on the timberinstallment notes receivable and incur annual interest expense of approximately$80.5 million on the securitization notes. The pledged timber installmentnotes receivable and nonrecourse securitization notes will mature in 2020 and2019, respectively. The securitization notes have an initial term that isapproximately three months shorter than the installment notes. The Companyexpects to refinance its ownership of the installment notes in 2019 with ashort-term secured borrowing to bridge the period from initial maturity of thesecuritization notes to the maturity of the installment notes.

The original entities issuingthe credit enhanced timber installment notes are variable-interest entities(the “VIE’s”) under Financial Accounting Standards Board (FASB) Interpretation 46R,“Consolidation of Variable Interest Entities”. The OMXQ’s are considered to bethe primary beneficiary, and therefore, the VIE’s are required to beconsolidated with the OMXQ’s, which are also the issuers of the securitizationnotes. As a result, the accounts of the OMXQ’s have been consolidated intothose of their ultimate parent, OfficeMax. The effect of our consolidation ofthe OMXQ’s is that the securitization transaction is treated as a financing,and both the timber notes receivable and the securitization notes payable arereflected in the Consolidated Balance Sheets.

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*Note Agreements*

In October 2003, we issued $300 million of6.50% senior notes due in 2010 and $200 million of 7.00% senior notes duein 2013. At the time of issuance, the senior note indentures contained a numberof restrictive covenants, substantially all of which have been eliminatedthrough the execution of supplemental indentures as described below. On November 5,2004, we repurchased approximately $286.3 million of the 6.50% seniornotes and received the requisite consents to adopt amendments to the indenturepursuant to a tender offer for these securities. As a result, the Company andthe trustee executed a supplemental indenture that eliminated substantially allof the restrictive covenants, certain events of default and related provisions,and replaced them with the covenants contained in the Company’s other publicdebt. Those covenants include a limitation on mergers and similar transactions,a restriction on secured transactions involving Principal Properties, asdefined, and a restriction on sale and leaseback transactions involvingPrincipal Properties.

In December 2004, bothMoody’s Investors Service, Inc. and Standard & Poor’s RatingServices upgraded the credit rating on our 7.00% senior notes to investmentgrade. The upgrades were the result of actions we took to collateralize thenotes by granting the note holders a security interest in $113 million inprincipal amount of General Electric Capital and Bank of America Corp. notesmaturing in 2008 (the “pledged instruments”). These pledged instruments arereflected as restricted investments in the Consolidated Balance Sheets. As aresult of these ratings upgrades, the original 7.00% senior note covenants havebeen replaced with the covenants found in the Company’s other public debt.During the first quarter of 2005, we purchased and cancelled $87.3 millionof the 7.00% senior notes. As a result, $92.8 million of the pledgedinstruments were released from the security interest granted to the 7.00%senior note holders, and were sold during the second quarter of 2005. Theremaining pledged instruments continue to be subject to the security interest,and are reflected as restricted investments in the Consolidated Balance Sheets.

*Other*

We had leased certainequipment at our integrated wood-polymer building materials facility near Elma,Washington under a capital lease. The lease agreement had a base term of sevenyears and an interest rate of 4.67%. Duringthe first quarter of 2006, we paid $29.1 million to terminate the leaseagreement. At December 31, 2005, the capital lease obligation was includedin the current portion of long-term debt in the Consolidated Balance Sheets.

*Cash Paid for Interest*

Cash payments for interest,net of interest capitalized, were $124.1 million in 2006,$122.6 million in 2005 and $167.7 million in 2004. The decline inpayments made in 2005 relative to 2004 was due to the repayment of outstandingdebt in the fourth quarter of 2004 using a portion of the proceeds from theSale.

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***ContractualObligations***

In thetable below, we set forth our contractual obligations as of December 30,2006. Some of the figures we include in this table are based on management’sestimates and assumptions about these obligations, including their duration,the possibility of renewal, anticipated actions by third parties and otherfactors. Because these estimates and assumptions are necessarily subjective,the amounts we will actually pay in future periods may vary from thosereflected in the table.
|                                 | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                  | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                      | ** ** | **(millions)**                            | ** ** |
| Debt(a)(c)                      |       | $                                         | 25.6       |   |   | $ | 86.0 |   |   |   | $ | 16.3 |   |   |   | $ | 282.7 |   |   | $ | 410.6 |   |
| Timber notes  securitized       |       | —                                    |       |   | — |   |   |   | — |   |   |   | 1,470.0 |   |   | 1,470.0 |   |
| Operating  leases(b)(e)         |       | 341.7                                     |       |   | 589.9 |   |   |   | 461.6 |   |   |   | 636.3 |   |   | 2,029.5 |   |
| Purchase obligations            |       | 37.3                                      |       |   | 35.9 |   |   |   | 1.5 |   |   |   | 0.8 |   |   | 75.5 |   |
| Other long-term  liabilities(d) |       | —                                    |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
|                            |       | $                                         | 404.6      |   |   | $ | 711.8 |   |   |   | $ | 479.4 |   |   |   | $ | 2,389.8 |   |   | $ | 3,985.6 |   |

 

(a)             Includedin debt are amounts owed on our note agreements, revenue bonds and creditagreements. These borrowings are further described in Note 13, Debt, ofthe Notes to Consolidated Financial Statements in “Item 8. Financial Statementsand Supplementary Data” in this Form 10-K. The table assumes our debtis held to maturity.

(b)            Weenter into operating leases in the normal course of business. We lease ourretail store space as well as certain other property and equipment underoperating leases. Some of our retail store leases require percentage rentals onsales above specified minimums and contain escalation clauses. These minimumlease payments do not include contingent rental expense. Some lease agreementsprovide us with the option to renew the lease or purchase the leased property.Our future operating lease obligations would change if we exercised theserenewal options and if we entered into additional operating lease agreements.For more information, see Note 8, Leases, of the Notes to ConsolidatedFinancial Statements in “Item 8. Financial Statements and Supplementary Data”in this Form 10-K.

(c)             Thecurrent portion of these liabilities is also included.

(d)            OurConsolidated Balance Sheet as of December 30, 2006 includes $287.1 millionof liabilities associated with our retirement and benefit plans and$311.8 million of other long-term liabilities. These amounts havebeen excluded from the above table as the timing and/or the amount of any cashpayment is uncertain.

(e)             Leaseobligations for closed facilities are included in operating leases and aliability equal to the fair value of these obligations is included in theCompany’s Consolidated Balance Sheets. For more information, see Note 4,Integration Activities and Facility Closures, of the Notes to ConsolidatedFinancial Statements in “Item 8. Financial Statements & Supplementary Data”in this Form 10-K.

In accordance with an amended and restated joint-ventureagreement, the minority owner of our subsidiary in Mexico, OfficeMax de Mexico,can elect to put its remaining 49% interest in the subsidiary to OfficeMax if earningstargets are achieved. At December 30, 2006, OfficeMax de Mexico had metthese earnings targets, which are calculated quarterly on a rollingfour-quarter basis. Accordingly, the targets can be achieved in one quarter butnot in the next. If the earnings targets are achieved and the minority ownerelects to put its ownership interest, the purchase price would be equal to fairvalue, calculated based on both the subsidiary’s earnings for the last four quartersbefore interest, taxes and depreciation and amortization, and the currentmarket multiples of similar companies. The fair value purchase price is currentlyestimated at $65 to $70 million. This contingent obligation is notincluded in the table above.

In addition to the contractualobligations quantified in the table above, we have other obligations for goodsand services entered into in the normal course of business. These contracts,however, are either not enforceable or legally binding or are subject to changebased on our business decisions.

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***Off-Balance-Sheet Activities and Guarantees***

On June 19, 2006, weentered into a Fourth Amended and Restated Receivables Sale Agreement with agroup of lenders, which replaced the Third Amended and Restated ReceivablesSale Agreement that expired on that day. Theagreement allows us to sell, on a revolving basis, an undivided interest in adefined pool of receivables while retaining a subordinated interest in aportion of the receivables. The receivables are sold without legalrecourse to third party conduits through a wholly owned bankruptcy-remotespecial purpose entity that is consolidated for financial reporting purposes.The Company continues servicing the sold receivables and charges the third partyconduits a monthly servicing fee at market rates. The program qualifies forsale treatment under FASB Statement No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities.” The amount of available proceeds under the programis limited to $200 million, and is subject to change based on the level ofeligible receivables, restrictions on concentrations of receivables and thehistorical performance of the transferred receivables. At December 30,2006 and December 31, 2005, $180.0 million and $163.0 million,respectively, of sold accounts receivable were excluded from receivables in theaccompanying Consolidated Balance Sheets. The Company’s subordinated retainedinterest in the transferred receivables was $111.2 million and $73.3 millionat December 30, 2006 and December 31, 2005, respectively, and isincluded in receivables, net in the Consolidated Balance Sheets. The receivables sale agreement will expire on June 18, 2007.When the current program expires, none of the parties are obligated to renewthe arrangement. Our experience over the last five years, however, has beenthat the parties do renew the arrangement with minimal alterations. If theprogram were not renewed, we would seek replacement funding from alternativefunding sources. Use of those sources, however, might result in an increase inour interest expense and an increase in both liabilities and assets on ourConsolidated Balance Sheet.

*Guarantees*

Note 18, Commitments andGuarantees, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” in this Form 10-Kdescribes the nature of our guarantees, including the approximate terms of theguarantees, how the guarantees arose, the events or circumstances that wouldrequire us to perform under the guarantees and the maximum potentialundiscounted amounts of future payments we could be required to make.

***Inflationary and Seasonal Influences***

We believe that neitherinflation nor deflation has had a material effect on our financial condition orresults of operations; however, there can be no assurance that we will not beaffected by inflation or deflation in the future. 

Our business is seasonal, withOfficeMax, Retail showing a more pronounced seasonal trend than OfficeMax,Contract. Sales in the second quarter and summer months are historically theslowest of the year. Sales are stronger during the first, third and fourthquarters that include the important new-year office supply restocking month ofJanuary, the back-to-school period and the holiday selling season,respectively.

***Disclosures of Financial Market Risks***

Our debt is predominantly fixed-rate. At December 30,2006, the estimated current market value of our debt, based on quoted marketprices when available or then-current interest rates for similar obligationswith like maturities, including the timber notes, was approximately$28 million less than the amount of debt reported in the ConsolidatedBalance Sheet. The estimated fair values of our other financial instruments,including cash and cash equivalents, receivables and short-term borrowings are 

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the same as their carryingvalues. In the opinion of management, we do not have any significantconcentration of credit risks. Concentration of credit risks with respect totrade receivables is limited due to the wide variety of vendors, customers andchannels to and through which our products are sourced and sold, as well astheir dispersion across many geographic areas.

Changes in interest and currency rates expose us tofinancial market risk. In the past we have used derivative financialinstruments, such as interest rate swaps, rate hedge agreements, forwardpurchase contracts and forward exchange contracts, to hedge underlying debtobligations or anticipated transactions. We do not use them for tradingpurposes.

At December 30, 2006, wewere not a party to any significant derivative financial instruments.

*AdditionalConsideration Agreement*

Pursuant to an Additional Consideration Agreementbetween OfficeMax and Boise Cascade, L.L.C., we may be required to makesubstantial cash payments to, or receive substantial cash payments from, BoiseCascade, L.L.C. Under the Additional Consideration Agreement, the Saleproceeds may be adjusted upward or downward based on paper prices during thesix years following the Sale, subject to annual and aggregate caps.Specifically, we have agreed to pay Boise Cascade, L.L.C. $710,000 foreach dollar by which the average market price per ton of a specified benchmarkgrade of cut-size office paper during any 12-month period ending on September30 is less than $800. Boise Cascade, L.L.C. has agreed to pay us $710,000 foreach dollar by which the average market price per ton exceeds $920. Under theterms of the agreement, neither party will be obligated to make a payment inexcess of $45 million in any one year. Payments by either party are alsosubject to an aggregate cap of $125 million that declines to$115 million in the fifth year and $105 million in the sixth year. 

In connection with recording the Sale in 2004, wecalculated our projected future obligation under the Additional ConsiderationAgreement and accrued $42 million in Other Long-term Liabilities on ourConsolidated Balance Sheet. We calculated the $42 million based onpublished industry paper price projections. During 2006 and 2005, we recognizedaccretion expense on the discounted accrual totaling approximately$6 million in our Consolidated Statements of Income (Loss). Due to recentincreases in actual and projected paper prices, the change in fair value ofthis obligation resulted in income of $48.0 million in our ConsolidatedStatement of Income (Loss) in 2006. As a result, at December 30, 2006, the netamount recognized in our Consolidated Balance Sheet related to the AdditionalConsideration Agreement (either receivable or payable) was zero. We recordchanges in the fair value of the Additional Consideration Agreement in our netincome (loss) in the period they occur; however, any potential payments fromBoise Cascade, L.L.C. to us are not recorded in net income (loss) until allcontingencies have been satisfied, which is generally at the end of a 12-monthmeasurement period ending on September 30. As of December 31, 2006, the averagemarket price per ton of the benchmark grade used to calculate payments dueunder the Additional Consideration Agreement was $943. This average is theaverage for the first three months of the 12-month measurement period ending onSeptember 30, 2007. Market prices for paper are volatile and subject tosignificant fluctuations. Accordingly, the average market price per ton for the12-month period ending on September 30, 2007 may be significantly different thanthe average as of December 31, 2006.

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The table below providesinformation about our financial instruments outstanding at December 30,2006 that are sensitive to changes in interest rates or paper prices. For debtobligations, the table presents principal cash flows and related weightedaverage interest rates by expected maturity dates. For obligations withvariable interest rates, the table sets forth payout amounts based on currentrates and does not attempt to project future rates. Estimated future cashpayments under the terms of the Additional Consideration Agreement, included inthe table below, are based on expected payments using published industry paperprice projections. Other instruments subject to market risk, such asobligations for pension plans and other postretirement benefits, are notreflected in the table.

***Financial Instruments***

| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | **Year Ended** | ** ** |
|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------|------------|---------------------|------------|
| ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | **2006**            | ** ** | **2005** | ** ** |
| ** ** | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **There-  after** | ** ** | **Total**           | ** ** | **Fair  Value** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| **Debt**   |       |       |       |       |       |       |       |       |       |       |       |              |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|            |            |            |            |            |            |            |            |            |            |            |            |                   |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Short-term borrowings               |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   | $       | — |   | $       | — |   | $       | — |   | $       | 18.7   |   | $       | 18.7   |   |
|-------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|
| Average interest rates              |   |   | — | %      |   |   | — | %      |   |   | — | %      |   |   | — | %      |   |   | — | %      |   | — | %      | — | %      | — | %       | 6.6    | %      | —  | %      |
| Long-term debt                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |    |   |   |    |   |
| Fixed-rate debt payments            |   |   | $      | 25.6   |   |   |   | $      | 35.1   |   |   |   | $      | 50.9   |   |   |   | $      | 15.8   |   |   |   | $      | 0.5    |   |   | $       | 282.7  |   | $       | 410.6  |   | $       | 412.0  |   | $       | 476.6  |   | $       | 471.3  |   |
| Average interest rates              |   |   | 7.8    | %      |   |   | 7.5    | %      |   |   | 8.9    | %      |   |   | 5.6    | %      |   |   | 5.8    | %      |   | 6.1    | %      | 7.0    | %      | — | %       | 6.9    | %      | —  | %      |
| Timber notes securitized            |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   |   |   |   | $      | 1,470.0 |   | $      | 1,470.0 |   | $      | 1,440.7 |   | $      | 1,470.0 |   | $      | 1,440.7 |   |
| Average interest rates              |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   | 5.5    | %      | 5.5    | %      | — | %       | 5.5    | %      | —  | %      |
| Additional  Consideration Agreement |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   | $      | — |   |   |   |   |   |   | $      | —  |   | $      | —  |   | $      | —  |   | $      | 54.7    |   | $      | 44.9    |   |

 

***Environmental***

As an owner and operator of real estate, we may beliable under environmental laws for the cleanup of past and present spills andreleases of hazardous or toxic substances on or from our properties andoperations. We can be found liable under these laws if we knew of, or were responsiblefor, the presence of such substances. In some cases, this liability may exceedthe value of the property itself.

Environmental liabilities thatrelate to the operation of the paper and forest products assets prior to theclosing of the Sale continue to be our liabilities. We have been notified thatwe are a “potentially responsible party” under the Comprehensive EnvironmentalResponse, Compensation and Liability Act (CERCLA) or similar federal and statelaws, or have received a claim from a private party, with respect to 12 activesites where hazardous substances or other contaminants are or may be located.All 12 active sites relate to operations either no longer owned by the Companyor unrelated to its ongoing operations. In most cases, we are one of manypotentially responsible parties, and our alleged contribution to these sites isrelatively minor. For sites where a range of potential liability can bedetermined, we have established appropriate reserves. We cannot predict withcertainty the total response and remedial costs, our share of the total costs,the extent to which contributions will be available from other parties, or theamount of time necessary to complete the cleanups. Based on our investigations;our experience with respect to cleanup of hazardous substances; the fact thatexpenditures will, in many cases, be incurred over extended periods of time;and the number of solvent potentially responsible parties, we do not believethat the known actual and potential response costs will, in the aggregate,materially affect our financial position or results of operations.

***Critical Accounting Estimates***

The Securities and ExchangeCommission defines critical accounting estimates as those that are mostimportant to the portrayal of our financial condition and results. Theseestimates require 

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management’smost difficult, subjective or complex judgments, often as a result of the needto estimate matters that are inherently uncertain. We reviewed the development,selection and disclosure of the following critical accounting estimates withthe Audit Committee of our board of directors. The accounting estimates that wecurrently consider critical are as follows:

*Vendor Rebates andAllowances*

We participate in variouscooperative advertising and other marketing programs with our vendors. We alsoparticipate in volume purchase rebate programs, some of which provide fortiered rebates based on defined levels of purchase volume. These arrangementsenable us to receive reimbursement for costs incurred to promote the sale ofvendor products, or to earn rebates that reduce the cost of merchandisepurchased. Vendor rebates and allowances are accrued as earned. Rebates andallowances received as a result of attaining defined purchase levels areaccrued over the incentive period based on the terms of the vendor arrangementand estimates of qualifying purchases during the rebate program period. Theseestimates are reviewed on a quarterly basis and adjusted for changes inanticipated product sales and expected purchase levels. Volume-basedrebates and allowances earned are initially recorded as a reduction in the costof merchandise inventories and are included in operations (as a reduction ofcost of goods sold) in the period the related product is sold. Amounts receivedunder other promotional programs are generally event-based and arerecognized at the time of the event as a reduction of cost of goods sold orinventory, as appropriate, based on the nature of the promotion and the termsof the vendor agreement. Advertising and other allowances that represent reimbursementsof specific, incremental and identifiable costs incurred to promote vendors’products are recorded as a reduction of operating and selling expenses in theperiod the expense is incurred. Amounts owed to us under these arrangements aresubject to credit risk. In addition, the terms of the contracts covering theseprograms can be complex and subject to interpretation, which can potentiallyresult in disputes. We provide an allowance for uncollectible accounts and tocover disputes in the event that our interpretation of the contract termsdiffer from our vendors’ and our vendors seek to recover some of theconsideration from us. These allowances are based on the current financialcondition of our vendors, specific information regarding disputes andhistorical experience. If we used different assumptions to estimate the amountof vendor receivables that will not be collected due to either credit defaultor a dispute regarding the amounts owed, our calculated allowance would be differentand the difference could be material. In addition, if actual losses aredifferent than those estimated, adjustments to the recorded allowance may berequired.

*Merchandise Inventories*

Inventories consist of office products merchandise andare stated at the lower of weighted average cost or net realizable value. Weestimate the realizable value of inventory using assumptions about futuredemand, market conditions and product obsolescence. If the estimated realizablevalue is less than cost, the inventory value is reduced to its estimatedrealizable value. If expectations regarding future demand and market conditionsare inaccurate or unexpected changes in technology or other factors affectdemand, we could be exposed to additional losses.

Throughout the year, weperform physical inventory counts at all of our locations. For periodssubsequent to each retail location’s last physical inventory count, anallowance for estimated shrinkage is provided based on historical shrinkresults and current business trends. If actual losses as a result of inventoryshrinkage are different than management’s estimates, adjustments to theallowance for inventory shrinkage may be required.

*Pensions*

Through October 28, 2004, some of our employeeswere covered by noncontributory defined benefit pension plans. Effective July 31,2004, we established separate mirror plans for active 

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associates in the paper andforest products businesses, and transferred the associated assets andobligations to the new plans. Effective October 29, 2004, under the termsof the Asset Purchase Agreement with affiliates of Boise Cascade, L.L.C.,we transferred sponsorship of the plans covering active employees of the paperand forest products businesses to Boise Cascade, L.L.C., and only thoseterminated vested employees and retirees whose employment with us ended on orbefore July 31, 2004, and some active OfficeMax, Contract employees werecovered under the plans remaining with us. OfficeMax, Retail employees, amongothers, never participated in the pension plans. The salaried pension plan wasclosed to new entrants on November 1, 2003, and on December 31, 2003,the benefits of OfficeMax, Contract participants were frozen with oneadditional year of service provided to active OfficeMax, Contract employees on January 1,2004, at a reduced 1% crediting rate. As a result of the closure, freeze andspin-off, our annual pension expense and contributions to the plans goingforward will be less than the amounts included in prior periods.

We account for pension expense in accordance with SFASNo. 87, “Employer’s Accounting for Pensions.” This statement requires usto calculate our pension expense and liabilities using actuarial assumptions,including a discount rate assumption and a long-term asset return assumption.We base our discount rate assumption on the rates of return on high-qualitybonds currently available and expected to be available during the period tomaturity of the pension benefits. We base our long-term asset return assumptionon the average rate of earnings expected on invested funds. We believe that theaccounting estimate related to pensions is a critical accounting estimatebecause it is highly susceptible to change from period to period, based on theperformance of plan assets, actuarial valuations and changes in interest rates,and the effect on our financial position and results of operations could bematerial.

For 2007, our discount rate assumption used in themeasurement of our net periodic benefit cost was 5.8%, and our expected returnon plan assets was 8.0%. Using these assumptions, our 2007 pension expense willbe approximately $10.0 million. If we were to decrease our estimateddiscount rate assumption used in the measurement of our net periodic benefitcost to 5.55% and our expected return on plan assets to 7.75%, our 2007 pensionexpense would be approximately $14.6 million. If we were to increase ourdiscount rate assumption used in the measurement of our net periodic benefitcost to 6.05% and our expected return on plan assets to 8.25%, our 2007 pensionexpense would be approximately $5.4 million.

The Company adopted SFAS No. 158,“Employer’s Accounting for Defined Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R),” effectiveDecember 30, 2006. This statement requires the recognition of the funded statusof a defined benefit plan in the statement of financial position, and thatchanges in the funded status be recognized through other comprehensive income(OCI), net of tax, in the year in which the changes occur.Actuarially-determined liabilities related to pension and postretirementbenefits are also recorded based on estimates and assumptions. Key factors usedin developing estimates of these liabilities include assumptions related todiscount rates, rates of return on investments, future compensation costs,healthcare cost trends, benefit payment patterns and other factors. At December 30,2006, the funded status of our defined benefit pension and other postretirementbenefit plans was a liability of $230.1 million. Changes in assumptionsrelated to the measurement of funded status could have a material impact on theamount reported.

*Facility ClosureReserves*

The Company conducts regularreviews of its real estate portfolio to identify underperforming facilities,and closes those facilities that are no longer strategically or economicallyviable. A liability for the cost associated with such a closure is recorded atits fair value in the period in which it is incurred. These costs are includedin facility closure reserves in our Consolidated Balance Sheets and includeprovisions for the present value of future lease obligations, less estimatedsublease income. At 

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December 30,2006, the facility closure reserve included approximately $108 million ofestimated future lease obligations, which is net of anticipated sublease incomeof approximately $109 million. For each closed location, we estimate futuresublease income based on current real estate trends by market andlocation-specific factors, including the age and quality of the location, aswell as our historical experience with similar locations. If we had useddifferent assumptions to estimate future sublease income our reserves would bedifferent and the difference could be material. In addition, if actual subleaseincome is different than our estimates, adjustments to the recorded reservesmay be required.

*AdditionalConsideration Agreement*

The Additional ConsiderationAgreement between OfficeMax and Boise Cascade, L.L.C. was entered into inconnection with the Sale. Under the Additional Consideration Agreement, we maybe required to make substantial cash payments to, or receive substantial cashpayments from, Boise Cascade, L.L.C. depending on average annual paper prices duringthe six years following the Sale, subject to annual and aggregate caps.Specifically, we have agreed to pay Boise Cascade, L.L.C. $710,000 foreach dollar by which the average market price per ton of a specified benchmarkgrade of cut-size office paper during any 12-month period ending on September30 is less than $800. Boise Cascade, L.L.C. has agreed to pay us $710,000 foreach dollar by which the average market price per ton exceeds $920. Under theterms of the agreement, neither party will be obligated to make a payment inexcess of $45 million in any one year. Payments by either party are alsosubject to an aggregate cap of $125 million that declines to $115 million in thefifth year and $105 million in the sixth year. We calculate the fair value ofthe obligation based on published industry paper price projections. We recordchanges in the fair value of the Additional Consideration Agreement in our netincome (loss) in the period they occur; however, any potential payments fromBoise Cascade, L.L.C. to us are not recorded in net income (loss) untilall contingencies have been satisfied, which is generally at the end of a12-month measurement period ending on September 30. At December 30,2006, the net amount recognized in our Consolidated Balance Sheets related tothe Additional Consideration Agreement (either receivable or payable) was zero.The net amount recognized at December 30, 2006, is based on current published industrypaper price projections. If actual future paper prices are different than thoseprojections adjustments to the amount recognized may be required and thoseadjustments may be material.

*EnvironmentalRemediation*

We are subject to a variety of environmental laws andregulations. We account for environmental remediation liabilities in accordancewith the Statement of Position (SOP) 96-1, “Environmental RemediationLiabilities.” We record liabilities on an undiscounted basis when assessmentsand/or remedial efforts are probable and the cost can be reasonably estimated.We estimate our environmental liabilities based on various assumptions andjudgments, as we cannot predict with certainty the total response and remedialcosts, our share of total costs, the extent to which contributions will beavailable from other parties or the amount of time necessary to complete anyremediation. In making these judgments and assumptions, we consider, amongother things, the activity to date at particular sites, information obtainedthrough consultation with applicable regulatory authorities and third-partyconsultants and contractors and our historical experience at other sites thatare judged to be comparable. Due to the number of uncertainties and variablesassociated with these assumptions and judgments and the effects of changes ingovernmental regulation and environmental technologies, the precision of theresulting estimates of the related liabilities is subject to uncertainty. Weregularly monitor our estimated exposure to our environmental liabilities. Asadditional information becomes known, our estimates may change.

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Environmental liabilities thatrelate to the operation of the paper and forest products assets prior to theclosing of the Sale continue to be liabilities of OfficeMax, in addition to theliabilities related to the 12 active sites referenced in Note 19, LegalProceedings and Contingencies, of the Notes to Consolidated FinancialStatements in “Item 8. Financial Statements and Supplementary Data” inthis Form 10-K.

*Goodwill Impairment*

SFAS No. 142, “Goodwill and Other IntangibleAssets,” requires us to assess goodwill for impairment at least annually in theabsence of an indicator of possible impairment and immediately upon an indicatorof possible impairment. In assessing impairment, the statement requires us tomake estimates of the fair values of our reporting units. If we determine thefair values are less than the carrying amount of goodwill recorded on ourConsolidated Balance Sheets, we must recognize an impairment in our financialstatements. At December 30, 2006, we had $1.2 billion of goodwillrecorded on our Consolidated Balance Sheet. Of the $1.2 billion,$528.1 million and $687.9 million were recorded in our OfficeMax, Contractand OfficeMax, Retail segments, respectively. At December 31, 2005, we had$1.2 billion of goodwill recorded on our Consolidated Balance Sheet. Ofthe $1.2 billion, $523.5 million and $694.7 million wererecorded in our OfficeMax, Contract and OfficeMax, Retail segments,respectively.

We completed our annual assessment in accordance withthe provisions of SFAS No. 142 in the first quarters of 2006 and 2005, andconcluded there was no impairment. We completed an additional assessment of thecarrying value of the goodwill in the OfficeMax, Retail segment in the fourthquarter of 2005, in connection with the development of management’s plan toclose retail stores in 2006, and concluded there was no impairment.

In testing for potential impairment,we measured the estimated fair value of our reporting units based upondiscounted future operating cash flows using a discount rate reflecting ourestimated average cost of funds. In estimating future cash flows, we used ourinternal budgets and operating plans, which include assumptions about retailstore openings and closures, the consolidation of our distribution networks andimprovements in our supply chain. Differences in assumptions used in projectingfuture operating cash flows and in selecting an appropriate discount rate couldhave a significant impact on the determination of fair value and impairmentamounts. Due to the numerous variables associated with our judgments andassumptions relating to the valuation of the reporting units and the effects ofchanges in circumstances on these valuations, both the precision andreliability of the resulting estimates are subject to uncertainty. Asadditional information becomes known, we may change our estimates.

*Recently Issued orNewly Adopted Accounting Standards*

Following are summaries of recently issued accountingpronouncements that have either been recently adopted or that may becomeapplicable to the preparation of our consolidated financial statements in thefuture.

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123R, “Share Based Payment.” SFAS No.123R is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation,” and supersedes Accounting Principles Board Opinion (APB) No. 25,“Accounting for Stock Issued to Employees,” and its related implementationguidance. SFAS No. 123R focuses primarily on accounting for transactionsin which an entity obtains employee services in exchange for share-basedpayments. SFAS No. 123R requires entities to recognize compensationexpense from all share-based payment transactions in the financial statements.SFAS No. 123R establishes fair value as the measurement objective inaccounting for share-based payment transactions and requires all 

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companies to apply afair-value-based measurement method in accounting for share-based paymenttransactions with employees.

Effective January 1, 2006, we adopted SFAS No. 123Rusing the modified prospective transition method. Accordingly, the financialstatements for periods prior to January 1, 2006 have not been restated toreflect the adoption of SFAS No. 123R. Under the modified prospectivetransition method, we must record compensation expense for all awards grantedafter the adoption date and for the unvested portion of previously grantedawards that remain outstanding at the adoption date, under the fair valuemethod. Previously, the Company recognized compensation expense for share-basedawards to employees using the fair-value-based guidance in SFAS No. 123.Due to the fact that the Company had previously accounted for share-basedawards using SFAS No. 123, the adoption of SFAS No. 123R did not havea material impact on the Company’s financial position, results of operations orcash flows.

During 2006, the Company adopted SFAS No. 158,“Employer’s Accounting for Defined Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R).” This Standardrequires that employers recognize, on a prospective basis, the funded status oftheir defined benefit and postretirement benefit plans in the statement offinancial position, and that changes in the funded status be recognized as acomponent of other comprehensive income, net of tax. SFAS No. 158 alsorequires the funded status of a plan to be measured as of the date of theyear-end statement of financial position, and requires additional notedisclosures. The recognition and disclosure guidance in SFAS No. 158 iseffective as of the end of the first fiscal year ending after December 15,2006, and other measurement elements are effective for fiscal years endingafter December 15, 2008. The Company adopted the recognition provisions ofSFAS No. 158 and initially applied them to the funded status of itsdefined benefit pension and other postretirement benefit plans as of December 31,2006. The initial recognition of the funded status of our defined benefitpension and other postretirement plans resulted in an increase in Shareholders’Equity of $11.9 million, which was net of income taxes of $7.6 million.We currently measure the funded status of our defined benefit plans as of thedate of our fiscal year-end statement of financial position, and therefore, theadoption of the measurement provisions of SFAS No. 158 will have no impacton our financial statements.

In June 2006, the FASB issued Interpretation (FIN) No. 48,“Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109.” This Interpretation clarifies the accounting for uncertainty inincome taxes recognized in accordance with SFAS No. 109, “Accounting forIncome Taxes.” The Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. It alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The Interpretation iseffective for fiscal years beginning after December 15, 2006. The Companyis in the process of evaluating the impact of applying the provisions of theInterpretation to all tax positions and currently anticipates the impact ofapplying the interpretation will not be material.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” This Standard defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. The adoptionof FAS 157 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows.

In September 2006, the Staff of the Securities andExchange Commission issued Staff Accounting Bulletin (SAB) No. 108, “Consideringthe Effects of a Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements.” SAB No. 108 addresses how the effectsof prior year uncorrected errors must be considered in quantifyingmisstatements in current year financial 

43

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statements. For purposes ofdetermining whether the financial statements are materially misstated, theeffects of prior year uncorrected errors include the potential accumulation ofimproper amounts that may result in a misstatement on the balance sheet or thereversal of prior period errors in the current period that result in amisstatement of the current period income statement amounts. Adjustments tocurrent or prior period financial statements would be required in the eventthat a misstatement in current period financial statements is determined to bematerial after consideration of all relevant quantitative and qualitativefactors. SAB No. 108 is applicable to all financial statements issued bythe Company after November 15, 2006. Its adoption in 2006 did not have animpact on our consolidated financial statements.

In 2006, the Emerging IssuesTask Force (EITF) reached a consensus on Issue No. 06-03, “How SalesTax Collected from Customers and Remitted to Governmental Authorities Should bePresented in the Income Statement (That is, Gross versus Net Presentation)”.This EITF Issue clarifies that the presentation of taxes collected fromcustomers and remitted to governmental authorities on a gross (included inrevenues and costs) or net (excluded from revenues) basis is an accountingpolicy decision that should be disclosed pursuant to Accounting PrinciplesBoard (APB) Opinion No. 22, “Disclosure of Accounting Policies.” The EITFIssue is effective for the Company beginning in fiscal year 2007. We collectsuch taxes from our customers and account for them on a net (excluded fromrevenues) basis. The adoption of EITF Issue No. 06-03 will notimpact our consolidated financial statements, but will result in additionaldisclosures.

***ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK***

Information concerning quantitative and qualitativedisclosures about market risk is included under the caption “Disclosures ofFinancial Market Risks” in “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” in this Form 10-K.

44

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***ITEM 8.   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA***

**OfficeMax Incorporated andSubsidiaries**Consolidated Statements of Income (Loss)

| ** **                                                                              | ** ** | **Fiscal Year Ended**            | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                              | ** ** | **December 30,  2006**                | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| ** **                                                                              | ** ** | **(thousands, except per-share  amounts)** | ** ** |
| Sales                                                                                   |       |                                       | $          | 8,965,707 |   |   |   | $ | 9,157,660 |   |   |   | $ | 13,270,196 |   |   |
| Cost of goods sold and  occupancy costs                                                 |       |                                       | 6,656,497  |   |   |   | 6,960,390 |   |   |   | 10,588,824 |   |   |
| **Gross profit**                                                                        |       |                                       | 2,309,210  |   |   |   | 2,197,270 |   |   |   | 2,681,372 |   |   |
| Operating expenses                                                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating and selling                                                                   |       |                                       | 1,641,147  |   |   |   | 1,765,268 |   |   |   | 2,014,546 |   |   |
| General and administrative                                                              |       |                                       | 361,818    |   |   |   | 368,265 |   |   |   | 365,466 |   |   |
| Other operating, net                                                                    |       |                                       | 140,343    |   |   |   | 54,045 |   |   |   | (370,609 | ) |   |
| **Operating income**                                                                    |       |                                       | 165,902    |   |   |   | 9,692 |   |   |   | 671,969 |   |   |
| Debt retirement  expense                                                                |       |                                       | —     |   |   |   | (14,391 | ) |   |   | (137,137 | ) |   |
| Interest expense                                                                        |       |                                       | (123,082   | ) |   |   | (128,504 | ) |   |   | (151,939 | ) |   |
| Interest income                                                                         |       |                                       | 89,723     |   |   |   | 97,272 |   |   |   | 14,093 |   |   |
| Timber notes  securitization                                                            |       |                                       | —     |   |   |   | — |   |   |   | (19,000 | ) |   |
| Other income  (expense), net                                                            |       |                                       | 39,335     |   |   |   | (1,685 | ) |   |   | 1,456 |   |   |
| **Income (loss) from continuing operations before income taxes and minority  interest** |       |                                       | 171,878    |   |   |   | (37,616 | ) |   |   | 379,442 |   |   |
| Income tax expense                                                                      |       |                                       | (68,741    | ) |   |   | (1,226 | ) |   |   | (142,291 | ) |   |
| **Income (loss) from continuing operations before minority interest**                   |       |                                       | 103,137    |   |   |   | (38,842 | ) |   |   | 237,151 |   |   |
| Minority interest, net  of income tax                                                   |       |                                       | (4,083     | ) |   |   | (2,370 | ) |   |   | (3,026 | ) |   |
| **Income (loss) from continuing operations**                                            |       |                                       | 99,054     |   |   |   | (41,212 | ) |   |   | 234,125 |   |   |
| Discontinued  operations                                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                                          |       |                                       | (17,972    | ) |   |   | (24,416 | ) |   |   | (32,095 | ) |   |
| Write-down of assets                                                                    |       |                                       | —     |   |   |   | (28,243 | ) |   |   | (67,841 | ) |   |
| Income tax benefit                                                                      |       |                                       | 10,639     |   |   |   | 20,109 |   |   |   | 38,869 |   |   |
| **Loss from discontinued operations**                                                   |       |                                       | (7,333     | ) |   |   | (32,550 | ) |   |   | (61,067 | ) |   |
| **Net  income (loss)**                                                                  | ** ** | ** **                                 | **91,721** |   | ** ** | ** ** | **(73,762** | **)** | ** ** | ** ** | **173,058** |   |   |
| Preferred dividends                                                                     |       |                                       | (4,037     | ) |   |   | (4,378 | ) |   |   | (11,917 | ) |   |
| **Net  income (loss) applicable to common shareholders**                                | ** ** | ** **                                 | **$**      | **87,684** |   | ** ** | ** ** | **$** | **(78,140** | **)** | ** ** | ** ** | **$** | **161,141** |   |   |
| Basic income (loss)  per common share                                                   |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                   |       |                                       | $          | 1.30 |   |   |   | $ | (0.58 | ) |   |   | $ | 2.55 |   |   |
| Discontinued operations                                                                 |       |                                       | (0.10      | ) |   |   | (0.41 | ) |   |   | (0.70 | ) |   |
| **Basic  income (loss) per common share**                                               | ** ** | ** **                                 | **$**      | **1.20** |   | ** ** | ** ** | **$** | **(0.99** | **)** | ** ** | ** ** | **$** | **1.85** |   |   |
| Diluted income (loss) per common share                                                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                   |       |                                       | $          | 1.29 |   |   |   | $ | (0.58 | ) |   |   | $ | 2.44 |   |   |
| Discontinued operations                                                                 |       |                                       | (0.10      | ) |   |   | (0.41 | ) |   |   | (0.67 | ) |   |
| **Diluted income (loss) per  common share**                                             | ** ** | ** **                                 | **$**      | **1.19** |   | ** ** | ** ** | **$** | **(0.99** | **)** | ** ** | ** ** | **$** | **1.77** |   |   |

 

See accompanying notes to consolidated financial statements.

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**OfficeMax Incorporated andSubsidiaries**Consolidated Balance Sheets

| ** **                       | ** ** | **December 30,  2006**                          | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(thousands except share and   per-share amounts)** | ** ** |
| **ASSETS**                       |       |                                                 |       |                        |       |   |   |   |   |
| Current assets:                  | ** ** | ** **                                           | ** ** |                        | ** ** | ** ** | ** ** |   |   |
| Cash and cash  equivalents       |       |                                                 | $          | 282,070                     |       |   |   | $ | 72,198 |   |   |
| Receivables, net                 |       |                                                 | 556,733    |                        |       |   | 596,724 |   |   |
| Related party  receivables       |       |                                                 | 5,795      |                        |       |   | 3,520 |   |   |
| Inventories                      |       |                                                 | 1,071,486  |                        |       |   | 1,114,570 |   |   |
| Deferred income taxes            |       |                                                 | 129,496    |                        |       |   | 105,820 |   |   |
| Other                            |       |                                                 | 51,264     |                        |       |   | 49,217 |   |   |
| **Total current assets**         |       |                                                 | 2,096,844  |                        |       |   | 1,942,049 |   |   |
| Property and  equipment:         |       |                                                 |       |                        |       |   |   |   |   |
| Land and land improvements       |       |                                                 | 36,195     |                        |       |   | 38,537 |   |   |
| Buildings and improvements       |       |                                                 | 359,481    |                        |       |   | 359,481 |   |   |
| Machinery and equipment          |       |                                                 | 794,010    |                        |       |   | 685,545 |   |   |
| **Total property and equipment** |       |                                                 | 1,189,686  |                        |       |   | 1,083,563 |   |   |
| Accumulated  depreciation        |       |                                                 | (610,061   | )                           |       |   | (548,118 | ) |   |
| **Net property and equipment**   |       |                                                 | 579,625    |                        |       |   | 535,445 |   |   |
| Goodwill                         |       |                                                 | 1,216,032  |                        |       |   | 1,218,200 |   |   |
| Intangible assets,  net          |       |                                                 | 201,304    |                        |       |   | 205,232 |   |   |
| Investments in  affiliates       |       |                                                 | 175,000    |                        |       |   | 175,000 |   |   |
| Timber notes  receivable         |       |                                                 | 1,635,000  |                        |       |   | 1,635,000 |   |   |
| Restricted  investments          |       |                                                 | 22,292     |                        |       |   | 22,377 |   |   |
| Deferred charges                 |       |                                                 | 40,439     |                        |       |   | 52,810 |   |   |
| Other non-current  assets        |       |                                                 | 249,512    |                        |       |   | 486,029 |   |   |
| **Total  assets**                | ** ** | ** **                                           | **$**      | **6,216,048**               |       | ** ** | ** ** | **$** | **6,272,142** |   |   |

 

See accompanying notes to consolidated financial statements.

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**OfficeMaxIncorporated and Subsidiaries**

**Consolidated Balance Sheets**

| ** **                                                                                                       | ** ** | **December 30,  2006**                          | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                       | ** ** | **(thousands except share and   per-share amounts)** | ** ** |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                   |       |                                                 |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                             |       |                                                 |       |                        |       |   |   |   |   |
| Short-term  borrowings                                                                                           |       |                                                 | $          | —                      |       |   |   | $ | 18,666 |   |   |
| Current portion of  long-term debt                                                                               |       |                                                 | 25,634     |                        |       |   | 68,648 |   |   |
| Accounts payable:                                                                                                |       |                                                 |       |                        |       |   |   |   |   |
| Trade                                                                                                            |       |                                                 | 965,218    |                        |       |   | 949,287 |   |   |
| Related parties                                                                                                  |       |                                                 | 32,482     |                        |       |   | 42,166 |   |   |
| Accrued expenses and other current liabilities:                                                                  |       |                                                 |       |                        |       |   |   |   |   |
| Compensation and benefits                                                                                        |       |                                                 | 172,632    |                        |       |   | 147,184 |   |   |
| Other                                                                                                            |       |                                                 | 317,434    |                        |       |   | 352,537 |   |   |
| Liabilities related  to assets held for sale                                                                     |       |                                                 | 15,503     |                        |       |   | 9,838 |   |   |
| **Total current liabilities**                                                                                    |       |                                                 | 1,528,903  |                        |       |   | 1,588,326 |   |   |
| Long-term debt:                                                                                                  |       |                                                 |       |                        |       |   |   |   |   |
| Long-term debt,  less current portion                                                                            |       |                                                 | 384,246    |                        |       |   | 407,242 |   |   |
| Timber notes  securitized                                                                                        |       |                                                 | 1,470,000  |                        |       |   | 1,470,000 |   |   |
| **Total long-term debt**                                                                                         |       |                                                 | 1,854,246  |                        |       |   | 1,877,242 |   |   |
| Other long-term obligations:                                                                                     |       |                                                 |       |                        |       |   |   |   |   |
| Compensation and  benefits                                                                                       |       |                                                 | 287,122    |                        |       |   | 538,830 |   |   |
| Deferred gain on sale  of assets                                                                                 |       |                                                 | 179,757    |                        |       |   | 179,757 |   |   |
| Other long-term  obligations                                                                                     |       |                                                 | 350,491    |                        |       |   | 324,853 |   |   |
| **Total other long-term obligations**                                                                            |       |                                                 | 817,370    |                        |       |   | 1,043,440 |   |   |
| **Minority interest**                                                                                            |       |                                                 | 29,885     |                        |       |   | 27,455 |   |   |
| **Commitments  and contingent liabilities**                                                                      |       |                                                 |       |                        |       |   |   |   |   |
| Shareholders’ equity:                                                                                       |       |                                                 |       |                        |       |   |   |   |   |
| Preferred stock—no par value; 10,000,000 shares  authorized;                                                |       |                                                 |       |                        |       |   |   |   |   |
| Series D ESOP:  $.01 stated value; 1,216,335 and 1,216,335 shares outstanding                               |       |                                                 | 54,735     |                        |       |   | 54,735 |   |   |
| Common stock—$2.50  par value; 200,000,000 shares authorized; 74,903,220 and 70,804,612 shares  outstanding |       |                                                 | 187,226    |                        |       |   | 176,977 |   |   |
| Additional paid-in  capital                                                                                      |       |                                                 | 893,848    |                        |       |   | 747,805 |   |   |
| Retained earnings                                                                                                |       |                                                 | 941,830    |                        |       |   | 898,283 |   |   |
| Accumulated other  comprehensive loss                                                                            |       |                                                 | (91,995    | )                           |       |   | (142,121 | ) |   |
| **Total shareholders’ equity**                                                                              |       |                                                 | 1,985,644  |                        |       |   | 1,735,679 |   |   |
| **Total liabilities and  shareholders’ equity**                                                             | ** ** | ** **                                           | **$**      | **6,216,048**               |       | ** ** | ** ** | **$** | **6,272,142** |   |   |

 

See accompanying notes to consolidated financial statements.

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**OfficeMax Incorporated andSubsidiaries**Consolidated Statements of Cash Flows

| ** **                                                      | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **December 30,  2006**     | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| ** **                                                      | ** ** | **(thousands)**                 | ** ** |
| **Cash provided by (used for)  operations:**                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                               |       |                            | $          | 91,721 |   |   |   | $ | (73,762 | ) |   |   | $ | 173,058 |   |   |
| Items in net income (loss) not using (providing) cash           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Earnings from affiliates                                        |       |                            | (5,873     | ) |   |   | (5,460 | ) |   |   | (6,311 | ) |   |
| Depreciation and amortization                                   |       |                            | 127,812    |   |   |   | 151,145 |   |   |   | 354,982 |   |   |
| Minority interest, net of income tax                            |       |                            | 4,083      |   |   |   | 2,370 |   |   |   | 3,026 |   |   |
| Pension and other postretirement benefits expense               |       |                            | 13,239     |   |   |   | 25,877 |   |   |   | 83,261 |   |   |
| Discontinued operations                                         |       |                            | 5,973      |   |   |   | 8,862 |   |   |   | 36,457 |   |   |
| Gain on sales of assets                                         |       |                            | (1,004     | ) |   |   | (410 | ) |   |   | (387,218 | ) |   |
| Non-cash asset write-downs                                      |       |                            | 9,543      |   |   |   | 23,062 |   |   |   | 1,582 |   |   |
| Other                                                           |       |                            | 24,602     |   |   |   | 38,384 |   |   |   | 22,027 |   |   |
| Changes other than from acquisition of business                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                     |       |                            | 29,126     |   |   |   | 47,517 |   |   |   | (490,168 | ) |   |
| Inventories                                                     |       |                            | 43,001     |   |   |   | 32,809 |   |   |   | (39,630 | ) |   |
| Accounts payable and accrued liabilities                        |       |                            | 8,662      |   |   |   | (142,582 | ) |   |   | (15,867 | ) |   |
| Current and deferred income taxes                               |       |                            | 58,683     |   |   |   | (136,629 | ) |   |   | 69,431 |   |   |
| Pension and other postretirement benefits payments              |       |                            | —     |   |   |   | — |   |   |   | (288,772 | ) |   |
| Other                                                           |       |                            | (33,871    | ) |   |   | (28,881 | ) |   |   | 32,993 |   |   |
| Cash provided by (used for) operations                          |       |                            | 375,697    |   |   |   | (57,698 | ) |   |   | (451,149 | ) |   |
| **Cash provided  by (used for) investment:**                    |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Expenditures for property and equipment                         |       |                            | (174,769   | ) |   |   | (152,450 | ) |   |   | (290,600 | ) |   |
| Expenditures for timber and timberlands                         |       |                            | —     |   |   |   | — |   |   |   | (7,642 | ) |   |
| Investments in affiliates                                       |       |                            | —     |   |   |   | — |   |   |   | (174,901 | ) |   |
| Acquisition of businesses and facilities, net of cash  acquired |       |                            | (1,500     | ) |   |   | (34,803 | ) |   |   | — |   |   |
| Proceeds from sale of (purchase of) restricted  investments     |       |                            | —     |   |   |   | 93,259 |   |   |   | (113,000 | ) |   |
| Proceeds from sales of assets                                   |       |                            | 12,333     |   |   |   | — |   |   |   | 2,225,561 |   |   |
| Discontinued operations                                         |       |                            | —     |   |   |   | — |   |   |   | (9,388 | ) |   |
| Other                                                           |       |                            | —     |   |   |   | (3,343 | ) |   |   | 15,078 |   |   |
| Cash provided by (used for) investment                          |       |                            | (163,936   | ) |   |   | (97,337 | ) |   |   | 1,645,108 |   |   |
| **Cash  provided by (used for) financing:**                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash dividends paid                                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Common stock                                                    |       |                            | (43,509    | ) |   |   | (49,817 | ) |   |   | (51,874 | ) |   |
| Preferred stock                                                 |       |                            | (4,037     | ) |   |   | (4,379 | ) |   |   | (12,211 | ) |   |
|                                                            |       |                            | (47,546    | ) |   |   | (54,196 | ) |   |   | (64,085 | ) |   |
| Short-term borrowings (repayments), net                         |       |                            | (18,666    | ) |   |   | 8,266 |   |   |   | 5,121 |   |   |
| Proceeds from timber notes securitized                          |       |                            | —     |   |   |   | — |   |   |   | 1,470,000 |   |   |
| Additions to long-term debt                                     |       |                            | —     |   |   |   | — |   |   |   | 246 |   |   |
| Payments of long-term debt                                      |       |                            | (65,610    | ) |   |   | (206,933 | ) |   |   | (1,570,504 | ) |   |
| Purchase of Series D preferred stock                       |       |                            | —     |   |   |   | (7,229 | ) |   |   | (123,233 | ) |   |
| Purchase of common shares                                       |       |                            | (33        | ) |   |   | (780,417 | ) |   |   | — |   |   |
| Proceeds from exercise of stock options                         |       |                            | 129,966    |   |   |   | 24,747 |   |   |   | 37,823 |   |   |
| Proceeds from adjustable conversion-rate equity  security units |       |                            | —     |   |   |   | — |   |   |   | 172,500 |   |   |
| Other                                                           |       |                            | —     |   |   |   | 453 |   |   |   | (4,164 | ) |   |
| Cash used for financing                                         |       |                            | (1,889     | ) |   |   | (1,015,309 | ) |   |   | (76,296 | ) |   |
| **Increase (decrease) in cash and cash equivalents**            |       |                            | 209,872    |   |   |   | (1,170,344 | ) |   |   | 1,117,663 |   |   |
| **Balance at beginning of the year**                            |       |                            | 72,198     |   |   |   | 1,242,542 |   |   |   | 124,879 |   |   |
| **Balance  at end of the year**                                 | ** ** | ** **                      | **$**      | **282,070** |   | ** ** | ** ** | **$** | **72,198** |   | ** ** | ** ** | **$** | **1,242,542** |   |   |

 

See accompanying notes to consolidated financial statements.

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**OfficeMax Incorporated andSubsidiaries**Consolidated Statements of Shareholders’ Equity

| ** **                      | ** **     | ** ** | ** ** | **For the Fiscal Years ended December 30, 2006,  December 31, 2005 and December 31, 2004** | ** ** |
|---------------------------------|----------------|------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Common  Shares  Outstanding** | ** **     | ** ** | ** ** | **Preferred  Stock**                                                                                      | ** ** | **Deferred  ESOP  Benefit** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Share-  holders’  Equity** | ** ** |
| ** **                      | ** **     | ** ** | ** ** | **(thousands,  except share amounts)**                                                                    | ** ** |
|                            | 87,137,306     |       |       | Balance at  December 31, 2003                                                                        |       |   | $ | 185,302 |   |   |   | $ | (19,087 | ) |   |   | $ | 214,805 |   |   | $ | 1,228,694 |   | $ | 907,738 |   |   | $ | (193,818 | ) |   | $ | 2,323,634 |   |
|                            |           |       |       | Comprehensive income                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Net income                                                                                                |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | 173,058 |   |   | — |   |   | 173,058 |   |
|                            |           |       |       | Other comprehensive income                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Cumulative foreign currency  translation adjustment                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 29,933 |   |   | 29,933 |   |
|                            |           |       |       | Cash flow hedges                                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 159 |   |   | 159 |   |
|                            |           |       |       | Minimum pension  liability adjustment, net of tax                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 19,027 |   |   | 19,027 |   |
|                            |           |       |       | Other comprehensive  income                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 49,119 |   |   | 49,119 |   |
|                            |           |       |       | Comprehensive income                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 222,177 |   |
|                            |           |       |       | Cash dividends declared                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Common stock                                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (52,284 | ) |   | — |   |   | (52,284 | ) |
|                            |           |       |       | Preferred stock                                                                                           |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (12,211 | ) |   | — |   |   | (12,211 | ) |
|                            | 5,412,705      |       |       | Conversion of ACES to  common stock                                                                       |       |   | — |   |   |   | — |   |   |   | 13,532 |   |   | 158,968 |   | — |   |   | — |   |   | 172,500 |   |
|                            | (547,275)      |       |       | Restricted stock                                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | 19,579 |   | — |   |   | — |   |   | 19,579 |   |
|                            | 365,787        |       |       | Restricted stock  vested                                                                                  |       |   | — |   |   |   | — |   |   |   | 915 |   |   | (915 | ) | — |   |   | — |   |   | — |   |
|                            | 1,202,308      |       |       | Stock options  exercised                                                                                  |       |   | — |   |   |   | — |   |   |   | 3,006 |   |   | 34,817 |   | — |   |   | — |   |   | 37,823 |   |
|                            | (3,129)        |       |       | Treasury stock  cancellations                                                                             |       |   | (123,338 | ) |   |   | — |   |   |   | (8 | ) |   | (91 | ) | — |   |   | — |   |   | (123,437 | ) |
|                            | 7,855          |       |       | Other                                                                                                     |       |   | — |   |   |   | 19,087 |   |   |   | 19 |   |   | 213 |   | 3,378 |   |   | — |   |   | 22,697 |   |
|                            | 93,575,557     |       |       | Balance at  December 31, 2004                                                                        |       |   | $ | 61,964 |   |   |   | $ | — |   |   |   | $ | 232,269 |   |   | $ | 1,441,265 |   | $ | 1,019,679 |   |   | $ | (144,699 | ) |   | $ | 2,610,478 |   |
|                            |           |       |       | Comprehensive income                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Net loss                                                                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (73,762 | ) |   | — |   |   | (73,762 | ) |
|                            |           |       |       | Other comprehensive income                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Cumulative foreign  currency translation adjustment                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | (6,037 | ) |   | (6,037 | ) |
|                            |           |       |       | Minimum pension  liability adjustment, net of tax                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 8,615 |   |   | 8,615 |   |
|                            |           |       |       | Other comprehensive  income                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 2,578 |   |   | 2,578 |   |
|                            |           |       |       | Comprehensive income  (loss)                                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | (71,184 | ) |
|                            |           |       |       | Cash dividends declared                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Common stock                                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (47,082 | ) |   | — |   |   | (47,082 | ) |
|                            |           |       |       | Preferred stock                                                                                           |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (4,379 | ) |   | — |   |   | (4,379 | ) |
|                            |           |       |       | Restricted stock                                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | 9,184 |   | — |   |   | — |   |   | 9,184 |   |
|                            | (199,134)      |       |       | Restricted stock  vested                                                                                  |       |   | — |   |   |   | — |   |   |   | 1,134 |   |   | (1,134 | ) | — |   |   | — |   |   | — |   |
|                            | 883,817        |       |       | Stock options  exercised                                                                                  |       |   | — |   |   |   | — |   |   |   | 2,210 |   |   | 24,250 |   | — |   |   | — |   |   | 26,460 |   |
|                            | (23,527,764)   |       |       | Treasury stock  cancellations                                                                             |       |   | — |   |   |   | — |   |   |   | (58,819 | ) |   | (722,362 | ) | — |   |   | — |   |   | (781,181 | ) |
|                            | 72,136         |       |       | Other                                                                                                     |       |   | (7,229 | ) |   |   | — |   |   |   | 183 |   |   | (3,398 | ) | 3,827 |   |   | — |   |   | (6,617 | ) |
| ** **                      | **70,804,612** |       |       | Balance at  December 31, 2005                                                                        |       |   | $ | 54,735 |   |   |   | $ | — |   |   |   | $ | 176,977 |   |   | $ | 747,805 |   | $ | 898,283 |   |   | $ | (142,121 | ) |   | $ | 1,735,679 |   |
|                            |           |       |       | Comprehensive income (loss)                                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Net income                                                                                                |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | 91,721 |   |   | — |   |   | 91,721 |   |
|                            |           |       |       | Other comprehensive income                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Cumulative foreign currency  translation adjustment                                                       |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 11,581 |   |   | 11,581 |   |
|                            |           |       |       | Minimum pension  liability adjustment, net of tax                                                         |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 26,634 |   |   | 26,634 |   |
|                            |           |       |       | Other comprehensive  income                                                                               |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 38,215 |   |   | 38,215 |   |
|                            |           |       |       | Comprehensive income                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 129,936 |   |
|                            |           |       |       | Adjustment from  initial adoption of SFAS No. 158, net of tax                                             |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | — |   |   | 11,911 |   |   | 11,911 |   |
|                            |           |       |       | Cash dividends declared                                                                                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |           |       |       | Common stock                                                                                              |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (44,136 | ) |   | — |   |   | (44,136 | ) |
|                            |           |       |       | Preferred stock                                                                                           |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   | (4,037 | ) |   | — |   |   | (4,037 | ) |
|                            |           |       |       | Restricted stock                                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | 24,116 |   | — |   |   | — |   |   | 24,116 |   |
|                            | 46,940         |       |       | Restricted stock  vested                                                                                  |       |   | — |   |   |   | — |   |   |   | 117 |   |   | (117 | ) | — |   |   | — |   |   | — |   |
|                            | 3,993,857      |       |       | Stock options  exercised                                                                                  |       |   | — |   |   |   | — |   |   |   | 9,985 |   |   | 119,982 |   | — |   |   | — |   |   | 129,967 |   |
|                            | (907)          |       |       | Treasury stock  cancellations                                                                             |       |   | — |   |   |   | — |   |   |   | (2 | ) |   | (31 | ) | — |   |   | — |   |   | (33 | ) |
|                            | 58,718         |       |       | Other                                                                                                     |       |   | — |   |   |   | — |   |   |   | 149 |   |   | 2,093 |   | (1 | ) |   | — |   |   | 2,241 |   |
| ** **                      | **74,903,220** | ** ** | ** ** | **Balance  at December 30, 2006**                                                                    | ** ** | ** ** | **$** | **54,735** | ** ** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **187,226** | ** ** | ** ** | **$** | **893,848** | ** ** | **$** | **941,830** |   | ** ** | **$** | **(91,995** | **)** | ** ** | **$** | **1,985,644** | ** ** |

 

See accompanying notes to consolidated financial statements.

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***Notes toConsolidated Financial Statements***

***1.   Summary of Significant Accounting Policies***

*Nature of Operations*

OfficeMax Incorporated (“OfficeMax” or the “Company”)is a leader in both business-to-business and retail office productsdistribution. The Company provides office supplies and paper, print anddocument services, technology products and solutions and furniture to large,medium and small businesses, governmental offices, and consumers. OfficeMaxcustomers are serviced by approximately 36,000 associates through direct sales,catalogs, the Internet and a network of retail stores located throughout theUnited States, Canada, Australia, New Zealand and Mexico. The Company’s commonstock is traded on the New York Stock Exchange under the ticker symbol OMX. TheCompany’s corporate headquarters is located in Naperville, Illinois, and theOfficeMax website address is www.officemax.com.

On October 29, 2004, the Company soldsubstantially all of its paper, forest products and timberland assets forapproximately $3.7 billion in cash and other consideration to affiliatesof Boise Cascade, L.L.C., a new company formed by Madison Dearborn Partners LLC(the “Sale”). With the Sale, the Company completed its transition, begun in themid-1990s, from a predominantly manufacturing-based company to anindependent office products distribution company. In connection with the Sale,Boise Cascade Corporation changed its company name to OfficeMax Incorporated.(See Note 2, Sale of Paper, Forest Products and Timberland Assets, foradditional information related to the Sale.)

Since the Sale, the Companymanages its business using three reportable segments: OfficeMax, Contract;OfficeMax, Retail; and Corporate and Other. Results for periods prior to theSale include the operations of the Boise Building Solutions and Boise PaperSolutions segments. Substantially all of the assets and operations of thesesegments were included in the Sale. OfficeMax, Contract markets and sells officesupplies and paper, technology products and solutions and office furnituredirectly to large corporate and government offices, as well as to small andmedium-sized offices through field salespeople, outbound telesales,catalogs, the Internet and in some markets office products stores. OfficeMax,Retail markets and sells office supplies and paper, print and documentservices, technology products and solutions and office furniture to small andmedium-sized businesses and consumers through a network of retail stores.Boise Building Solutions manufactured, marketed and distributed variousproducts that are used for construction. Boise Paper Solutions manufactured,marketed and distributed uncoated free sheet papers, containerboard, corrugatedcontainers, and newsprint and market pulp.

*Consolidation*

The consolidated financialstatements include the accounts of OfficeMax and all majority ownedsubsidiaries as well as those of variable interest entities in which theCompany is the primary beneficiary. All significant intercompany balances andtransactions have been eliminated in consolidation.

*Fiscal Year*

Effective March 11, 2005,the Company amended its bylaws to make its fiscal year-end the last Saturday inDecember. Prior to this change, all of the Company’s businesses except for itsU.S. retail operations had a December 31 fiscal year-end. The U.S. retailoperations maintained a fiscal year that ended on the last Saturday inDecember. Due primarily to statutory requirements, the Company’s internationalbusinesses have maintained their December 31 year-ends. Fiscal year2006 ended on 

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December 30,2006 and included 52 weeks for all reportable segments and businesses.Fiscal year 2005 ended on December 31, 2005 for all reportable segmentsand businesses, and included 53 weeks for the Retail segment.

*Use of Estimates*

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosuresabout contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues and expenses during the reporting period.Actual results are likely to differ from those estimates, but management doesnot believe such differences will materially affect the Company’s financialposition, results of operations or cash flows. Significant items subject tosuch estimates and assumptions include the recognition of vendor rebates andallowances; the carrying amount of property, plant and equipment, intangiblesand goodwill; valuation allowances for receivables, inventories and deferredincome tax assets; facility closure reserves and environmental liabilities;valuation of the additional consideration agreement; and assets and obligationsrelated to employee benefits.

*Foreign Currency Translation*

Local currencies areconsidered the functional currencies for the Company’s operations outside theUnited States. Assets and liabilities of foreign operations are translated intoU.S. dollars at the rate of exchange in effect at the balance sheet date withthe related translation adjustments reported in stockholders’ equity as acomponent of accumulated other comprehensive income (loss). Revenues andexpenses are translated into U.S. dollars at average monthly exchange ratesprevailing during the year. Foreign currency transaction gains and lossesrelated to assets and liabilities that are denominated in a currency other thanthe functional currency are reported in the Consolidated Statements of Income(Loss) in the period they occur.

*Revenue Recognition*

Revenue from the sale of products is recognized at thetime both title and the risk of ownership are transferred to the customer,which generally occurs upon delivery to the customer or third-partydelivery service for contract, catalog and Internet sales, and at the point ofsale for retail transactions. Service revenue is recognized as the services arerendered. Revenue is reported less an appropriate provision for returns and netof coupons, rebates and other sales incentives.

Revenue from transactions in which the Company acts asan agent or broker is reported on a commission basis. Revenue from the sale ofextended warranty contracts is reported on a commission basis at the time ofsale, except in a limited number of states where state law specifies theCompany as the legal obligor. In such states, the revenue from the sale ofextended warranty contracts is recorded at the gross amount and recognizedratably over the contract period. The performance obligations and risk of lossassociated with extended warranty contracts sold by the Company are assumed byan unrelated third party. Costs associated with these contracts are recognizedin the same period as the related revenue.

Fees for shipping and handlingcharged to customers in connection with sale transactions are included insales. Costs related to shipping and handling are included in cost of goodssold and occupancy costs.

*Cash and CashEquivalents*

Cash equivalents includesshort-term debt instruments that have an original maturity of three months orless at the date of purchase. The Company’s banking arrangements allow theCompany to 

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fundoutstanding checks when presented to the financial institution for payment.This cash management practice frequently results in a net cash overdraft positionfor accounting purposes, which occurs when total issued checks exceed availablecash balances at a single financial institution. The company records itsoutstanding checks in accounts payable—trade in the Consolidated BalanceSheets, and the net change in overdrafts in the accounts payable—trade lineitem within the cash flows from operating activities section of theConsolidated Statements of Cash Flows.

*Accounts Receivable*

Accounts receivable relate primarily to amounts owedby customers for trade sales of products and services and amounts due fromvendors under volume purchase rebate, cooperative advertising and various othermarketing programs. An allowance for doubtful accounts is recorded to providefor estimated losses resulting from uncollectible accounts, and is the Company’sbest estimate of the amount of probable credit losses in the Company’s existingaccounts receivable. Management believes that the Company’s exposure to creditrisk associated with accounts receivable is limited due to the size anddiversity of its customer and vendor base, which extends across many differentindustries and geographic regions.

The Company has an agreement with a third-partyservice provider that manages the Company’s private label credit card programand directly extends credit to customers.

The Company has an accounts receivable securitizationprogram under which it sells fractional ownership interests in a defined poolof accounts receivable and retains a subordinated interest and servicing rightsto those receivables. The sale of the receivables under this program isaccounted for under Statement of Financial Accounting Standards (“SFAS”) No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities.” Sold accounts receivable are excluded from Receivables in theCompany’s Consolidated Balance Sheets. The portion of the fractional ownershipin the transferred receivables that the Company retains is included in Receivablesin the Consolidated Balance Sheets. See Note 9, Sales of AccountsReceivable, for additional information related to the sale of accountsreceivable.

At December 30, 2006 and December 31,2005, the Company had allowances for doubtful accounts of $15,072 and $22,408,respectively.

*Vendor Rebates andAllowances*

The Company participates invarious cooperative advertising and other marketing programs with its vendors.The Company also participates in volume purchase rebate programs, some of whichprovide for tiered rebates based on defined levels of purchase volume. Thesearrangements enable the Company to receive reimbursement for costs incurred topromote the sale of vendor products, or to earn rebates that reduce the cost ofmerchandise purchased. Vendor rebates and allowances are accrued as earned.Rebates and allowances received as a result of attaining defined purchaselevels are accrued over the incentive period based on the terms of the vendorarrangement and estimates of qualifying purchases during the rebate programperiod. These estimates are reviewed on a quarterly basis and adjusted forchanges in anticipated product sales and expected purchase levels. Volume-basedrebates and allowances earned are initially recorded as a reduction in the costof merchandise inventories and are included in operations (as a reduction in costof goods sold) in the period the related product is sold. Amounts receivedunder other promotional programs are generally event-based and arerecognized at the time of the event as a reduction of cost of goods sold orinventory, as appropriate, based on the nature of the promotion and the termsof the vendor agreement. Advertising and other allowances that representreimbursements of specific, incremental and identifiable costs incurred topromote vendors’ products are recorded as a reduction of operating and sellingexpenses in the period the expense is incurred.

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*Merchandise Inventories*

Inventories consist of office products merchandise andare stated at the lower of weighted average cost or net realizable value. TheCompany estimates the realizable value of inventory using assumptions aboutfuture demand, market conditions and product obsolescence. If the estimatedrealizable value is less than cost, the inventory value is reduced to itsestimated realizable value.

Throughout the year, the Companyperforms physical inventory counts at all locations. For periods subsequent toeach retail location’s last physical inventory count, an allowance forestimated shrinkage is provided based on historical shrink results and currentbusiness trends.

*Property and Equipment*

Property and equipment arerecorded at cost. The Company calculates depreciation using the straight-linemethod over the estimated useful lives of the assets or the terms of therelated leases. The estimated useful lives of depreciable assets are generallyas follows: building and improvements, 5 to 40 years; furniture andequipment, 1.5 to 5 years; and machinery, equipment and delivery trucks, 5to 10 years. Leasehold improvements are amortized over the lesser of theterm of the lease, including any option periods that management believes areprobable of exercise, or the estimated lives of the improvements, whichgenerally range from 5 to 15 years. Depreciation on assets used in theCompany’s sold paper and forest products operations was determined using eitherthe straight-line method or a units-of-production method that approximatedstraight-line over three to five years.

*Long-Lived AssetImpairment*

In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” long-livedassets, such as property, plant, and equipment, capitalized software costs andpurchased intangibles subject to amortization, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held andused is measured by a comparison of the carrying amount of an asset to theestimated undiscounted future cash flows expected to be generated by the asset.If the carrying amount of an asset exceeds its estimated future cash flows, animpairment charge is recognized equal to the amount by which the carryingamount of the asset exceeds the fair value of the asset. Assets to be disposedof are separately presented in the Consolidated Balance Sheets and reported atthe lower of the carrying amount or fair value less costs to sell, and are nolonger depreciated.

*Goodwill and IntangibleAssets*

The Company accounts for goodwill and other indefinitelife intangible assets in accordance with SFAS No. 142, “Goodwill andOther Intangible Assets.” Goodwill represents the excess of purchase price andrelated direct costs over the value assigned to the net tangible andidentifiable intangible assets of businesses acquired. Goodwill and intangibleassets with indefinite lives are not amortized, but are tested for impairmentat least annually, or more frequently if events and circumstances indicate thatthe asset might be impaired, using a fair-value-based approach. Animpairment loss is recognized to the extent that the carrying amount exceedsthe asset’s fair value. This determination is made at the reporting unit leveland consists of two steps. First, the Company determines the fair value of areporting unit and compares it to its carrying amount. Second, if the carryingamount of a reporting unit exceeds its fair value, an impairment loss isrecognized for any excess of the carrying amount of the reporting unit’sgoodwill over the implied fair value of that goodwill. The implied fair valueof goodwill is determined by allocating the fair value of the reporting unit ina manner similar to a purchase price allocation in accordance with SFAS No. 141,“Business Combinations.” The residual fair value after this allocation is theimplied fair value of the reporting unit goodwill. The Company 

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completed its annualassessment in accordance with the provisions of SFAS No. 142 in the firstquarters of 2006 and 2005, and concluded there was no impairment. The Companycompleted an additional assessment of the carrying value of the goodwill in theOfficeMax, Retail segment in the fourth quarter of 2005, in connection with theclosure of 109 retail stores in 2006, and concluded there was no impairment.

Intangible assets representthe values assigned to trade names, customer lists and relationships,noncompete agreements and exclusive distribution rights of businesses acquired.Trade name assets have an indefinite life and are not amortized. All otherintangible assets are amortized on a straight-line basis over their expecteduseful lives, which range from three to 20 years. (See Note 11,Goodwill and Intangible Assets, for additional information related to goodwilland intangible assets.)

*Investments inAffiliates*

Investments in affiliatedcompanies that represent less than 20% voting interest are accounted for underthe cost method if the Company does not exercise significant influence over theaffiliated company. At December 30, 2006 and December 31, 2005, theCompany held an investment in Boise Cascade, L.L.C., which is accounted forunder the cost method. Investments that enable the Company to exercisesignificant influence over an affiliated company, but do not represent acontrolling interest, are accounted for under the equity method; suchinvestments are carried at cost and are adjusted to reflect the Company’sproportionate share of income or loss, less dividends received. The Companyperiodically reviews the recoverability of investments in affiliates. TheCompany would recognize a loss on these investments if there is a loss in valueof an investment which is other than a temporary decline. (See Note 10,Investments in Affiliates, for additional information related to the Company’sinvestments in affiliates.)

*Capitalized SoftwareCosts*

The Company capitalizes certain costs related to theacquisition and development of internal use software that is expected tobenefit future periods in accordance with American Institute of CertifiedPublic Accountants’ Statement of Position (SOP) 98-1, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use.” These costsare amortized using the straight-line method over the expected life of thesoftware, which is typically three to five years. Deferred charges in theConsolidated Balance Sheets include unamortized capitalized software costs of$25.7 million and $36.7 million at December 30, 2006 and December 31,2005, respectively. Amortization of capitalized software costs totaled $17.7million, $25.6 million and $25.2 million in 2006, 2005 and 2004,respectively.

Software development coststhat do not meet the criteria for capitalization are expensed as incurred.

*Facility Closure Reserves*

The Company conducts regularreviews of its real estate portfolio to identify underperforming facilities,and closes those facilities that are no longer strategically or economicallyviable. The Company accounts for facility closure costs that are not related toa purchase business combination in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities.” In accordance with SFASNo. 146, the Company records a liability for the cost associated with afacility closure at its fair value in the period in which the liability isincurred, which is either the date the lease termination is communicated to thelessor or the location’s cease-use date. Upon closure, unrecoverable costs areincluded in facility closure reserves on the Consolidated Balance Sheets andinclude provisions for the present value of future lease obligations, lesscontractual or estimated sublease income. Accretion expense is recognized overthe life of the payments.

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The closure of certainfacilities acquired in the OfficeMax, Inc. acquisition was accounted forin accordance with EITF Issue No. 95-3, “Recognition of Liabilitiesin Connection With a Purchase Business Combination.” The estimated costs to beincurred in closing these facilities were accrued in connection with theacquisition, and did not result in a charge to income in the Company’s ConsolidatedStatements of Income (Loss).

*Environmental Matters*

The Company has adopted theprovisions of SFAS No. 143, “Accounting for Asset Retirement Obligations,”in accounting for landfill closure costs related to the sold paper, forestproducts and timberland assets. This statement requires legal obligationsassociated with the retirement of long-lived assets to be recognized at theirfair value at the time the obligations are incurred. Upon initial recognitionof a liability, that cost is capitalized as part of the related long-livedasset and depreciated on a straight-line basis over the remaining estimateduseful life of the asset. Accretion expense on the discounted liability is alsorecognized over the remaining useful life of the asset. At December 30,2006 and December 31, 2005, the asset retirement obligation for estimatedclosure and closed-site monitoring costs recorded on the Company’s ConsolidatedBalance Sheet was $4.2 million for both years. These obligations arerelated to assets held for sale.

Under the terms of the Sale,environmental liabilities that relate to the operation of the paper, forestproducts and timberland assets prior to the closing of the Sale transactionwere retained by the Company. These environmental obligations are not withinthe scope of SFAS No. 143, and the Company accrues for losses associatedwith these types of environmental remediation obligations when such losses areprobable and reasonably estimable according to the guidance in SOP 96-1,“Environmental Remediation Liabilities.” The liabilities for environmentalobligations are not discounted to their present value. (See Note 19, LegalProceedings and Contingencies, for additional information.)

*Self-insurance*

The Company is self-insuredfor certain losses related to workers’ compensation and medical claims as wellas general and auto liability. The expected ultimate cost for claims incurred isrecognized as a liability in the Consolidated Balance Sheets. The expectedultimate cost of claims incurred is estimated based principally on analysis ofhistorical claim data and actuarial estimates of claims incurred but notreported. Losses are accrued and charged to operations when it is probable thata loss has been incurred and the amount can be reasonably estimated.

*Income Taxes*

Income taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date.

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The determination of theCompany’s provision for income taxes requires significant judgment, the use ofestimates, and the interpretation and application of complex tax laws.Significant judgment is also required in assessing the timing and amounts ofdeductible and taxable items.

*Advertising and CatalogCosts*

Advertising costs are eitherexpensed the first time the advertising takes place or, in the case of direct-responseadvertising, capitalized and charged to expense in the periods in which therelated sales occur. Advertising expense was $240.4 million in 2006,$276.2 million in 2005 and $344.1 million in 2004, and is recorded inoperating and selling expenses in the Consolidated Statements of Income (Loss).Capitalized catalog costs, which are included in other current assets in theConsolidated Balance Sheets, totaled $9.3 million at December 30, 2006,and $9.9 million at December 31, 2005.

*Pre-Opening Expenses*

The Company incurs certainnon-capital expenses prior to the opening of a store. These pre-openingexpenses consist primarily of straight-line rent from the date ofpossession, store payroll, and supplies and are expensed as incurred andreflected in operating and selling expenses. In 2006 and 2005, the Companyrecorded approximately $5.6 million and $4.5 million in pre-openingcosts, respectively. Pre-opening costs in 2004 were $1.5 million.

*Leasing Arrangements*

The Company conducts a substantial portion of itsbusiness in leased properties. Some of the Company’s leases contain escalationclauses and renewal options. In accordance with SFAS No. 13, “Accountingfor Leases,” as amended by SFAS No. 29, “Determining Contingent Rentals,”and FASB Technical Bulletin 85-3, “Accounting for Operating Leaseswith Scheduled Rent Increases,” the Company recognizes rental expense for theleases that contain predetermined fixed escalation clauses on a straight-linebasis over the expected term of the lease. The difference between the amountscharged to expense and the contractual minimum lease payment is recorded toother long-term liabilities in the Consolidated Balance Sheets. At December 30,2006 and December 31, 2005, other long-term liabilities includedapproximately $51.3 million and $27.8 million related to these futureescalation clauses.

The expected term of a leaseis calculated from the date the Company first takes possession of the facility,including any periods of free rent and any option or renewal periods managementbelieves are probable of exercise. This expected term is used in thedetermination of whether a lease is capital or operating and in the calculationof straight-line rent expense. Rent abatements and escalations are consideredin the calculation of minimum lease payments in the Company’s capital lease testsand in determining straight-line rent expense for operating leases.Straight-line rent expense is also adjusted to reflect any allowances orreimbursements provided by the lessor.

*Derivative Instrumentsand Hedging Activities*

The Company accounts forderivatives and hedging activities in accordance with SFAS No. 133,“Accounting for Derivative Instruments and Certain Hedging Activities,” asamended, which requires that all derivative instruments be recorded on thebalance sheet at fair value.  Changes inthe fair value of derivative instruments are recorded in current earnings ordeferred in accumulated other comprehensive income (loss), depending on whethera derivative is designated as, and is effective as, a hedge and on the type ofhedging transaction. Changes in fair value of derivatives that are designatedas cash flow hedges are deferred in accumulated other comprehensive income(loss) until the underlying hedged transactions are recognized in earnings, atwhich time any deferred hedging gains or losses are also recorded in earnings.If a derivative instrument is designated as a fair value 

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hedge,changes in the fair value of the instrument are reported in current earningsand offset the change in fair value of the hedged assets, liabilities or firmcommitments. The ineffective portion of an instrument’s change in fair value isimmediately recognized in earnings. Instruments that do not meet the criteriafor hedge accounting or contracts for which the Company has not elected hedgeaccounting, are marked to fair value with unrealized gains or losses reportedin earnings.

*Recently Issued orNewly Adopted Accounting Standards*

Following are summaries of recently issued accountingpronouncements that have either been recently adopted or that may become applicableto the preparation of the Company’s consolidated financial statements in thefuture.

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, “Share Based Payment.”SFAS No. 123R is a revision of SFAS No. 123, “Accounting forStock-Based Compensation,” and supersedes Accounting Principles Board Opinion(APB) No. 25, “Accounting for Stock Issued to Employees,” and its relatedimplementation guidance. SFAS No. 123R focuses primarily on accounting fortransactions in which an entity obtains employee services in exchange forshare-based payments. SFAS No. 123R requires entities to recognizecompensation expense from all share-based payment transactions in the financialstatements. SFAS No. 123R establishes fair value as the measurementobjective in accounting for share-based payment transactions and requires allcompanies to apply a fair-value-based measurement method in accounting forshare-based payment transactions with employees.

Effective January 1, 2006, the Company adoptedSFAS No. 123R using the modified prospective transition method.Accordingly, the financial statements for periods prior to January 1, 2006have not been restated to reflect the adoption of SFAS No. 123R.Under the modified prospective transition method, the Company must recordcompensation expense for all awards granted after the adoption date and for theunvested portion of previously granted awards that remain outstanding at theadoption date, under the fair value method. Previously, the Company recognizedcompensation expense for share-based awards to employees using thefair-value-based guidance in SFAS No. 123. Due to the fact that theCompany had previously accounted for share-based awards using SFAS No. 123,the adoption of SFAS No. 123R did not have a material impact on theCompany’s financial position, results of operations or cash flows.

During 2006, the Company adopted SFAS No. 158,“Employer’s Accounting for Defined Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R).” This Standardrequires that employers recognize, on a prospective basis, the funded status oftheir defined benefit and postretirement benefit plans in the statement offinancial position, and that changes in the funded status be recognized as acomponent of other comprehensive income, net of tax. SFAS No. 158 alsorequires the funded status of a plan to be measured as of the date of theyear-end statement of financial position, and requires additional notedisclosures. The recognition and disclosure guidance in SFAS No. 158 iseffective as of the end of the first fiscal year ending after December 15,2006, and other measurement elements are effective for fiscal years endingafter December 15, 2008. The Company adopted the recognition provisions ofSFAS No. 158 and initially applied them to the funded status of itsdefined benefit pension and other postretirement benefit plans as of December 31,2006. The initial recognition of the funded status of our defined benefitpension and other postretirement plans resulted in an increase in Shareholders’Equity of $11.9 million, which was net of income taxes of $7.6 million.We currently measure the funded status of our defined benefit plans as of thedate of our fiscal year-end statement of financial position, and therefore, theadoption of the measurement provisions of SFAS No. 158 will have no impacton our financial statements.

In June 2006, the FASB issued Interpretation (FIN) No. 48,“Accounting for Uncertainty in Income Taxes– an interpretation of FASBStatement No. 109.” This Interpretation clarifies the accounting for 

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uncertainty in income taxesrecognized in accordance with SFAS No. 109, “Accounting for IncomeTaxes.”  The Interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. The Interpretation is effective for fiscal years beginning afterDecember 15, 2006. The Company is in the process of evaluating the impactof applying the provisions of the Interpretation to all tax positions andcurrently anticipates the impact of applying the interpretation will not bematerial.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.” This Standard defines fair value, establishes aframework for measuring fair value in generally accepted accounting principlesand expands disclosures about fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Theadoption of FAS 157 is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows.

In September 2006, the Staff of the Securities andExchange Commission issued Staff Accounting Bulletin (SAB) No. 108,“Considering the Effects of a Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements.” SAB No. 108 addresseshow the effects of prior year uncorrected errors must be considered inquantifying misstatements in current year financial statements. For purposes ofdetermining whether the financial statements are materially misstated, theeffects of prior year uncorrected errors include the potential accumulation ofimproper amounts that may result in a misstatement on the balance sheet or thereversal of prior period errors in the current period that result in amisstatement of the current period income statement amounts. Adjustments tocurrent or prior period financial statements would be required in the eventthat a misstatement in current period financial statements is determined to bematerial after consideration of all relevant quantitative and qualitativefactors. SAB No. 108 is applicable to all financial statements issued bythe Company after November 15, 2006. Its adoption in 2006 did not have animpact on our consolidated financial statements.

In 2006, the Emerging IssuesTask Force (EITF) reached a consensus on Issue No. 06-03, “How Sales TaxCollected from Customers and Remitted to Governmental Authorities Should bePresented in the Income Statement (That is, Gross versus Net Presentation).” ThisEITF Issue clarifies that the presentation of taxes collected from customersand remitted to governmental authorities on a gross (included in revenues andcosts) or net (excluded from revenues) basis is an accounting policy decisionthat should be disclosed pursuant to Accounting Principles Board (APB) OpinionNo. 22, “Disclosure of Accounting Policies.” The EITF Issue is effectivefor the Company beginning in fiscal year 2007. We collect such taxes from ourcustomers and account for them on a net (excluded from revenues) basis. Theadoption of EITF Issue No. 06-03 will not impact our consolidatedfinancial statements, but will result in additional disclosures.

*Reclassifications*

Certain amounts included inthe prior years’ financial statements have been reclassified to conform withthe current year’s presentation. These reclassifications did not affect thereported amounts of net income (loss) or earnings (loss) per share.

***2.   Sale of Paper, Forest Products and TimberlandAssets***

On October 29, 2004, the Company completed theSale, which included substantially all of the assets of the Boise BuildingSolutions and Boise Paper Solutions segments. In connection with the Sale, theCompany recognized a $280.6 million gain in the Consolidated Statement ofIncome (Loss). For segment reporting purposes, the gain was included in theCorporate and Other segment.

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The Sale did not include the wood-polymer buildingmaterials facility near Elma, Washington. (See Note 3, DiscontinuedOperations, for additional information relating to the Elma, Washingtonfacility.) The Company also retained certain other assets and liabilities ofthe sold paper, forest products and timberland business, including Company-ownedlife insurance policies, and liabilities such as those associated with retireepension and other benefits, litigation, and environmental remediation atselected active sites and facilities previously closed.

In connection with the sale, the Company invested$175 million in securities of affiliates of Boise Cascade, L.L.C.This investment represents continuing involvement as defined in SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” andaccordingly, the historical results of the sold paper, forest products andtimberland assets are not reported as discontinued operations. An additional$180 million of gain realized from the Sale was deferred as a result ofthe Company’s continuing involvement with Boise Cascade, L.L.C. Thisdeferred gain is expected to be recognized in earnings as the Company’sinvestment in affiliates of Boise Cascade, L.L.C. is reduced.

The Company received cash andother consideration of approximately $3.7 billion from the Sale. Totalproceeds to the Company after allowing for the $175 million investment inthe securities of affiliates of Boise Cascade, L.L.C and transactionrelated expenses were approximately $3.5 billion. The consideration forthe timberlands portion of the Sale included $1.6 billion of timberinstallment notes receivable. In December 2004, the Company completed asecuritization transaction and transferred its interest in the timberinstallment notes receivable to wholly owned bankruptcy remote subsidiaries inexchange for cash proceeds of $1.5 billion. Including the cash received atthe closing of the Sale and the proceeds from the securitization of the timberinstallment notes, and deducting the cash used to pay for the $175 millioninvestment and transaction-related expenses, the Company received a nettotal of $3.3 billion in cash from the Sale and related transactions. In2004, the Company used a portion of these proceeds to repurchase and retireoutstanding debt, to redeem outstanding Series D preferred stock and to makecontributions to the pension plans for active employees who became employees ofBoise Cascade, L.L.C. in connection with the Sale. In the second quarterof 2005, the Company used substantially all of the remaining proceeds torepurchase 23.5 million shares of its common stock and the associatedcommon stock purchase rights through a modified Dutch auction tender offer.

***3.   Discontinued Operations***

In December 2004, the Company’s board ofdirectors authorized management to pursue the divestiture of a facility nearElma, Washington that manufactured integrated wood-polymer building materials.The board of directors and management concluded that the operations of thefacility were no longer consistent with the Company’s strategic direction. As aresult of that decision, the Company recorded the facility’s assets as held forsale on the Consolidated Balance Sheets and reported the results of itsoperations as discontinued operations.

During 2005, the Company experienced unexpecteddifficulties in achieving anticipated levels of production at the facility.These issues delayed the process of identifying and qualifying a buyer for thebusiness. While management made substantial progress in addressing themanufacturing issues that caused production to fall below plan, during thefourth quarter of 2005, the Company concluded that it was unable to attract abuyer in the near term and elected to cease operations at the facility duringthe first quarter of 2006.

In accordance with SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” the Company recorded pre-taxcharges of $67.8 million in the fourth quarter of 2004 and $28.2 million in thefourth quarter of 2005 to reduce the carrying value of the long-lived assets ofthe Elma, Washington facility to their estimated fair value. During the firstquarter of 2006, the Company ceased operations at the facility and recordedpre-tax expenses of $18.0 million for contract 

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termination and other closurecosts. These charges and expenses were reflected within discontinued operationsin the Consolidated Statements of Income (Loss).

The assets and liabilities ofthe wood-polymer building materials facility near Elma, Washington, areincluded in current assets ($0.3 million at December 31, 2005) andcurrent liabilities ($15.5 million at December 30, 2006 and$9.8 million at December 31, 2005, respectively) in the ConsolidatedBalance Sheets. The assets are reported at their estimated fair value lesscosts to sell and are no longer depreciated.

***4.   Integration Activities and Facility Closures***

During 2003, the Company acquired OfficeMax, Inc.for $1.3 billion (the “Acquisition”). Increased scale as a result of theAcquisition allowed management to evaluate the Company’s combined officeproducts business and to identify opportunities for consolidating operations.Costs associated with the planned closure and consolidation of acquiredOfficeMax, Inc. facilities were accounted for under EITF Issue No. 95-3,“Recognition of Liabilities in Connection with a Purchase Business Combination,”and recognized as liabilities in connection with the acquisition and charged togoodwill. Costs incurred in connection with all other business integrationactivities have been recognized in the Consolidated Statement of Income (Loss).

Prior to the Acquisition, OfficeMax, Inc. hadidentified and closed underperforming facilities. As part of the purchase priceallocation, the Company recorded $58.7 million of reserves for the estimatedfair value of future liabilities associated with these closures. These reservesrelated primarily to future lease termination costs, net of estimated subleaseincome. In addition to these store closures, at December 31, 2003, theCompany identified and closed 45 OfficeMax, Retail facilities that were nolonger strategically and economically viable, and recorded a $69.4 millionliability in the Consolidated Balance Sheet. During 2004, the Companyidentified and closed an additional 11 stores. All of the above chargeswere accounted for as exit activities in connection with the acquisition andwere not recorded as charges to income.

Since the Acquisition, the Company has closed 18 U.S.distribution centers and 2 customer service centers. In connection with theseclosures the Company recorded a charge to income in the Consolidated Statementof Income (Loss) of $29.7 million during 2004.

In September 2005, the board of directorsapproved a plan to relocate and consolidate the Company’s retail headquartersin Shaker Heights, Ohio and its existing corporate headquarters in Itasca,Illinois into a new facility in Naperville, Illinois. The Company began theconsolidation and relocation process in the latter half of 2005. As of December 30,2006, the Company has incurred and expensed approximately $70.9 million ofcosts related to the headquarters consolidation, including $45.9 millionrecognized during 2006 and $25.0 million recognized during the second half of2005, all of which was reflected in the Corporate and Other segment. Theconsolidation and relocation process was completed during the second half of2006.

Also in 2005, the Company recorded charges to incomeof $23.2 million for the write-down of impaired assets related tounderperforming retail stores and the restructuring of its Canadian operations.

During 2006, the Company announced the reorganizationof the Contract segment, and recorded a pre-tax charge of $7.3 million foremployee severance related to the reorganization. The Contract segment alsorecorded an additional $3.0 million of costs during 2006 primarily related to afacility closure and employee severance.

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During 2006, the Company closed 109 underperformingdomestic retail stores and recorded a pre-tax charge of $89.5 million,comprised of $11.3 million for employee severance, asset write-off andimpairment and other closure costs and $78.2 million of estimated future leaseobligations.

TheCompany conducts regular reviews of its real estate portfolio to identifyunderperforming facilities, and closes those facilities that are no longer strategicallyor economically viable. The Company records a liability for the cost associatedwith a facility closure at its fair value in the period in which the liabilityis incurred, which is either the date the lease termination is communicated tothe lessor or the location’s cease-use date. Upon closure, unrecoverable costsare included in facility closure reserves on the Consolidated Balance Sheetsand include provisions for the present value of future lease obligations, lesscontractual or estimated sublease income. Accretion expense is recognized overthe life of the payments. Integration and facility closure reserve accountactivity during 2006, 2005 and 2004, including activity related to thereorganization of the Contract segment, retail store closures and headquartersconsolidation, was as follows:

| ** **                                     | ** ** | **Lease\  Contract  Terminations** | ** ** | **Severance\  Retention** | ** ** | **Asset  Write-off &  Impairment** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                     | ** ** | **(thousands)**                    | ** ** |
| Balance at December 31,  2003             |       |                               | $          | 126,922                   |       |                                        |       | $         | 3,094      |      |       |   | $ | — |   |   | $ | 412 |   | $ | 130,428 |   |
| Charges to income                              |       |                               | 1,043      |                      |       |                                        | 7,539      |      |       |      | 1,582      |   |   | 19,581 |   | 29,745 |   |
| Change in goodwill                             |       |                               | 11,245     |                      |       |                                        | 4,653      |      |       |      | —     |   |   | — |   | 15,898 |   |
| Changes to estimated costs  included in income |       |                               | —     |                      |       |                                        | (1,228     | )         |       |      | —     |   |   | — |   | (1,228 | ) |
| Cash payments                                  |       |                               | (26,503    | )                         |       |                                        | (7,416     | )         |       |      | —     |   |   | (19,584 | ) | (53,503 | ) |
| Non-cash charges                               |       |                               | —     |                      |       |                                        | —     |      |       |      | (1,582     | ) |   | — |   | (1,582 | ) |
| Accretion                                      |       |                               | 3,683      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 3,683 |   |
| Balance at December 31,  2004             |       |                               | $          | 116,390                   |       |                                        |       | $         | 6,642      |      |       |   | $ | — |   |   | $ | 409 |   | $ | 123,441 |   |
| Charges to income                              |       |                               | 547        |                      |       |                                        | 21,214     |      |       |      | 23,062     |   |   | 3,565 |   | 48,388 |   |
| Change in goodwill                             |       |                               | —     |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | — |   |
| Changes to estimated costs  included in income |       |                               | —     |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | — |   |
| Cash payments                                  |       |                               | (28,872    | )                         |       |                                        | (6,354     | )         |       |      | —     |   |   | (3,235 | ) | (38,461 | ) |
| Non-cash charges                               |       |                               | —     |                      |       |                                        | —     |      |       |      | (23,062    | ) |   | — |   | (23,062 | ) |
| Accretion                                      |       |                               | 3,390      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 3,390 |   |
| Balance at December 31,  2005             |       |                               | $          | 91,455                    |       |                                        |       | $         | 21,502     |      |       |   | $ | — |   |   | $ | 739 |   | $ | 113,696 |   |
| Charges to income                              |       |                               | 89,934     |                      |       |                                        | 19,407     |      |       |      | 9,543      |   |   | 27,332 |   | 146,216 |   |
| Change in goodwill                             |       |                               | (11,000    | )                         |       |                                        | —     |      |       |      | —     |   |   | — |   | (11,000 | ) |
| Changes to estimated costs  included in income |       |                               | —     |                      |       |                                        | (1,080     | )         |       |      | —     |   |   | — |   | (1,080 | ) |
| Cash payments                                  |       |                               | (68,596    | )                         |       |                                        | (28,991    | )         |       |      | —     |   |   | (18,951 | ) | (116,538 | ) |
| Non-cash charges                               |       |                               | —     |                      |       |                                        | —     |      |       |      | (9,543     | ) |   | (5,978 | ) | (15,521 | ) |
| Accretion                                      |       |                               | 6,031      |                      |       |                                        | —     |      |       |      | —     |   |   | — |   | 6,031 |   |
| Balance at December 30,  2006             |       |                               | $          | 107,824                   |       |                                        |       | $         | 10,838     |      |       |   | $ | — |   |   | $ | 3,142 |   | $ | 121,804 |   |

 

At December 30, 2006,approximately $44.7 million of the reserve liability was included inaccrued liabilities, other, and $77.1 million was included in otherlong-term liabilities. At December 31, 2005, approximately$60.4 million of the reserve liability was included in accruedliabilities, other, and $53.3 million was included in other long-termliabilities. At December 30, 2006, the integration activities and facilityclosures reserve included approximately $108 million for estimated futurelease 

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obligations,which represents the estimated fair value of the lease obligations and is netof anticipated sublease income of approximately $109 million. 

***5.   Net Income (Loss) Per Common Share***

Basic netincome (loss) per share is calculated using net earnings available to commonstockholders divided by the weighted-average number of shares of common stockoutstanding during the year. Diluted net income (loss) per share is similar tobasic net income (loss) per share except that the weighted-average number ofshares of common stock outstanding is increased to include the number ofadditional shares of common stock that would have been outstanding assuming theissuance of all potentially dilutive shares, such as common stock to be issuedupon exercise of options and non-vested restricted shares. Net income (loss)per common share was determined by dividing net income (loss), as adjusted, byweighted average shares outstanding as follows:

| ** **                                        | ** ** | **2006**                                                 | ** ** | **2005**   | ** ** | **2004**    | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|------------|------------|-------------|------------|
| ** **                                        | ** ** | **(thousands, except per-share amounts)** | ** ** |
| **Basic  income (loss) per common share:**        | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** **  | ** ** |
| Income (loss) from  continuing operations         |       | $                                                        | 99,054     |       | $          | (41,212     | )          | $ | 234,125 |   |
| Preferred dividends                               |       | (4,037                                                   | )          | (4,378     | )          | (11,917     | )          |
| Basic income (loss)  from continuing operations   |       | 95,017                                                   |       | (45,590    | )          | 222,208     |       |
| Loss from  discontinued operations                |       | (7,333                                                   | )          | (32,550    | )          | (61,067     | )          |
| Basic income (loss)                               | ** ** | **$**                                                    | **87,684** | ** ** | **$**      | **(78,140** | **)**      | **$** | **161,141** | ** ** |
| Average shares—basic                         | ** ** | **73,142**                                               | ** ** | **78,745** | ** ** | **86,917**  | ** ** |
| Basic income (loss)  per common share:            |       |                                                     |       |       |       |        |       |
| Continuing operations                             |       | $                                                        | 1.30       |       | $          | (0.58       | )          | $ | 2.55 |   |
| Discontinued operations                           |       | (0.10                                                    | )          | (0.41      | )          | (0.70       | )          |
| Basic income (loss)  per common share             | ** ** | **$**                                                    | **1.20**   | ** ** | **$**      | **(0.99**   | **)**      | **$** | **1.85** | ** ** |
| **Diluted income (loss) per common share:**       | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** **  | ** ** |
| Basic income (loss)  from continuing operations   |       | $                                                        | 95,017     |       | $          | (45,590     | )          | $ | 222,208 |   |
| Preferred dividends  eliminated                   |       | —                                                   |       | —     |       | 11,917      |       |
| Supplemental ESOP  contribution                   |       | —                                                   |       | —     |       | (10,833     | )          |
| Diluted income (loss)  from continuing operations |       | 95,017                                                   |       | (45,590    | )          | 223,292     |       |
| Loss from  discontinued operations                |       | (7,333                                                   | )          | (32,550    | )          | (61,067     | )          |
| Diluted income (loss)                             | ** ** | **$**                                                    | **87,684** | ** ** | **$**      | **(78,140** | **)**      | **$** | **162,225** | ** ** |
| Average shares—basic                         | ** ** | **73,142**                                               | ** ** | **78,745** | ** ** | **86,917**  | ** ** |
| Restricted stock,  stock options and other        | ** ** | **571**                                                  |       | —     | ** ** | **1,857**   | ** ** |
| Series D  Convertible Preferred Stock        |       | —                                                   |       | —     | ** ** | **2,880**   | ** ** |
| Average  shares—diluted (a)                  | ** ** | **73,713**                                               | ** ** | **78,745** | ** ** | **91,654**  | ** ** |
| Diluted income (loss)  per common share:          |       |                                                     |       |       |       |        |       |
| Continuing operations                             |       | $                                                        | 1.29       |       | $          | (0.58       | )          | $ | 2.44 |   |
| Discontinued operations                           |       | (.10                                                     | )          | (0.41      | )          | (0.67       | )          |
| Diluted income (loss) per  common share           | ** ** | **$**                                                    | **1.19**   | ** ** | **$**      | **(0.99**   | **)**      | **$** | **1.77** | ** ** |

 

(a)             Optionsto purchase 3.8 million shares of common stock were outstanding during 2005,but were not included in the computation of diluted income (loss) per commonshare because the impact would have been anti-dilutive due to the net lossrecognized in the period.

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***6.   Other Operating, Net***

Thecomponents of other operating, net in the Consolidated Statements of Income(Loss) are as follows:

| ** **                                                  | ** ** | **2006**        | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------|------------|-----------------|-------------|------------|------------|------------|------------|
| ** **                                                  | ** ** | **(thousands)** | ** **  |
| Gain on sale of  interest in Voyageur Panel (Note 10)       |       | $               | —      |       | $          | —     |       | $ | (46,498 | ) |
| Gain on sale of  Louisiana timberlands(a)                   |       | —          |        | —     |       | (59,915    | )          |
| Gains on sales of  other timberlands                        |       | —          |        | —     |       | (15,059    | )          |
| Gain on sale of  forest products assets (Note 2)            |       | —          |        | —     |       | (280,558   | )          |
| Integration activities  and facility closure costs (Note 4) |       | 146,216         |        | 48,178     |       | 8,936      |       |
| Loss on sale and  write-down of Yakima assets(b)            |       | —          |        | —     |       | 7,123      |       |
| Costs incidental to  the Sale (Note 2)                      |       | —          |        | —     |       | 18,916     |       |
| Legal settlement(c)                                         |       | —          |        | 9,800      |       | —     |       |
| Other, net                                                  |       | —          |        | 1,527      |       | 2,757      |       |
| Earnings from  affiliates                                   |       | (5,873          | )           | (5,460     | )          | (6,311     | )          |
|                                                        | ** ** | **$**           | **140,343** | ** ** | **$**      | **54,045** | ** ** | **$** | **(370,609** | **)** |

 

(a)             InMarch 2004, the Company sold approximately 79,000 acres of timberland inwestern Louisiana for $84 million in cash and recognized a$59.9 million pre-tax gain in the Consolidated Statement of Income (Loss)for 2004.

(b)            InFebruary 2004, the Company completed the sale of its plywood and lumberfacilities in Yakima, Washington. In connection with the sale, the Companyrecorded $7.1 million of costs in other operating, net in the ConsolidatedStatement of Income for 2004. The sale also resulted in a $7.4 millionreduction in the LIFO inventory reserve, the effect of which was reflected incost of goods sold and occupancy costs in 2004.

(c)             Legal settlement withthe Department of Justice.

***7.   Income Taxes***

Income tax(provision) benefit attributable to income (loss) from continuing operations asshown in the Consolidated Statements of Income (Loss) includes the followingcomponents:

| ** **                              | ** ** | **2006**        | ** **  | **2005** | ** ** | **2004**   | ** ** |
|-----------------------------------------|------------|-----------------|-------------|----------|------------|------------|------------|
| ** **                              | ** ** | **(thousands)** | ** **  |
| Current income tax (provision) benefit  |       |            |        |     |       |       |       |
| Federal                                 |       | $               | (10,014     | )        | $          | 28,908     |       | $ | (124,944 | ) |
| State                                   |       | (4,079          | )           | (14,629  | )          | (7,933     | )          |
| Foreign                                 |       | (17,816         | )           | (20,512  | )          | (24,606    | )          |
|                                    |       | (31,909         | )           | (6,233   | )          | (157,483   | )          |
| Deferred income tax (provision) benefit |       |            |        |     |       |       |       |
| Federal                                 |       | (31,521         | )           | 22,646   |       | 21,350     |       |
| State                                   |       | (6,428          | )           | (23,331  | )          | (10,595    | )          |
| Foreign                                 |       | 1,117           |        | 5,692    |       | 4,437      |       |
|                                    |       | (36,832         | )           | 5,007    |       | 15,192     |       |
|                                    | ** ** | **$**           | **(68,741** | **)**    | **$**      | **(1,226** | **)**      | **$** | **(142,291** | **)** |

 

Income tax benefit attributable to loss fromdiscontinued operations was $10.6 million, $20.1 million and$38.9 million for 2006, 2005 and 2004, respectively.

During 2006, 2005 and 2004, the Company made cashpayments for income taxes, net of refunds received, of $0.6 million,$134.1 million and $36.6 million, respectively.

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The incometax provision attributable to income (loss) from continuing operations for theyears ended December 30, 2006 and December 31, 2005 and 2004 differedfrom the amounts computed by applying the statutory U.S. Federal income taxrate of 35% to pre-tax income (loss) from continuing operations as a result ofthe following:

| ** **                                   | ** ** | **2006**        | ** **  | **2005** | ** ** | **2004**   | ** ** |
|----------------------------------------------|------------|-----------------|-------------|----------|------------|------------|------------|
| ** **                                   | ** ** | **(thousands)** | ** **  |
| Tax (provision) benefit at  statutory rate   |       | $               | (60,157     | )        | $          | 13,166     |       | $ | (132,805 | ) |
| State taxes, net of federal  effect          |       | (5,907          | )           | (5,532   | )          | (12,043    | )          |
| Foreign tax provision  differential          |       | (5,262          | )           | (2,883   | )          | (6,905     | )          |
| Basis difference in  investments disposed of |       | —          |        | 14,867   |       | 7,000      |       |
| Nondeductible compensation                   |       | (473            | )           | (4,268   | )          | —     |       |
| State NOL valuation  allowance               |       | (6,498          | )           | (21,533  | )          | —     |       |
| Change in contingency liability              |       | 1,925           |        | (4,607   | )          | —     |       |
| Tax settlement, net of other  charges        |       | 5,240           |        | 12,462   |       | —     |       |
| ESOP dividend deduction                      |       | 1,413           |        | 1,489    |       | 2,911      |       |
| Other, net                                   |       | 978             |        | (4,387   | )          | (449       | )          |
|                                         | ** ** | **$**           | **(68,741** | **)**    | **$**      | **(1,226** | **)**      | **$** | **(142,291** | **)** |

 

The taxeffects of temporary differences that give rise to significant portions of thedeferred tax assets and deferred tax liabilities are presented below at yearend:

| ** **                                                        | ** ** | **2006**        | ** **  | **2005**   | ** ** |
|-------------------------------------------------------------------|------------|-----------------|-------------|------------|------------|
| ** **                                                        | ** ** | **(thousands)** | ** **  |
| **Current deferred tax assets  (liabilities) attributable to**    |       |            |        |       |       |
| Accrued expenses                                                  |       | $               | 40,231      |       | $          | 41,157 |   |
| Net operating loss  carryforwards                                 |       | 43,489          |        | —     |       |
| Allowances for  receivables                                       |       | 17,998          |        | 18,410     |       |
| Compensation and  benefits                                        |       | 11,657          |        | 13,473     |       |
| Inventory                                                         |       | (6,047          | )           | 10,290     |       |
| Other temporary  differences                                      |       | 17,124          |        | 19,922     |       |
| Contingency reserves                                              |       | 5,044           |        | 2,568      |       |
| **Total  current net deferred tax assets**                        | ** ** | **$**           | **129,496** | ** ** | **$**      | **105,820** | ** ** |
| **Noncurrent deferred tax assets  (liabilities) attributable to** |       |            |        |       |       |
| Deferred gain(a)                                                  |       | (473,838        | )           | (473,838   | )          |
| Alternative minimum  tax and other credit carryforwards           |       | 214,590         |        | 234,222    |       |
| Compensation and  benefits                                        |       | 152,221         |        | 158,853    |       |
| Net operating loss  carryforwards                                 |       | 66,849          |        | 110,788    |       |
| Reserves                                                          |       | 44,445          |        | 57,851     |       |
| Investments                                                       |       | 10,046          |        | 22,852     |       |
| Goodwill                                                          |       | (33,110         | )           | (31,060    | )          |
| Other non-current  liabilities                                    |       | 3,010           |        | 2,091      |       |
| Undistributed earnings                                            |       | (4,776          | )           | (4,689     | )          |
| Deferred charges                                                  |       | 2,692           |        | 3,056      |       |
| Property and  equipment                                           |       | 14,300          |        | 1,890      |       |
| Other temporary  differences                                      |       | (4,430          | )           | (4,253     | )          |
|                                                              |       | (8,001          | )           | 77,763     |       |
| Less: Valuation  allowance                                        |       | (30,734         | )           | (21,533    | )          |
| **Total noncurrent net deferred  tax assets (liabilities)**       | ** ** | **$**           | **(38,735** | **)**      | **$**      | **56,230** | ** ** |

 

(a)             Includes$543.8 million related to the gain on the sale of the Company’stimberlands to affiliates of Boise Cascade, L.L.C. that was deferred until 2019for tax purposes.

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In assessing the realizability of deferred tax assets,management considers whether it is more likely than not that some portion orall of the deferred tax assets will not be realized. The ultimate realizationof deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income, and tax planning strategies inmaking this assessment. Management believes it is more likely than not that theCompany will realize the benefits of these deductible differences, except forcertain state net operating losses as noted below. The amount of the deferredtax asset considered realizable, however, could be reduced if estimates offuture taxable income during the carryforward period are reduced.

The Company has established a valuation allowance of$30.7 million related to net operating loss carryforwards in jurisdictionswhere the Company has substantially reduced operations because managementbelieves it is more likely than not that these items will expire before theCompany is able to realize their benefits. Periodically, the valuationallowance is reviewed and adjusted based on management’s assessments ofrealizable deferred tax assets.

The Company has a deferred tax asset related to netoperating loss carryforwards for Federal income tax purposes of $68.2 millionand $65.9 million at December 30, 2006 and December 31, 2005respectively. These net operating loss carryforwards are available to offsetfuture Federal taxable income, if any, through 2025. As of December 30,2006, the Company has alternative minimum tax credit carryforwards ofapproximately $196.8 million, which are available to reduce future regularFederal income taxes, if any, over an indefinite period, and foreign tax creditcarryforwards of $11.8 million with an expiration date of 2016. TheCompany also has deferred tax assets related to various state net operatinglosses of $24.3 million, net of the valuation allowance, that expirebetween 2007 and 2025.

Pre-taxincome (loss) related to continuing operations from domestic and foreignsources is as follows:

| ** **                  | ** ** | **2006**        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|-----------------|------------|----------|------------|----------|------------|
| ** **                  | ** ** | **(thousands)** | ** ** |
| Domestic                    |       | $               | 124,643    |     | $          | (65,073  | )          | $ | 340,484 |   |
| Foreign                     |       | 47,235          |       | 27,457   |       | 38,958   |       |
| Total pre-tax income (loss) |       | $               | 171,878    |     | $          | (37,616  | )          | $ | 379,442 |   |

 

As of December 30, 2006, the Company hadundistributed earnings and profits of foreign operations of approximately $270 million.The Company has not provided any U.S. income tax related to jurisdictions for whichit has determined that it has permanently reinvested its earnings. The Company hasprovided for $4.7 million in Federal income taxes related to theanticipated repatriation of earnings from its investment in a Mexican jointventure, net of foreign tax credit.

The Company has established,and periodically reviews, estimated contingent tax liabilities to provide forthe possibility of unfavorable outcomes in tax matters. Contingent taxliabilities totaled $66.6 million as of December 30, 2006 and$66.7 million as of December 31, 2005, and are included in othernoncurrent liabilities in the Consolidated Balance Sheets. These liabilitiesare accrued when considered probable and estimable, consistent with therequirements of SFAS No. 5, “Accounting for Contingencies.”

***8.   Leases***

TheCompany leases its retail stores as well as certain other property andequipment under operating leases. These leases are noncancelable and generallycontain multiple renewal options for periods ranging from three to five years,and require the Company to pay all executory costs such as 

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maintenance and insurance. Rental payments includeminimum rentals plus, in some cases, contingent rentals based on a percentageof sales above specified minimums. Rental expense for operating leases includedthe following components:

| ** **         | ** ** | **2006**        | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|--------------------|------------|-----------------|-------------|------------|------------|-------------|------------|
| ** **         | ** ** | **(thousands)** | ** **  |
| Minimum rentals    |       | $               | 343,203     |       | $          | 365,880     |       | $ | 371,959 |   |
| Contingent rentals |       | 763             |        | 752        |       | 1,036       |       |
| Sublease rentals   |       | (1,660          | )           | (2,021     | )          | (3,007      | )          |
|               | ** ** | **$**           | **342,306** | ** ** | **$**      | **364,611** | ** ** | **$** | **369,988** | ** ** |

 

For operating leases with remaining terms of more thanone year, the minimum lease payment requirements are: $341.7 million for2007, $310.8 million for 2008, $279.1 million for 2009,$245.9 million for 2010, $215.7 million for 2011 and$636.3 million thereafter. These minimum lease payments do not includecontingent rental payments that may be due based on a percentage of sales inexcess of stipulated amounts. These future minimum lease payment requirements havenot been reduced by $63.8 million of minimum sublease rentals due in thefuture under noncancelable subleases. These sublease rentals include amountsrelated to closed stores and other facilities that are accounted for in theintegration activities and facility closures reserve. See Note 4,Integration Activities and Facility Closures.

The Company capitalizes leaseobligations for which it assumes substantially all property rights and risks ofownership. The Company did not have any material capital leases during any ofthe periods presented.

***9.   Sales of Accounts Receivable***

On June 19, 2006, theCompany entered into a Fourth Amended and Restated Receivables Sale Agreementwith a group of lenders, which replaced the Third Amended and RestatedReceivables Sale Agreement that expired on that day. The agreement allows the Company to sell, on a revolving basis, anundivided interest in a defined pool of receivables while retaining asubordinated interest in a portion of the receivables. The receivablesare sold without legal recourse to third party conduits through a wholly ownedbankruptcy-remote special purpose entity that is consolidated forfinancial reporting purposes. The Company continues servicing the soldreceivables and charges the third party conduits a monthly servicing fee atmarket rates. The program qualifies for sale treatment under SFAS No. 140,“Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities.*”*The amount of availableproceeds under the program is limited to $200 million, and is subject tochange based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the transferredreceivables. At December 30, 2006 and December 31, 2005,$180.0 million and $163.0 million, respectively, of sold accountsreceivable were excluded from receivables in the accompanying ConsolidatedBalance Sheets. The Company’s subordinated retained interest in the transferredreceivables was $111.2 million and $73.3 million at December 30, 2006 and December 31,2005, respectively, and is included in receivables, net in the ConsolidatedBalance Sheets. Expenses associated with thesecuritization program totaled $10.6 million, $5.5 million and$4.2 million in 2006, 2005 and 2004, respectively. These expenses relateprimarily to the loss on sale of receivables and discount on retainedinterests, facility fees and professional fees associated with the program, andare included in the Consolidated Statements of Income (Loss). The receivablessale agreement will expire on June 18, 2007.

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***10.   Investments in Affiliates***

*Boise Cascade, L.L.C.and Affiliates*

In connection with the Sale, the Company invested$175 million in the equity units of affiliates of Boise Cascade, L.L.C. Aportion (approximately $66 million) of the equity units received inexchange for the Company’s investment carry no voting rights. This investmentis accounted for under the cost method as Boise Cascade, L.L.C. does notmaintain separate ownership accounts for its members, and the Company has lessthan a 20 percent voting interest in Boise Cascade, L.L.C. and does nothave the ability to significantly influence its operating and financialpolicies. This investment is included in investment in affiliates in theConsolidated Balance Sheets. The Company has determined that it is notpracticable to estimate the fair value of this investment. However, the Companydid not observe any events or changes in circumstances that would have had asignificant adverse effect on the fair value of the investment.

The Boise Cascade, L.L.C. non-votingequity units accrue dividends daily at the rate of 8% per annum on theliquidation value plus accumulated dividends. Dividends accumulate semiannuallyto the extent not paid in cash on the last day of any June and December.The Company recognized dividend income on this investment of $5.9 millionin 2006 and $5.5 million in 2005.

*Voyageur Panel*

In May 2004, the Company sold its 47 percentjoint venture interest in Voyageur Panel, which owned and operated an orientedstrand board plant in Barwick, Ontario, Canada, to Ainsworth LumberCo. Ltd. for $91.2 million in cash. The Company recognized a$46.5 million pre-tax gain ($28.4 million after tax) on thetransaction, which is included in other operating, net in the ConsolidatedStatement of Income (Loss) for 2004, and reported in the Boise BuildingSolutions segment.

Prior to the sale, the Company accounted for thisjoint venture interest under the equity method. Accordingly, segment results donot include the sales of Voyageur Panel, but do include $6.3 million ofequity in earnings from this investment for 2004.

Under the terms of anagreement with Voyageur Panel, the Company operated the plant and marketed itsproduct in exchange for a management fee and sales commissions. During 2004,Voyageur Panel paid $2.1 million in sales commissions and $0.4 million inmanagement fees to the Company.

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***11.   Goodwill and Intangible Assets***

*Goodwill*

Changes inthe carrying amount of goodwill by segment are as follows:

| ** **                              | ** ** | **OfficeMax,  Contract** | ** ** | **OfficeMax,  Retail** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|--------------------------|------------|------------------------|------------|------------|------------|
| Balance at  December 31, 2004      |       |                     | $          | 505,916                |       |       |       | $ | 659,400 |   |   | $ | 1,165,316 |   |
| Effect of foreign  currency translation |       |                     | (4,188     | )                      |       |       | —     |   |   | (4,188 | ) |
| Businesses acquired                     |       |                     | 22,461     |                   |       |       | —     |   |   | 22,461 |   |
| Purchase accounting  adjustments        |       |                     | (652       | )                      |       |       | 35,263     |   |   | 34,611 |   |
| Balance at  December 31, 2005      |       |                     | 523,537    |                   |       |       | 694,663    |   |   | 1,218,200 |   |
| Effect of foreign  currency translation |       |                     | 6,423      |                   |       |       | —     |   |   | 6,423 |   |
| Businesses acquired                     |       |                     | 1,114      |                   |       |       | —     |   |   | 1,114 |   |
| Purchase accounting  adjustments        |       |                     | (2,984     | )                      |       |       | (6,721     | ) |   | (9,705 | ) |
| Balance at December 30,  2006      | ** ** | ** **               | **$**      | **528,090**            |       | ** ** | ** ** | **$** | **687,942** |   | ** ** | **$** | **1,216,032** | ** ** |

 

The initial OfficeMax, Inc.purchase price allocation was revised during 2004 as additional informationrelated to the fair values of the assets acquired and liabilities assumedbecame available. These revisions were primarily related to accruals forestimated costs associated with retail store closures and the consolidation ofthe Company’s distribution center network and customer service centers. During2005, the Company filed the remaining tax returns related to the pre-acquisitionoperations of OfficeMax, Inc. and adjusted goodwill to reflect adjustmentsto the deferred tax assets and liabilities related to the acquired net assets.During 2006, additional adjustments were necessary to reflect the recognitionof certain identifiable assets in the contract seqment and the reversal of aportion of the EITF 95-3 liability recorded in purchase accounting relatedto the retail segment.

*Acquired IntangibleAssets*

Intangible assets represent the values assigned to trade names, customerlists and relationships, noncompete agreements and exclusive distributionrights of businesses acquired. The trade name assets have an indefinite lifeand are not amortized. All other intangible assets are amortized on astraight-line basis over their expected useful lives. Customer lists andrelationships are amortized over three to 20 years, noncompete agreementsover their terms, which are generally three to five years, and exclusivedistribution rights over ten years. Intangible assets consisted of the followingat year end:

| ** **                        | ** ** | **2006**                        | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                        | ** ** | **(thousands)**                 | ** ** |
| Trade names                       |       |                            | $          | 173,150 |   |   |   | $ | — |   |   |   | $ | 173,150 |   |   |
| Customer lists and  relationships |       |                            | 39,681     |   |   |   | (17,678 | ) |   |   | 22,003 |   |   |
| Noncompete agreements             |       |                            | 12,853     |   |   |   | (8,213 | ) |   |   | 4,640 |   |   |
| Exclusive  distribution rights    |       |                            | 3,616      |   |   |   | (2,105 | ) |   |   | 1,511 |   |   |
|                              | ** ** | ** **                      | **$**      | **229,300** |   | ** ** | ** ** | **$** | **(27,996** | **)** | ** ** | ** ** | **$** | **201,304** |   |   |

 

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| ** **                        | ** ** | **2005**                        | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                        | ** ** | **(thousands)**                 | ** ** |
| Trade names                       |       |                            | $          | 173,100 |   |   |   | $ | — |   |   |   | $ | 173,100 |   |   |
| Customer lists and  relationships |       |                            | 36,438     |   |   |   | (13,438 | ) |   |   | 23,000 |   |   |
| Noncompete agreements             |       |                            | 12,852     |   |   |   | (5,577 | ) |   |   | 7,275 |   |   |
| Exclusive  distribution rights    |       |                            | 3,508      |   |   |   | (1,651 | ) |   |   | 1,857 |   |   |
|                              | ** ** | ** **                      | **$**      | **225,898** |   | ** ** | ** ** | **$** | **(20,666** | **)** | ** ** | ** ** | **$** | **205,232** |   |   |

 

Intangible asset amortization expense totaled $7.3million in 2006, $6.8 million in 2005 and $5.8 million in 2004. Theestimated amortization expense is $7.1 million, $4.9 million,$1.8 million, $1.7 million, $1.4 million and $1.4 million in2007, 2008, 2009, 2010, 2011 and 2012, respectively.

During the first quarter ofboth 2006 and 2005, the Company evaluated the remaining useful lives of finite-livedpurchased intangible assets to determine if any adjustments to the useful liveswere necessary. Based on this review, management determined that no adjustmentsto the useful lives of finite-lived purchased intangible assets werenecessary.

***12.   Timber Notes Receivable***

In October 2004,OfficeMax sold its timberlands as part of the Sale. In exchange for thetimberlands, the Company received timber installment notes receivable in theamount of $1,635 million, which were credit enhanced with guarantees. Theguarantees were issued by highly-rated financial institutions and were securedby the pledge of underlying collateral notes issued by the credit enhancementbanks. The timber installment notes receivable are 15-yearnon-amortizing. There are two notes that total $817.5 million bearinginterest at 4.982% and a third note in the amount of $817.5 millionbearing interest at 5.112%. Interest earned on all of the notes is receivedsemiannually. See the sub-caption “Timber Notes” in Note 13, Debt, foradditional information concerning a securitization transaction involving thetimber installment notes receivable.

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***13.   Debt***

*Long-Term Debt*

Long-termdebt, almost all of which is unsecured, consists of the following at year end:

| ** **                                                                                                                    | ** ** | **2006**        | ** **    | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|---------------|------------|------------|
| ** **                                                                                                                    | ** ** | **(thousands)** | ** **    |
| 7.50% notes, due in  2008                                                                                                     |       | $               | 29,656        |       | $          | 29,601 |   |
| 9.45% debentures, due  in 2009                                                                                                |       | 35,707          |          | 35,764     |       |
| 6.50% notes, due in  2010                                                                                                     |       | 13,680          |          | 13,680     |       |
| 7.00% notes, due in  2013                                                                                                     |       | 19,100          |          | 19,100     |       |
| 7.35% debentures, due  in 2016                                                                                                |       | 17,967          |          | 17,966     |       |
| Medium-term  notes, Series A, with interest rates averaging 7.8% and 7.7%, due in  varying amounts annually through 2013 |       | 82,300          |          | 121,000    |       |
| Revenue bonds, with  interest rates averaging 6.4% and 6.4%, due in varying amounts annually  through 2029                    |       | 189,930         |          | 189,930    |       |
| American &  Foreign Power Company Inc. 5% debentures, due in 2030                                                    |       | 18,526          |          | 18,469     |       |
| Other indebtedness,  with interest rates averaging 7.1% and 5.5%, due in varying amounts annually  through 2017               |       | 3,687           |          | 31,044     |       |
|                                                                                                                          |       | 410,553         |          | 476,554    |       |
| Less unamortized  discount                                                                                                    |       | 673             |          | 664        |       |
| Less current portion                                                                                                          |       | 25,634          |          | 68,648     |       |
|                                                                                                                          |       | 384,246         |          | 407,242    |       |
| 5.42% securitized  timber notes, due in 2019                                                                                  |       | 735,000         |          | 735,000    |       |
| 5.54% securitized  timber notes, due in 2019                                                                                  |       | 735,000         |          | 735,000    |       |
|                                                                                                                          | ** ** | **$**           | **1,854,246** | ** ** | **$**      | **1,877,242** | ** ** |

 

In 2004, the Company repaidapproximately $1.6 billion of outstanding debt, primarily with theproceeds from the Sale, and expensed $137.1 million of costs related tothe early retirement of debt. In 2005, the Company expensed an additional$14.4 million of costs related to the early retirement of debt and repaidan additional $198.7 million of outstanding debt. During 2006, the Companyreduced its short and long-term borrowing by $84.3 million.

*Scheduled DebtMaturities*

The scheduled payments oflong-term debt, excluding timber notes due in 2019, are $25.6 million in 2007,$35.1 million in 2008, $50.9 million in 2009, $15.8 million in 2010, $0.5million in 2011 and $282.7 million thereafter.

*Credit Agreements*

On June 24, 2005, the Company entered into a loanand security agreement for a new revolving credit facility. The revolvingcredit facility permits the Company to borrow up to the maximum aggregateborrowing amount, which is equal to the lesser of (i) a percentage of thevalue of certain eligible inventory less certain reserves or (ii) $500 million.In the second quarter of 2006, the Company amended the revolving creditagreement to provide greater access to the borrowing base availability underthe facility. There were no borrowings outstanding under the revolving creditfacility as of December 30, 2006. There were $18.7 million in borrowingsoutstanding under the revolving credit facility as of December 31, 2005.The maximum amount outstanding under the revolving credit facility was $122.0million and $101.0 million during 2006 and 2005, respectively. The averageamount outstanding under the revolving credit facility was $20.6 million during2006 and $30.3 million during 

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2005. Letters of credit, whichmay be issued under the revolver up to a maximum of $100 million, reduceavailable borrowing capacity under the revolving credit facility. Letters ofcredit issued under the revolver totaled $75.5 million as of December 30,2006. As of December 30, 2006, the maximum aggregate amount availableunder the revolver was $500.0 million and $424.5 was available forborrowing.

Borrowings under the revolver bear interest at ratesbased on either the prime rate or the London Interbank Offered Rate (“LIBOR”).Margins are applied to the applicable borrowing rates and letter of credit feesunder the revolver depending on the level of average excess availability. Forborrowings outstanding under the revolver during 2006 and 2005, the weightedaverage interest rate was equal to 6.9% and 6.6%, respectively. Fees on lettersof credit issued under the revolver were charged at a weighted average rate of1.125%. The Company is also charged an unused line fee of 0.25% on theamount by which the maximum available credit of $500 million exceeds theaverage daily outstanding borrowings and letters of credit.

Borrowings under the revolverare secured by a lien on substantially all inventory and related proceeds. Therevolving loan and security agreement contains customary conditions toborrowing including a monthly calculation of excess borrowing availability andreporting compliance. Covenants in the revolver agreement restrict the amountof letters of credit that may be issued, dividend distributions and other usesof cash if excess availability is less than $75 million. At December 30,2006, the Company was in compliance with all covenants under the revolveragreement and excess availability was in excess of $75 million. Therevolver expires on June 24, 2010.

*Timber Notes*

In October 2004, the Company sold its timberlandsas part of the Sale and received credit-enhanced timber installment notesreceivable in the amount of $1,635 million. In December 2004, theCompany completed a securitization transaction in which its interests in thetimber installment notes receivable and related guarantees were transferred towholly-owned bankruptcy remote subsidiaries that were designated to bequalifying special purpose entities (the “OMXQ’s”). The OMXQ’s pledged thetimber installment notes receivable and related guarantees and issuedsecuritization notes in the amount of $1,470 million. Recourse on thesecuritization notes is limited to the pledged timber installment notesreceivable. The securitization notes are 15-year non-amortizing, and wereissued in two equal $735 million tranches paying interest of 5.42% and5.54%, respectively.

As a result of these transactions, OfficeMax received$1,470 million in cash from the OMXQ’s, and over 15 years will earnapproximately $82.5 million per year in interest income on the timberinstallment notes receivable and incur annual interest expense of approximately$80.5 million on the securitization notes. The pledged timber installmentnotes receivable and nonrecourse securitization notes will mature in 2020 and2019, respectively. The securitization notes have an initial term that isapproximately three months shorter than the installment notes. The Companyexpects to refinance its ownership of the installment notes in 2019 with ashort-term secured borrowing to bridge the period from initial maturity of thesecuritization notes to the maturity of the installment notes.

The original entities issuingthe credit enhanced timber installment notes are variable-interest entities(the “VIE’s”) under FASB Interpretation 46R, “Consolidation of VariableInterest Entities”. The OMXQ’s are considered to be the primary beneficiary,and therefore, the VIE’s are required to be consolidated with the OMXQ’s, whichare also the issuers of the securitization notes. As a result, the accounts ofthe OMXQ’s have been consolidated into those of their ultimate parent,OfficeMax. The effect of the Company’s consolidation of the OMXQ’s is that thesecuritization transaction is treated as a financing, and both the timber notesreceivable and the securitization notes payable are reflected in theConsolidated Balance Sheets.

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*Note Agreements*

In October 2003, the Company issued$300 million of 6.50% senior notes due in 2010 and $200 million of7.00% senior notes due in 2013. At the time of issuance, the senior noteindentures contained a number of restrictive covenants, substantially all ofwhich have been eliminated through the execution of supplemental indentures asdescribed below. On November 5, 2004, the Company repurchasedapproximately $286.3 million of the 6.50% senior notes and received therequisite consents to adopt amendments to the indenture pursuant to a tenderoffer for these securities. As a result, the Company and the trustee executed asupplemental indenture that eliminated substantially all of the restrictivecovenants, certain events of default and related provisions, and replaced themwith the covenants contained in the Company’s other public debt. Thosecovenants include a limitation on mergers and similar transactions, arestriction on secured transactions involving Principal Properties, as defined,and a restriction on sale and leaseback transactions involving PrincipalProperties.

In December 2004, both Moody’s InvestorsService, Inc., and Standard & Poor’s Rating Services upgraded thecredit rating on the Company’s 7.00% senior notes to investment grade. Theupgrades were the result of actions the Company took to collateralize the notesby granting the note holders a security interest in $113 million inprincipal amount of General Electric Capital and Bank of America Corp. notesmaturing in 2008 (the “pledged instruments”). These pledged instruments arereflected as restricted investments in the Consolidated Balance Sheets. As aresult of these ratings upgrades, the original 7.00% senior note covenants havebeen replaced with the covenants found in the Company’s other public debt.During the first quarter of 2005, the Company purchased and cancelled$87.3 million of the 7.00% senior notes. As a result, $92.8 millionof the pledged instruments were released from the security interest granted tothe 7.00% senior note holders, and were sold during the second quarter of 2005.The remaining pledged instruments continue to be subject to the securityinterest, and are reflected as restricted investments in the ConsolidatedBalance Sheets.

*Other*

The Company had leased certainequipment at its integrated wood-polymer building materials facility near Elma,Washington under a capital lease. The lease agreement had a base term of sevenyears and an interest rate of 4.67%. Duringthe first quarter of 2006, the Company paid $29.1 million to terminate thelease agreement. At December 31, 2005, the capital lease obligation wasincluded in the current portion of long-term debt in the Consolidated BalanceSheets.

*Cash Paid for Interest*

Cash payments for interest,net of interest capitalized, were $124.1 million in 2006,$122.6 million in 2005 and $167.7 million in 2004.

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***14.   Financial Instruments, Derivatives andHedging Activities***

*Fair Value of FinancialInstruments*

Thecarrying amounts of cash and cash equivalents, trade accounts receivable, otherassets (nonderivatives), short-term borrowings, trade accounts payable,and due to affiliated company, approximate fair value because of the shortmaturity of these instruments. The following table presents the carryingamounts and estimated fair values of the Company’s other financial instrumentsat December 30, 2006 and December 31, 2005. The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction between willing parties.

| ** **                    | ** ** | **2006**                 | ** ** | **2005**            | ** ** |
|-------------------------------|------------|--------------------------|------------|---------------------|------------|
| ** **                    | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** | **Carrying amount** | ** ** | **Fair value** | ** ** |
| ** **                    | ** ** | **(thousands)**          | ** ** |
| Financial assets:             |       |                     |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Timber notes receivable       |       |                     | $          | 1,635.0             |       |   |   | $ | 1,669.3 |   |   |   | $ | 1,635.0 |   |   |   | $ | 1,669.3 |   |   |
| Restricted investments        |       |                     | 22.3       |                |       |   | 21.6 |   |   |   | 22.4 |   |   |   | 21.7 |   |   |
| Financial  liabilities:       |       |                     |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                |       |                     | $          | 409.9               |       |   |   | $ | 412.0 |   |   |   | $ | 475.9 |   |   |   | $ | 471.3 |   |   |
| Securitization notes  payable |       |                     | 1,470.0    |                |       |   | 1,440.7 |   |   |   | 1,470.0 |   |   |   | 1,440.7 |   |   |

 

The carrying amountsshown in the table are included in the Consolidated Balance Sheets under theindicated captions. The following methods and assumptions were used to estimatethe fair value of each class of financial instruments:

·       Timbernotes receivable: The fair value is determined as the present value of expectedfuture cash flows discounted at the current interest rate for loans of similarterms with comparable credit risk.

·       Restrictedinvestments: The fair values of debt securities are based on quoted marketprices at the reporting date for those or similar investments.

·       Securitizationnotes: The fair value of the Company’s securitization notes is estimated bydiscounting the future cash flows of each instrument at rates currentlyavailable to the Company for similar instruments of comparable maturities.

·       Long-term debt: The fairvalue of the Company’s long-term debt is estimated based on quoted market priceswhen available or by discounting the future cash flows of each instrument atrates currently offered to the Company for similar debt instruments ofcomparable maturities.

*Derivatives and HedgingActivities*

At December 30, 2006, the Company was not a partyto any significant derivative instruments.

Changes in interest rates and currency exchange ratesexpose the Company to financial market risk. Management occasionally usesderivative financial instruments, such as interest rate swaps, forward purchasecontracts and forward exchange contracts, to manage the Company’s exposure tochanges in interest rates on outstanding debt instruments and to manage theCompany’s exposure to changes in currency exchange rates. The Company generallydoes not enter into derivative instruments for any purpose other than hedgingthe cash flows associated with future interest payments on variable rate debtand hedging the exposure related to changes in the fair value of certainoutstanding fixed rate debt instruments due to changes in interest rates. TheCompany occasionally hedges interest rate risk associated with anticipatedfinancing transactions, as well as commercial transactions and certainliabilities that are denominated in a currency other than the 

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currency of the operating unitentering into the underlying transaction. The Company does not speculate usingderivative instruments.

The derivative financial instruments that the Companyuses in its management of interest rate risk consist principally of interestrate swap agreements. By using derivative financial instruments to hedgeexposures to changes in interest rates, the Company exposes itself to creditrisk and market risk. Credit risk is the risk that the counterparty will failto perform under the terms of the derivative contract. The Company attempts to minimizethe credit risk in derivative instruments by entering into transactions onlywith investment grade counterparties. Market risk is the adverse effect on thevalue of a financial instrument that results from a change in interest rates.The market risk associated with interest rate contracts is managed by establishingand monitoring parameters that limit the types and degree of market risk thatmay be undertaken.

The Company assesses its exposure to variability ininterest rates by continually identifying and monitoring changes in interestrates that may adversely impact future cash flows and the fair value ofexisting debt instruments, and by evaluating hedging opportunities. The Companymaintains risk management control systems to monitor interest rate riskattributable to both the Company’s outstanding and forecasted debt obligationsas well as the Company’s offsetting hedge positions. The risk managementcontrol systems involve the use of analytical techniques, including sensitivityanalysis, to estimate the expected impact of changes in interest rates on thefair value of the Company’s outstanding and forecasted debt instruments.

The Company uses a combination of fixed and variablerate debt to finance its operations. The debt obligations with fixed cash flowsexpose the Company to variability in the fair value of outstanding debtinstruments due to changes in interest rates. The Company has from time to timeentered into interest rate swap agreements that effectively convert theinterest rate on certain fixed-rate debt to a variable rate. The Company hasdesignated these interest rate swap agreements as hedges of the changes in fairvalue of the underlying debt obligation attributable to changes in interestrates and accounted for them as fair value hedges. Changes in the fair value ofinterest rate swaps designated as hedging instruments that effectively offsetthe variability in the fair value of outstanding debt obligations are reportedin operations. These amounts offset the gain or loss (that is, the change infair value) of the hedged debt instrument that is attributable to changes ininterest rates (that is, the hedged risk) which is also recognized currently inoperations. The Company has also from time to time entered into interest rateswap agreements that effectively convert floating rate debt to a fixed rateobligation. These swaps have been designated as hedges of floating interestrate payments attributable to changes in interest rates and accounted for ascash flow hedges, with changes in the fair value of the swap recorded to othercomprehensive income (loss) until the hedged transaction occurs, at which timeit is reclassified to operations.

Prior to the Sale, the Company had a commodity-pricerisk management strategy that used derivative instruments to minimizesignificant, unanticipated earnings fluctuations caused by energy pricevolatility. The activities of the Company’s paper, forest products and buildingmaterials businesses required a significant volume of electricity and naturalgas. Price fluctuations in electricity and natural gas could cause the actualpurchase prices paid for energy to differ from anticipated prices.

Unrealized gains and lossesassociated with marking the electricity and natural gas swap contracts tomarket were recorded as a component of other comprehensive income (loss) andincluded in the stockholders’ equity section of the Consolidated Balance Sheetsas part of accumulated other comprehensive income (loss). These amounts werereclassified into operations in the month in which the related electricity ornatural gas was used or in the month a hedge was determined to be ineffective.

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*Interest Rate Swaps*

On October 27, 2004, the Company and one of itssubsidiaries each entered into an interest rate swap contract with an affiliateof Goldman, Sachs & Co. The contracts were entered into in order tohedge the interest rate risk associated with the issuance of debt securities inconnection with the securitization of the timber notes received in the Sale.(See Note 13 Debt, for additional information related to the timber notesand the related securitization transaction.) The Company paid$19.0 million to settle these swap contracts on December 16, 2004, inconjunction with the issuance of the securitization notes. The settlementamount reflected the effect of the decrease in interest rates that occurredduring the period the swaps were outstanding.

In April and May 2004, the Company enteredinto two interest rate swaps with notional amounts of $50 million each.These swaps converted $100 million of fixed-rate 7.50% debentures tovariable-rate debt based on six-month LIBOR plus approximately 3.9% for the April swap,and six-month LIBOR plus 3.8% for the May swap. In March 2002, theCompany entered into an interest rate swap with a notional amount of$50 million. This swap converted $50 million of fixed-rate 7.05%debentures to variable-rate debt based on six-month LIBOR plus approximately2.2%. In September 2004, the Company settled all of these swaps inanticipation of making a tender offer for the underlying debt instruments.These swaps were designated as fair value hedges of a proportionate amount ofthe fixed-rate debentures. The swaps and debentures were marked to market, withchanges in the fair value of the instruments recorded in income (loss) in theperiod they arose. These swaps were effective in hedging the changes in thefair value of the hedged item; accordingly, changes in the fair values of theseinstruments had no net effect on reported net income (loss).

In February 2001, theCompany entered into two interest rate swaps with notional amounts of$50 million each, one that matured in February 2003 and one thatmatured in February 2004. In November 2001, the Company entered intoa third interest rate swap with a notional amount of $50 million, whichmatured in November 2004. The swaps were designated as hedges of thevariable cash flow risk related to the variable interest payments on equivalentamounts of LIBOR-based revolving credit borrowings outstanding in 2004and 2003. Changes in the fair value of these swaps, net of taxes, were recordedin accumulated other comprehensive income (loss) and reclassified to interestexpense as interest expense was recognized on the LIBOR-based debt.Amounts reclassified to operations in 2004 increased interest expense by$1.2 million. Ineffectiveness related to these hedges was not significant.

*AdditionalConsideration Agreement*

Pursuant to an Additional Consideration Agreementbetween OfficeMax and Boise Cascade, L.L.C., we may be required to makesubstantial cash payments to, or receive substantial cash payments from, BoiseCascade, L.L.C. Under the Additional Consideration Agreement, the Saleproceeds may be adjusted upward or downward based on paper prices during thesix years following the Sale, subject to annual and aggregate caps.Specifically, we have agreed to pay Boise Cascade, L.L.C. $710,000 for eachdollar by which the average market price per ton of a specified benchmark gradeof cut-size office paper during any 12-month period ending on September 30 isless than $800. Boise Cascade, L.L.C. has agreed to pay us $710,000 for eachdollar by which the average market price per ton exceeds $920. Under the termsof the agreement, neither party will be obligated to make a payment in excessof $45 million in any one year. Payments by either party are also subjectto an aggregate cap of $125 million that declines to $115 million inthe fifth year and $105 million in the sixth year. 

In connection with recording the Sale in 2004, wecalculated our projected future obligation under the Additional ConsiderationAgreement and accrued $42 million in Other long-term liabilities on ourConsolidated Balance Sheet. We calculated the $42 million based onpublished industry paper price 

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projections. During 2006 and2005, we recognized accretion expense on the discounted accrual totalingapproximately $6 million in our Consolidated Statements of Income (Loss).Due to recent increases in actual and projected paper prices, the change infair value in 2006 resulted in income of $48.0 million in our ConsolidatedStatement of Income (Loss). As a result, at December 30, 2006, the net amountrecognized in our Consolidated Balance Sheet related to the AdditionalConsideration Agreement (either receivable or payable) was zero. We recordchanges in the fair value of the Additional Consideration Agreement in our netincome (loss) in the period they occur; however, any potential payments fromBoise Cascade, L.L.C. to us are not recorded in net income (loss) until allcontingencies have been satisfied, which is generally at the end of a 12-monthmeasurement period ending on September 30.  As of December 31, 2006, the average market price per ton of thebenchmark grade used to calculate payments due under the Additional ConsiderationAgreement was $943. This average is the average for the first three months ofthe 12-month measurement period ending on September 30, 2007.  Market prices for paper are volatile and subjectto significant fluctuations. Accordingly, the average market price per ton for the 12-month periodending on September 30, 2007 may be significantly different than the average asof December 31, 2006.

***15.   Retirement and Benefit Plans***

*Pension and OtherPostretirement Benefit Plans*

Through October 28, 2004, some of the Company’semployees were covered by noncontributory defined benefit pension plans.Effective July 31, 2004, the Company established separate mirror plans foractive employees in the paper and forest products businesses, and transferred theassociated assets and obligations to the new plans. Effective October 29,2004, under the terms of the Asset Purchase Agreement, the Company transferredsponsorship of the plans covering active employees of the paper and forest productsbusinesses to Boise Cascade, L.L.C. As a result, only those terminated vestedemployees and retirees whose employment with the Company ended on or before July 31,2004, and some active OfficeMax, Contract employees, were covered under theplans sponsored by the Company. OfficeMax, Retail employees, among others,never participated in any of the Company’s defined benefit pension plans. TheCompany’s salaried pension plan was closed to new entrants on November 1,2003, and on December 31, 2003, the benefits of eligible OfficeMax,Contract participants were frozen. Active OfficeMax, Contract employees whowere eligible to participate in the plan on December 31, 2003 werecredited with one additional year of service on January 1, 2004, at areduced 1% crediting rate.

Under the terms of the Company’s plans, the pensionbenefit for salaried employees was based primarily on the employees’ years ofservice and highest five-year average compensation. The pension benefit forhourly employees was generally based on a fixed amount per year of service. TheCompany’s general funding policy is to make contributions to the plans inamounts that are within the limits of deductibility under current taxregulations, and not less than the minimum contribution required by law. TheCompany generally uses a measurement date consistent with its year end for itspension plans.

The Company also sponsors various retiree medicalbenefit plans. The type of retiree medical benefits and the extent of coveragevary based on employee classification, date of retirement, location, and otherfactors. All of the Company’s postretirement medical plans are unfunded. TheCompany explicitly reserves the right to amend or terminate its retiree medicalplans at any time, subject only to constraints, if any, imposed by the terms ofcollective bargaining agreements. Amendment or termination may significantlyaffect the amount of expense incurred.

During the third quarter of2005, the Company made changes to its retiree medical benefit plans that hadthe net effect of reducing the medical insurance subsidy provided to retirees,including eliminating the subsidy for certain retirees. As a result of theseplan changes, the accumulated 

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post-retirementbenefit obligation was reduced by approximately $44 million. The planchanges were considered to be a negative plan amendment, as defined in SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other than Pensions.”Accordingly, there was no gain related to the plan changes recognized in theConsolidated Statement of Income (Loss) for 2005. The reduction in theaccumulated post-retirement benefit obligation will be recognized ratablyover the remaining life expectancy of the participants in the plans, which iscurrently estimated to be approximately 12 years.

*Obligations and FundedStatus*

Thechanges in pension and other postretirement benefit obligations and plan assetsduring 2006 and 2005, as well as the funded status of the Company’s plans at December 30,2006 and December 31, 2005, were as follows:

| ** **                                      | ** ** | **Pension Benefits** | ** **    | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|---------------------------|---------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                  | ** **    | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**           | ** **    |
| **Change in benefit obligation:**               |       |                      |          |                    |       |   |   |   |   |
| Benefit obligation at  beginning of year        |       | $                         | 1,382,760     |                    | $          | 1,394,125 |   | $ | 31,523 |   | $ | 78,871 |   |
| Service cost                                    |       | 1,600                     |          | 959                     |       | 870 |   | 643 |   |
| Interest cost                                   |       | 74,679                    |          | 75,266                  |       | 1,583 |   | 3,668 |   |
| Amendments                                      |       | —                    |          | —                  |       | — |   | (44,240 | ) |
| Actuarial (gain) loss                           |       | 20,007                    |          | 8,138                   |       | (180 | ) | (963 | ) |
| Changes due to  exchange rates                  |       | —                    |          | —                  |       | 35 |   | 490 |   |
| Transfers and  immediate recognition            |       | 6,158                     |          | —                  |       | — |   | — |   |
| Benefits paid                                   |       | (103,649                  | )             | (95,728                 | )          | (2,042 | ) | (6,946 | ) |
| Benefit obligation at  end of year              | ** ** | **$**                     | **1,381,555** | ** **              | **$**      | **1,382,760** | ** ** | **$** | **31,789** | ** ** | **$** | **31,523** | ** ** |
| **Change in plan assets:**                      |       |                      |          |                    |       |   |   |   |   |
| Fair value of plan  assets at beginning of year |       | $                         | 1,146,596     |                    | $          | 1,161,894 |   | $ | — |   | $ | — |   |
| Actual return on plan  assets                   |       | 130,690                   |          | 77,654                  |       | — |   | — |   |
| Employer  contributions                         |       | 9,638                     |          | 2,776                   |       | 2,042 |   | 6,946 |   |
| Benefits paid                                   |       | (103,649                  | )             | (95,728                 | )          | (2,042 | ) | (6,946 | ) |
| Fair value of plan  assets at end of year       | ** ** | **$**                     | **1,183,275** | ** **              | **$**      | **1,146,596** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| Funded status                                   |       | $                         | (198,280      | )                       | $          | (236,165 | ) | $ | (31,789 | ) | $ | (31,523 | ) |
| Unrecognized  actuarial loss                    |       | 335,444                   |          | 383,431                 |       | 10,220 |   | 11,086 |   |
| Unrecognized  transition obligation             |       | —                    |          | —                  |       | 4,947 |   | 5,317 |   |
| Unrecognized prior  service cost (benefit)      |       | —                    |          | —                  |       | (41,845 | ) | (45,797 | ) |
| Net amount recognized                           | ** ** | **$**                     | **137,164**   | ** **              | **$**      | **147,266** | ** ** | **$** | **(58,467** | **)** | **$** | **(60,917** | **)** |

 

Thefollowing table shows the amounts recognized in the Consolidated Balance Sheetsrelated to the Company’s defined benefit pension and other postretirementbenefit plans at year end:

| ** **                                  | ** ** | **Pension Benefits** | ** **  | **Other Benefits** | ** ** |
|---------------------------------------------|------------|---------------------------|-------------|-------------------------|------------|
| ** **                                  | ** ** | **2006**                  | ** **  | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(thousands)**           | ** **  |
| Prepaid benefit cost                        |       | $                         | —      |                    | $          | 182,088 |   | $ | — |   | $ | — |   |
| Deferred income tax  assets                 |       | 130,488                   |        | 144,848                 |       | (10,690 | ) | — |   |
| Accrued benefit  liability—current     |       | (11,100                   | )           | (2,600                  | )          | (2,100 | ) | (6,900 | ) |
| Accrued benefit  liability—non-current |       | (187,180                  | )           | (404,578                | )          | (29,689 | ) | (54,017 | ) |
| Accumulated other  comprehensive loss       |       | 204,956                   |        | 227,508                 |       | (15,988 | ) | — |   |
| Net amount recognized                       | ** ** | **$**                     | **137,164** | ** **              | **$**      | **147,266** | ** ** | **$** | **(58,467** | **)** | **$** | **(60,917** | **)** |

 

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TheCompany adopted the recognition provisions of SFAS No. 158, “Employer’sAccounting for Defined Pension and Other Postretirement Plans—an amendment ofFASB Statements No. 87, 88, 106 and 132(R),” as of December 30, 2006,which requires the recognition of the funded status of all defined benefitplans in the statement of financial position, and that changes in the fundedstatus be recognized through other comprehensive income (OCI), net of tax, inthe year in which the changes occur. The initial recognition of the funded statusof the Company’s pension and other postretirement plans resulted in an increasein shareholders’ equity of $11.9 million, which was net of  income taxes of $7.6 million. The incrementaleffect of applying SFAS No. 158 on the Consolidated Balance Sheet at December 30,2006, was as follows:

| ** **                                         | ** ** | **Before SFAS  No. 158** | ** ** | **Incremental  Effect of  SFAS No.158** | ** ** | **After SFAS  No. 158** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                         | ** ** | **(thousands)**                    | ** ** |
| Other assets                                       |       |                               | $          | 173,824                                           |       |                              |       | $ | (173,824 | ) |   |   | $ | — |   |   |
| Accrued benefit  liability - current and long-term |       |                               | 423,388    |                                              |       |                              | (193,319   | ) |   |   | 230,069 |   |   |
| Accumulated other  comprehensive loss              |       |                               | 200,879    |                                              |       |                              | (11,911    | ) |   |   | 188,968 |   |   |
| Deferred income tax assets                         |       |                               | 127,382    |                                              |       |                              | (7,584     | ) |   |   | 119,798 |   |   |

 

*Components of NetPeriodic Benefit Cost (Income)*

Thecomponents of net periodic benefit cost (income) are as follows:

| ** **                                              | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | **(thousands)**           | ** ** |
| Service cost                                            |       | $                         | 1,600      |                    | $          | 959 |   | $ | 25,370 |   | $ | 870 |   | $ | 643 |   | $ | 1,743 |   |
| Interest cost                                           |       | 74,679                    |       | 75,266                  |       | 100,675 |   | 1,583 |   | 3,668 |   | 6,176 |   |
| Expected return on  plan assets                         |       | (87,353                   | )          | (84,135                 | )          | (99,165 | ) | — |   | — |   | — |   |
| Recognized actuarial  loss                              |       | 23,159                    |       | 29,628                  |       | 38,071 |   | 692 |   | 675 |   | 1,075 |   |
| Plan  settlement/curtailment/closures expense (benefit) |       | 1,580                     |       | —                  |       | 94,885 |   | — |   | — |   | (24,002 | ) |
| Amortization of prior  service costs and other          |       | —                    |       | —                  |       | 9,386 |   | (3,571 | ) | (826 | ) | (530 | ) |
| Company-sponsored  plans                                |       | 13,665                    |       | 21,718                  |       | 169,222 |   | (426 | ) | 4,160 |   | (15,538 | ) |
| Multiemployer pension  plans                            |       | —                    |       | —                  |       | 460 |   | — |   | — |   | — |   |
| Net periodic benefit cost  (income)                     |       | $                         | 13,665     |                    | $          | 21,718 |   | $ | 169,682 |   | $ | (426 | ) | $ | 4,160 |   | $ | (15,538 | ) |

 

The estimated net actuarialloss for the defined benefit pension plans that will be amortized fromaccumulated other comprehensive loss into net periodic benefit cost over thenext fiscal year is $20.2 million. The estimated net actuarial loss,transition obligation and prior service benefit for the retiree medical plansthat will be amortized from accumulated other comprehensive loss into netperiodic benefit cost (income) over the next fiscal year are $0.5 million,$0.4 million and ($4.0) million, respectively.

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*Assumptions*

Theassumptions used in accounting for the Company’s plans are estimates of factorsincluding, among other things, the amount and timing of future benefitpayments. The following table presents the key assumptions used in themeasurement of the Company’s benefit obligations:

| ** **                                    | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | **United States** | ** ** | **Canada** | ** ** |
| ** **                                    | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  assumptions as of year end: |       |                      |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                 |       |                      | 5.80       | %                       |       |   | 5.60 | % |   |   | 5.60 | % |   |   | 5.60 | % |   |   | 5.20 | % |   |   | 5.60 | % |   |   | 5.00 | % |   |   | 5.10 | % |   |   | 6.00 | % |   |
| Rate of compensation  increase                |       |                      | —     |                    |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |

 

Thefollowing table presents the assumptions used in the measurement of netperiodic benefit cost:

| ** **                     | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|--------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | ** **                | ** ** | ** **              | ** ** | ** ** | ** ** | **United States** | ** ** | **Canada** | ** ** |
| ** **                     | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  assumptions: |       |                      |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                  |       |                      | 5.60       | %                       |       |   | 5.60 | % |   |   | 5.75 | % |   |   | 5.20 | % |   |   | 5.48 | % |   |   | 5.75 | % |   |   | 5.10 | % |   |   | 6.00 | % |   |   | 6.25 | % |   |
| Expected return on plan assets |       |                      | 8.00       | %                       |       |   | 8.00 | % |   |   | 8.25 | % |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Rate of compensation  increase |       |                      | —     |                    |       |   | — |   |   |   | 4.25 | % |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |

 

For the period from January 1through October 28, 2004, the discount rate assumption used in themeasurement of net periodic pension benefit cost was 6.25%. As a result of theSale, the pension and postretirement benefit obligations for those individualswho became employees of Boise Cascade, L.L.C. were settled. The settlementtriggered a new measurement of the discount rate and, as a result, on October 29,2004, the Company changed the discount rate assumption to 5.75%. The revisedrate was used to measure net periodic benefit cost for the period from October 29through December 31, 2004.

The Company bases its discountrate assumption on the rates of return available on high-quality bonds withmaturities approximating the expected period over which the pension benefitswill be paid.

The expected long-term rate ofreturn on plan assets assumption is based on the weighted average of expectedreturns for the major asset classes in which the plans’ assets are held. Asset-classexpected returns are based on long-term historical returns, inflationexpectations, forecasted gross domestic product and earnings growth, as well asother economic factors. The weights assigned to each asset class are based onthe Company’s investment strategy. The weighted-average expected returnon plan assets used in the calculation of net periodic pension benefit cost for2006 is 8.00%.

Thefollowing table presents the assumed healthcare cost trend rates used inmeasuring the Company’s postretirement benefit obligations at December 30,2006 and December 31, 2005:

| ** **                                                                         | ** ** | **United States** | ** ** | **Canada** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                         | ** ** | **2006**               | ** ** | **2005**   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average assumptions as of year-end:                                       |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Healthcare cost trend rate  assumed for next year                                  |       |                   | —     |       |       |   | 8.00 | % |   |   | 9.50 | % |   | 10.00 | % |
| Rate to which the cost trend  rate is assumed to decline (the ultimate trend rate) |       |                   | —     |       |       |   | 5.00 | % |   |   | 5.00 | % |   | 5.00 | % |
| Year that the rate reaches the ultimate trend rate                                 |       |                   | —     |       |       |   | 2009 |   |   |   | 2015 |   |   | 2015 |   |

 

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Theassumed healthcare cost trend rates have a significant effect on the amountsreported for the healthcare plans. A one-percentage-point change in theassumed healthcare cost trend rates would have the following effects:

| ** **                                    | ** ** | **One-Percentage-Point  Increase** | ** ** | **One-Percentage-Point  Decrease** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **(thousands)**                    | ** ** |
| Effect on total of service  and interest cost |       |                               | $          | 421                                |       |   |   | $ | (322 | ) |   |
| Effect on postretirement benefit obligation   |       |                               | $          | 3,469                              |       |   |   | $ | (2,737 | ) |   |

 

Effective October 1,2005, the healthcare cost trend rate assumptions for the U.S. plan were reducedto zero following the adoption of plan changes that reduced the medicalinsurance subsidy to retirees as discussed previously. As a result, the aboveamounts reflect the impact of changes in trend rates for the Canadian planonly.

*Plan Assets*

The allocation of pension plan assets by category at December 30,2006 and December 31, 2005 is as follows:

| **Asset Category**          | ** ** | ** ** | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|------------|------------|
| U.S. equity  securities          |       |       | 45.1       | %        |       |       | 51.5       | % |   |
| International equity  securities |       |       | 23.4       | %        |       |       | 15.7       | % |   |
| Fixed-income  securities         |       |       | 31.5       | %        |       |       | 32.8       | % |   |
|                             | ** ** | ** ** | **100**    | **%**    | ** ** | ** ** | **100**    | **%** | ** ** |

 

The Company’s Retirement Funds Investment Committee isresponsible for establishing and overseeing the implementation of theinvestment policy for the Company’s pension plans. The investment policy isstructured to optimize growth of the pension plan trust assets, whileminimizing the risk of significant losses, in order to enable the plans tosatisfy their benefit payment obligations over time. Plan assets are invested primarilyin U.S. equities, international equities and fixed-income securities. TheCompany uses benefit payments and Company contributions as its primaryrebalancing mechanisms to maintain the asset class exposures within theguideline ranges established under the investment policy.

The current asset allocationguidelines set forth a U.S. equity range of 40% to 50%, an international equityrange of 20% to 26% and a fixed-income range of 27% to 37%. Asset-classpositions within the ranges are continually evaluated and adjusted based onexpectations for future returns, the funded position of the plans and marketrisks. Occasionally, the Company may utilize futures or other financialinstruments to alter the pension trust’s exposure to various asset classes in alower-cost manner than trading securities in the underlying portfolios. At December 30,2006 and December 31, 2005, the pension trust did not have any equityinvestments in the Company’s common stock.

*Cash Flows*

Pension plan contributions include required statutoryminimums and, in some years, additional discretionary amounts. During 2006, theCompany made cash contributions to its pension plans totaling $9.6 million.During 2005, the Company made cash contributions to its pension plans totaling$2.8 million. In 2004, cash contributions to the Company’s pension planstotaled $279.8 million. Minimum contribution requirements for 2007 areapproximately $11 million. However, the Company may elect to make additional voluntarycontributions.

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Qualifiedpension benefit payments are paid from the assets held in the plan trust, whilenonqualified pension and other benefit payments are paid by the Company. Futurebenefit payments by year are estimated to be as follows:

| ** **      | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-----------------|------------|-----------------------|------------|---------------------|------------|
| ** **      | ** ** | **(thousands)**       | ** ** |
| 2007            |       | $                     | 103,788    |                |       | $ | 2,551 |   |   |
| 2008            |       | 102,835               |       |                | 2,347      |   |   |
| 2009            |       | 101,679               |       |                | 2,156      |   |   |
| 2010            |       | 100,616               |       |                | 2,009      |   |   |
| 2011            |       | 99,742                |       |                | 1,875      |   |   |
| Years 2012-2016 |       | 485,165               |       |                | 8,251      |   |   |
|                 |            |                       |            |                     |            |  |  |  |  |

 

*Defined ContributionPlans*

The Company also sponsorsdefined contribution plans for most of its employees. Through 2004, the Companysponsored four contributory defined contribution savings plans for most of itssalaried and hourly employees: a plan for OfficeMax, Retail employees, a planfor non-Retail salaried employees, a plan for union hourly employees, and aplan for non-Retail, nonunion hourly employees. Effective October 29,2004, the defined contribution plan account balances for active paper and forestproducts employees were transferred to plans established by Boise Cascade,L.L.C. The plan for non-Retail salaried employees includes an employee stockownership plan (“ESOP”) component through which the Company matchescontributions of eligible employees. Under that plan, the Company’s Series DESOP convertible preferred stock is allocated to eligible participants, asprincipal and interest payments are made on the ESOP debt by the plan. The ESOPdebt was guaranteed by the Company. (See Note 16, Shareholders’ Equity foradditional information related to the ESOP.) The final principal and interestpayments on the ESOP debt were made on June 30, 2004. All remaining shareswere allocated to the ESOP participants as matching contributions in 2005. As aresult, Company matching contributions for ESOP participants are now made incash. In January 2005, all of the remaining savings plans were merged intoa single plan. Total Company contributions to the defined contribution savingsplans were $7.8 million in 2006, $9.9 million in 2005, and$26.6 million in 2004.

***16.   Shareholders’ Equity***

*Preferred Stock*

At December 30, 2006, 1,216,335 shares of 7.375% Series DESOP convertible preferred stock were outstanding, compared with 1,216,335shares outstanding at December 31, 2005 and 1,376,987 shares outstandingat December 31, 2004. The Series D ESOP convertible preferred stockis shown in the Consolidated Balance Sheets at its liquidation preference of$45 per share. This preferred stock, a portion of which was redeemed in 2004with proceeds from the Sale, was originally issued to the trustee of theCompany’s ESOP for salaried employees in 1989, and was allocated to eligibleparticipants through 2005. All shares outstanding have been allocated toparticipants in the plan. Each ESOP preferred share is entitled to one vote,bears an annual cumulative dividend of $3.31875 and is convertible at any timeby the trustee to 0.80357 share of common stock. The ESOP preferred shares maynot be redeemed for less than the liquidation preference.

The Company redeemed$110 million of its Series D preferred stock on November 1,2004, and paid related accrued dividends of $3 million.

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*Common Stock*

TheCompany is authorized to issue 200,000,000 shares of common stock, of which74,903,220 shares were issued and outstanding at December 30, 2006. Ofthese, 7,170 shares were restricted stock, which is discussed below. Ofthe unissued shares, 8,133,246 shares were reserved for the followingpurposes:

| Conversion or  redemption of Series D ESOP preferred stock |   | 977,410   |   |
|-----------------------------------------------------------------|--------|-----------|--------|
| Issuance under  OfficeMax Incentive and Performance Plan        |   | 5,657,893 |   |
| Issuance under Key  Executive Stock Option Plan                 |   | 1,382,264 |   |
| Issuance under  Director Stock Compensation Plan                |   | 7,475     |   |
| Issuance under  Director Stock Option Plan                      |   | 36,000    |   |
| Issuance under Key  Executive Deferred Compensation Plan        |   | 13,464    |   |
| Issuance under 2003 Director  Stock Compensation Plan           |   | 58,740    |   |

 

The Company has a shareholderrights plan that was adopted in December 1988. The current rights plan, asamended and restated, took effect in December 1998 and expires in December 2008.On January 18, 2006, the Company announced that the Company’s Board of Directorsvoted not to seek an extension of the shareholder rights plan when it expiresin 2008.

*Accumulated OtherComprehensive Loss*

Accumulated other comprehensive loss includes thefollowing:

| ** **                                                         | ** ** | **Minimum  Pension  Liability  Adjustment** | ** **   | **Foreign  Currency  Translation  Adjustment** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------|--------------|------------------------------------------------|------------|---------------------------------------------|------------|
| Balance at  December 31, 2004, net of taxes                   |       |                                        | $            | (236,123                                       | )          |                                        |       | $ | 91,424 |   |   |   | $ | (144,699 | ) |   |
| Current-period  changes, before taxes                              |       |                                        | 14,099       |                                           |       |                                        | (6,037     | ) |   |   | 8,062 |   |   |
| Income taxes                                                       |       |                                        | (5,484       | )                                              |       |                                        | —     |   |   |   | (5,484 | ) |   |
| Balance at  December 31, 2005, net of taxes                   | ** ** | ** **                                  | **(227,508** | **)**                                          | ** ** | ** **                                  | **85,387** |   | ** ** | ** ** | **(142,121** | **)** | ** ** |
| Current-period  changes, before taxes                              |       |                                        | 29,999       |                                           |       |                                        | 11,581     |   |   |   | 41,580 |   |   |
| Income taxes                                                       |       |                                        | (3,365       | )                                              |       |                                        | —     |   |   |   | (3,365 | ) |   |
| Adjustment from  initial adoption of SFAS No. 158, net of tax |       |                                        | 11,911       |                                           |       |                                        | —     |   |   |   | 11,911 |   |   |
| Balance at December 30,  2006, net of taxes                   | ** ** | ** **                                  | **$**        | **(188,963**                                   | **)**      | ** **                                  | ** ** | **$** | **96,968** |   | ** ** | ** ** | **$** | **(91,995** | **)** | ** ** |

 

*Share-Based Payments*

In December 2004, the FASB issued SFAS No. 123R,“Share Based Payment.” SFAS 123R is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes Accounting Principles BoardOpinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and itsrelated implementation guidance. SFAS 123R focuses primarily on accounting fortransactions in which an entity obtains employee services in exchange forshare-based payments. SFAS 123R requires entities to recognizecompensation expense from all share-based payment transactions in the financialstatements. SFAS 123R establishes fair value as the measurement objective inaccounting for share-based payment transactions and requires all companies toapply a fair-value-based measurement method in accounting for share-basedpayment transactions with employees.

Effective January 1, 2006, the Company adoptedSFAS 123R using the modified prospective transition method. Accordingly, thefinancial statements for periods prior to January 1, 2006 have not beenrestated to reflect the adoption of SFAS 123R. Under the modifiedprospective transition 

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method, the Company mustrecord compensation expense for all awards granted after the adoption date andfor the unvested portion of previously granted awards that remain outstandingat the adoption date, under the fair value method. Previously, the Companyrecognized compensation expense for share-based awards to employees using thefair-value-based guidance in SFAS 123. Due to the fact that the Companyhad previously accounted for share-based awards using SFAS 123, theadoption of SFAS 123R did not have a material impact on the Company’s financialposition, results of operations or cash flows.

The Company sponsors severalshare-based compensation plans, which are described below. Compensation costsrelated to the Company’s share-based plans were $24.7 million, $10.0 millionand $25.1 million for 2006, 2005 and 2004, respectively. Compensation expenseis generally recognized on a straight-line basis over the vesting periodof grants. The total income tax benefit recognized in the income statement forshare-based compensation arrangements was $9.6 million for 2006, $3.9 millionfor 2005 and $9.8 million for 2004.

*2003 Director StockCompensation Plan and OfficeMax Incentive and Performance Plan*

In February 2003, the Company’s Board ofDirectors adopted the 2003 Director Stock Compensation Plan (the “2003 DSCP”)and the 2003 OfficeMax Incentive and Performance Plan (the “2003 Plan”),formerly named the 2003 Boise Incentive and Performance Plan, which wereapproved by shareholders in April 2003.

A total of 58,740 shares ofcommon stock are reserved for issuance under the 2003 DSCP. Prior to December 8,2005, the 2003 DSCP permitted non-employee directors to elect to receive someor all of their annual retainer and meeting fees in the form of options topurchase shares of the Company’s common stock. Non-employee directors whoelected to receive a portion of their compensation in the form of stock optionsdid not receive cash for that portion of their compensation. The differencebetween the $2.50-per-share exercise price of the options and the marketvalue of the common stock on the date of grant was equal to the cashcompensation that participating directors elected to forego and was recognizedas compensation expense in the Consolidated Statements of Income (Loss). On December 8,2005, the Board of Directors amended the 2003 DSCP to eliminate the choice toreceive discounted stock options. All options granted under the 2003 DSCPexpire three years after the holder ceases to be a director.

The 2003 Plan was effective January 1,2003, and replaced the Key Executive Performance Plan for Executive Officers,Key Executive Performance Plan for Key Executives/Key Managers, 1984 KeyExecutive Stock Option Plan (“KESOP”), Key Executive Performance Unit Plan (“KEPUP”)and Director Stock Option Plan (“DSOP”). No further grants or awards have beenmade under the Key Executive Performance Plans, KESOP, KEPUP, or DSOP since2003. A total of 5,657,893 shares of common stock is reserved for issuanceunder the 2003 Plan. The Company’s executive officers, key employees andnonemployee directors are eligible to receive awards under the 2003 Plan at thediscretion of the Executive Compensation Committee of the Board of Directors.Eight types of awards may be granted under the 2003 Plan, including stockoptions, stock appreciation rights, restricted stock, restricted stock units,performance units, performance shares, annual incentive awards and stock bonusawards.

*Restricted Stock andRestricted Stock Units*

In 2006, the Company granted to employees andnonemployee directors 1,157,479 restricted stock units (“RSUs”). The weighted-averagegrant-date fair value of the RSUs was $28.79. As of December 30,2006, 1,100,469 of these RSUs remained outstanding, which vest after definedservice periods as follows: 12,159 units in 2007, 544,151 in 2008 and 544,159in 2009. The remaining 

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compensation expense to berecognized related to this grant, net of estimated forfeitures, isapproximately $25 million.

In 2005, the Company granted to employees andnonemployee directors 728,123 RSUs. The weighted-average grant-datefair value of the RSUs was $33.15. As of December 30, 2006, 558,449 ofthese RSUs remained outstanding, which vest after defined service periods asfollows: 30,910 units in 2006, 475,639 units in 2007, 45,900 units in 2008 and3,000 units in both 2009 and 2010. The remaining compensation expense to berecognized related to this grant, net of estimated forfeitures, isapproximately $2 million.

In 2004, the Company granted 366,775 RSUs to employeesand 14,765 shares of restricted stock to nonemployee directors. Theweighted-average grant-date fair value of the RSUs and restrictedstock shares was $32.14. The vesting of the 2004 RSU award to employees wasbased on performance criteria established for 2004 and 2005. The performancecriteria were not met; therefore, no compensation expense was recorded for thisRSU award, and these units were forfeited and will not be distributed. Therestricted stock granted to directors vests six months after their terminationor retirement from board service, and 7,170 of these restricted stock sharesremain restricted and outstanding at December 30, 2006.

Restricted stock shares are restricted until they vestand cannot be sold by the recipient until the restriction has lapsed. RSUs arerestricted until they vest and are convertible into one common share after therestriction has lapsed. No entries are made in the financial statements on thegrant date of restricted stock and RSU awards. The Company recognizescompensation expense related to these awards over the vesting periods based onthe closing prices of the Company’s common stock on the grant dates. If theseawards contain performance criteria, management periodically reviews actualperformance against the criteria and adjusts compensation expense accordingly.In 2006, 2005 and 2004, the Company recognized $24.1 million,$9.2 million and $25.1 million, respectively, of pre-tax compensationexpense and additional paid-in capital related to restricted stock andRSU awards.

Restricted shares and RSUs arenot included as shares outstanding in the calculation of basic earnings pershare, but are included in the number of shares used to calculate dilutedearnings per share as long as all applicable performance criteria are met, and theireffect is dilutive. When the restriction lapses on restricted stock, the parvalue of the stock is reclassified from additional paid-in-capitalto common stock. When the restriction lapses on RSUs, the units are convertedto unrestricted common shares and the par value of the stock is reclassifiedfrom additional paid-in-capital to common stock. Unrestrictedshares are included in shares outstanding for purposes of calculating bothbasic and diluted earnings per share. Depending on the terms of the applicablegrant agreement, restricted stock and RSUs may be eligible to receive alldividends declared on the Company’s common shares during the vesting period;however, such dividends are not paid until the restrictions lapse.

*Stock Units*

The Company has a shareholderapproved deferred compensation program for certain of its executive officersthat allows them to defer a portion of their cash compensation. Previously,these officers could allocate their deferrals to a stock unit account. Eachstock unit is equal in value to one share of the Company’s common stock. TheCompany matched deferrals used to purchase stock units with a 25% Companyallocation of stock units. The value of deferred stock unit accounts is paid inshares of the Company’s common stock when an officer retires or terminatesemployment. At December 30, 2006, 13,464 stock units were allocated to theaccounts of these executive officers. As a result of an amendment to the plan,no additional deferrals can be allocated to the stock unit accounts.

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*Stock Options*

In addition to the 2003 DSCP and the 2003 Plandiscussed above, the Company has the following shareholder-approved stockoption plans: the Key Executive Stock Option Plan (“KESOP”), the Director StockOption Plan (“DSOP”) and the Director Stock Compensation Plan (“DSCP”). Nofurther grants will be made under the KESOP, DSOP and DSCP.

The KESOP provided for the grant of options topurchase shares of common stock to key employees of the Company. The exerciseprice of awards under the KESOP was equal to the fair market value of theCompany’s common stock on the date the options were granted. Options grantedunder the KESOP expire, at the latest, ten years and one day following thegrant date.

The DSOP, which was available only to nonemployeedirectors, provided for annual grants of options. The exercise price of awardsunder the DSOP was equal to the fair market value of the Company’s common stockon the date the options were granted. The options granted under the DSOP expireupon the earlier of three years after the director ceases to be a director orten years after the grant date.

The DSCP permitted nonemployee directors to elect toreceive grants of options to purchase shares of the Company’s common stock inlieu of cash compensation. The difference between the $2.50-per-shareexercise price of DSCP options and the market value of the common stock subjectto the options was intended to offset the cash compensation that participatingdirectors elected not to receive. Options granted under the DSCP expire threeyears after the holder ceases to be a director.

Under the KESOP and DSOP, options may not, exceptunder unusual circumstances, be exercised until one year following the grantdate. Under the DSCP, options may be exercised six months after the grant date.

A summaryof stock option activity for the years ended December 30, 2006 andDecember 31, 2005 and 2004 is presented in the table below:

| ** **                                                      | ** ** | **2006**      | ** ** | **2005**                           | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------|------------|---------------|------------|------------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **Shares**    | ** ** | **Wtd. Avg.  Ex. Price** | ** ** | **Shares** | ** ** | **Wtd. Avg.  Ex. Price** | ** ** | **Shares** | ** ** | **Wtd. Avg.  Ex. Price** | ** ** |
| Balance at beginning  of year                                   |       | 5,759,545     |       |                               | $          | 32.39      |       |   | 6,963,462 |   |   | $ | 32.62 |   |   | 8,457,888 |   |   | $ | 32.16 |   |   |
| Options granted                                                 |       | —        |       |                               | —     |       |       | 310,200 |   |   | 32.38 |   |   | 9,032 |   |   | 2.50 |   |   |
| Options exercised                                               |       | (3,993,857    | )          |                               | 32.62      |       |       | (883,817 | ) |   | 28.00 |   |   | (1,202,308 | ) |   | 27.56 |   |   |
| Options forfeited and  expired                                  |       | (12,500       | )          |                               | 37.57      |       |       | (630,300 | ) |   | 41.20 |   |   | (301,150 | ) |   | 38.95 |   |   |
| Balance at end of  year                                         | ** ** | **1,753,188** |       |                               | $          | 31.81      |       | ** ** | **5,759,545** |   |   | $ | 32.39 |   | ** ** | **6,963,462** |   |   | $ | 32.62 |   |   |
| Exercisable at end of  year                                     |       | 1,522,390     |       |                               |       |       |       | 5,449,345 |   |   |   |   |   | 6,954,430 |   |   |   |   |   |
| Weighted average fair value  of options granted (Black-Scholes) |       | —        |       |                               |       |       |       | $ | 7.21 |   |   |   |   |   | $ | 27.63 |   |   |   |   |   |
|                                                                 |            |               |            |                                    |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Thefollowing table provides summarized information about stock options outstandingat December 30, 2006:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Options  Outstanding**     | ** ** | **Weighted  Average  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $2.50                                       |       |                         | 12,724     |                         |       |   | — |   |   |   | $ | 2.50 |   |   |   | 12,724 |   |   |   | $ | 2.50 |   |   |
| $18.00 — $28.00                        |       |                         | 615,004    |                         |       |   | 3.6 |   |   |   | 27.62 |   |   |   | 615,004 |   |   |   | 27.62 |   |   |
| $28.01 — $39.00                        |       |                         | 1,125,460  |                         |       |   | 4.5 |   |   |   | 34.43 |   |   |   | 894,662 |   |   |   | 34.95 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The remaining compensation expense to be recognizedrelated to outstanding stock options, net of estimated forfeitures, isapproximately $0.8 million. At December 30, 2006, the aggregate intrinsicvalue of outstanding stock options was $31.3 million and for exercisable stockoptions was $27.3 million. The aggregate intrinsic value represents the totalpre-tax intrinsic value (i.e. the difference between the Company’s closingstock price on the last trading day of the fourth quarter of 2006 and theexercise price, multiplied by the number of in-the-money options at the end ofthe quarter).

The Company did not grant anystock options in 2006. To calculate stock-based employee compensation expenseunder the fair value method as outlined in SFAS 123 in 2005 and 2004, theCompany estimated the fair value of each option award on the date of grantusing the Black-Scholes option pricing model with the followingweighted-average assumptions: risk-free interest rates of 4.3% in 2005 and 3.6%in 2004 (based on the applicable Treasury bill rate); expected dividends of 60cents per share in both years (based on actual cash dividends expected to bepaid); expected life of 3.4 years in 2005 and 4.3 years in 2004 (based on thetime period options are expected to be outstanding based on historicalexperience); and expected stock price volatility of 28% in 2005 and 40% in 2004(based on the historical volatility of the Company’s common stock).

*Other*

In May 2005, the Company repurchased23.5 million shares of its common stock and the associated common stockpurchase rights through a modified Dutch auction tender offer at a purchase priceof $775.5 million, or $33.00 per share, plus transaction costs.

In September 1995, theCompany’s Board of Directors authorized the purchase of up to 4.3 millionshares of the Company’s common stock. As part of this authorization, theCompany repurchased odd-lot shares (fewer than 100 shares) from shareholderswishing to exit their holdings in the Company’s common stock. Sharesrepurchased under this program are retired. Since 1995, the Company hasrepurchased 50,577 shares of common stock under this authorization, including907 shares in 2006 and 2,190 shares in 2005. The Company’s Board of Directorsterminated the share repurchase authorization in December 2006.

***17.   Segment Information***

The Company manages its business using threereportable segments: OfficeMax, Contract; OfficeMax, Retail; and Corporate andOther. Results for periods prior to the sale include the operations of theBoise Building Solutions and Boise Paper Solutions segments. Substantially allof the assets and operations of these segments were included in the Sale. Eachof the Company’s segments represents a business with differing products,services and/or distribution channels. Each of these segments requires distinctoperating and marketing strategies. Management reviews the performance of theCompany based on these segments.

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OfficeMax, Contract distributes a broad line of itemsfor the office, including office supplies and paper, technology products andsolutions and office furniture. OfficeMax, Contract sells directly to largecorporate and government offices, as well as small and medium-sizedoffices in the United States, Canada, Australia and New Zealand. Thissegment markets and sells through field salespeople, outbound telesales,catalogs, the Internet and in some markets, including Canada, Hawaii, Australiaand New Zealand through office products stores. Substantially all productssold by OfficeMax, Contract are purchased from third-party manufacturersor industry wholesalers, except office papers. OfficeMax, Contract purchasesoffice papers primarily from the paper operations of Boise Cascade, L.L.C.,under a 12-year paper supply contract entered into at the time of theSale. (See Note 18, Commitments and Guarantees, for additional informationrelated to the paper supply contract.)

OfficeMax, Retail is a retail distributor of officesupplies and paper, print and document services, technology products andsolutions and office furniture. OfficeMax, Retail has operations in the UnitedStates, Puerto Rico and the U.S. Virgin Islands. OfficeMax, Retail officesupply stores feature OfficeMax ImPress, an in-store module devoted toprint-for-pay and related services. The retail segment alsooperates office supply stores in Mexico through a 51%-owned jointventure. Substantially all products sold by OfficeMax, Retail are purchasedfrom third-party manufacturers or industry wholesalers, except officepapers. OfficeMax, Retail purchases office papers primarily from the paperoperations of Boise Cascade, L.L.C., under a 12-year paper supplycontract entered into at the time of the Sale. (See Note 18, Commitments andGuarantees, for additional information related to the paper supply contract.)

Boise Building Solutions was a major producer ofplywood, lumber and particleboard. This segment also manufactured engineeredwood products, including laminated veneer lumber, wood I-joists and laminatedbeams. Most of the production was sold to independent wholesalers and dealersor through the segment’s building materials distribution outlets for use inhousing, industrial construction and a variety of manufactured products.Substantially all of the assets of this segment were included in the Sale. TheCompany retained ownership of a facility near Elma, Washington, thatmanufactures integrated wood-polymer building materials. In December 2004,the board of directors authorized management to pursue the divestiture of thisfacility. (See Note 3, Discontinued Operations for additional informationrelated to the Elma, Washington facility.) The following segment tables havebeen adjusted for this discontinued operation.

Boise Paper Solutions manufactured and sold uncoatedfree sheet papers, containerboard, corrugated containers, newsprint and marketpulp. Substantially all of the assets of this segment were included in theSale.

Corporate and Other includes corporate support staffservices and related assets and liabilities.

Management evaluates the segments based on operatingprofits before interest expense, income taxes, minority interest, extraordinaryitems and cumulative effect of accounting changes. The income and expenserelated to certain assets and liabilities that are reported in the Corporateand Other segment have been allocated to the Contract and Retail segments.Certain expenses that management considers unusual or non-recurring arenot allocated to the segments.

The segments follow the accounting principlesdescribed in Note 1, Summary of Significant Accounting Policies. Salesbetween segments are recorded primarily at market prices.

No single customer accounts for 10% or more ofconsolidated trade sales. Export sales to foreign unaffiliated customers were$104.0 million in 2004. There were no such sales in 2006 and 2005.

OfficeMax, Contract has foreign operations in Canada, Australiaand New Zealand. OfficeMax, Retail has foreign operations in Mexico through a51%-owned joint venture. Boise Building Solutions 

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had operations in Canada and Brazil.The Company also had a 47% interest in an oriented strand board plant inCanada, which was accounted for under the equity method and sold in May 2004.

Thefollowing table summarizes by geography, net sales for fiscal years 2006, 2005and 2004, and long-lived assets at each year end:

| ** **        | ** ** | **2006**       | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|-------------------|------------|----------------|-------------|------------|------------|-------------|------------|
| ** **        | ** ** | **(millions)** | ** **  |
| Net sales         |       |           |        |       |       |        |       |
| United States     |       | $              | 7,617.2     |       | $          | 7,878.6     |       | $ | 11,986.8 |   |
| Foreign           |       | 1,348.5        |        | 1,279.1    |       | 1,283.4     |       |
|              | ** ** | **$**          | **8,965.7** | ** ** | **$**      | **9,157.7** | ** ** | **$** | **13,270.2** | ** ** |
| Long-lived assets |       |           |        |       |       |        |       |
| United States     |       | $              | 3,805.3     |       | $          | 4,013.5     |       | $ | 4,072.7 |   |
| Foreign           |       | 313.9          |        | 316.6      |       | 323.4       |       |
|              | ** ** | **$**          | **4,119.2** | ** ** | **$**      | **4,330.1** | ** ** | **$** | **4,396.1** | ** ** |

 

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Segmentsales to external customers by product line are as follows:

| ** **                               | ** ** | **2006**       | ** **  | **2005**   | ** ** | **2004**    | ** ** |
|------------------------------------------|------------|----------------|-------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **(millions)** | ** **  |
| OfficeMax, Contract                      |       |           |        |       |       |        |       |
| Office supplies and paper                |       | $              | 2,568.9     |       | $          | 2,598.1     |       | $ | 2,462.0 |   |
| Technology products                      |       | 1,551.9        |        | 1,469.2    |       | 1,403.9     |       |
| Office furniture                         |       | 593.7          |        | 561.3      |       | 502.9       |       |
|                                     |       | 4,714.5        |        | 4,628.6    |       | 4,368.8     |       |
| OfficeMax, Retail                        |       |           |        |       |       |        |       |
| Office supplies and paper                |       | 1,585.9        |        | 1,639.6    |       | 1,768.4     |       |
| Technology products                      |       | 2,210.8        |        | 2,363.5    |       | 2,308.0     |       |
| Office furniture                         |       | 454.5          |        | 526.0      |       | 404.9       |       |
|                                     |       | 4,251.2        |        | 4,529.1    |       | 4,481.3     |       |
| Total OfficeMax                          |       |           |        |       |       |        |       |
| Office supplies and paper                |       | 4,154.8        |        | 4,237.7    |       | 4,230.4     |       |
| Technology products                      |       | 3,762.7        |        | 3,832.7    |       | 3,711.9     |       |
| Office furniture                         |       | 1,048.2        |        | 1,087.3    |       | 907.8       |       |
|                                     |       | 8,965.7        |        | 9,157.7    |       | 8,850.1     |       |
| Boise Building Solutions                 |       |           |        |       |       |        |       |
| Structural panels                        |       | —         |        | —     |       | 1,042.4     |       |
| Engineered wood products                 |       | —         |        | —     |       | 487.0       |       |
| Lumber                                   |       | —         |        | —     |       | 859.5       |       |
| Particleboard                            |       | —         |        | —     |       | 58.8        |       |
| Building supplies and other              |       | —         |        | —     |       | 785.1       |       |
|                                     |       | —         |        | —     |       | 3,232.8     |       |
| Boise Paper Solutions                    |       |           |        |       |       |        |       |
| Uncoated free sheet                      |       | —         |        | —     |       | 425.6       |       |
| Containerboard and corrugated containers |       | —         |        | —     |       | 425.7       |       |
| Newsprint                                |       | —         |        | —     |       | 157.9       |       |
| Market pulp and other                    |       | —         |        | —     |       | 152.1       |       |
|                                     |       | —         |        | —     |       | 1,161.3     |       |
| Corporate and Other                      |       | —         |        | —     |       | 26.0        |       |
|                                     | ** ** | **$**          | **8,965.7** | ** ** | **$**      | **9,157.7** | ** ** | **$** | **13,270.2** | ** ** |

 

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Ananalysis of the Company’s operations by segment is as follows:

| ** **                             | ** ** | ** **     | ** ** | ** **                                | ** ** | ** **   | ** ** | ** **                                                       | ** ** | **Selected Components of  Income (Loss)** | ** ** | ** **            | ** ** | ** **          | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------|------------|-------------------------------------------|------------|--------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|------------|------------|
| ** **                             | ** ** | **Sales**      | ** ** | **Income (Loss)  Before Taxes** | ** ** | **Earnings** | ** ** | **Depreciation,  Amortization,  and Cost of  Company** | ** ** | **Capital**                                              | ** ** | ** **            | ** ** | **Invest-  ments**  | ** ** |
| ** **                             | ** ** | **Trade**      | ** ** | **Inter-  segment**                       | ** ** | **Total**    | ** ** | **and Minority  Interest(a)**                               | ** ** | **from  Affiliates**                                     | ** ** | **Timber  Harvested** | ** ** | **Expendi-  tures** | ** ** | **Assets** | ** ** | **In  Affiliates** | ** ** |
| ** **                             | ** ** | **(millions)** | ** ** |
| **Year  Ended December 30, 2006** |       |           |       |                                      |       |         |       |                                                             |       |                                                     |       |                  |       |                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                        |            |                |            |                                           |            |              |            |                                                                  |            |                                                          |            |                       |            |                     |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| OfficeMax, Contract                    |       | $       | 4,714.5      |       |       | $      | —     |    |       | $      | 4,714.5      |       |       | $      | 197.7     |       |       |       | $      | —  |   |       |       | $      | 60.6      |    |       |       | $      | 82.7      |   |       | $     | 1,576.5     |       |       | — |      |   |
|----------------------------------------|------------|---------|--------------|------------|------------|--------|------------|---------|------------|--------|--------------|------------|------------|--------|-----------|------------|------------|------------|--------|---------|--------|------------|------------|--------|-----------|---------|------------|------------|--------|-----------|--------|------------|-------|-------------|------------|------------|--------|-----------|--------|
| OfficeMax, Retail                      |       | 4,251.2 |         |       | —     |   |       | 4,251.2 |       |   | 86.3         |       |       |   | —    |       |       |       | 67.1   |    |   |       | 93.6       |   |      | 2,479.9 |       |       | — |      |   |
|                                   |       | 8,965.7 |         |       | —     |   |       | 8,965.7 |       |   | 284.0        |       |       |   | —    |       |       |       | 127.7  |    |   |       | 176.3      |   |      | 4,056.4 |       |       |   |      |   |
| Corporate and Other                    |       | —  |         |       | —     |   |       | —  |       |   | (118.1       | )          |       |   | 5.9       |       |       |       | 0.1    |    |   |       | —     |   |      | 2,159.6 |       |       | 175.0  |      |   |
|                                   |       | $       | 8,965.7      |       |       | $      | —     |    |       | $      | 8,965.7      |       |       | $      | 165.9     |       |       |       | 5.9    |    |   |       | 127.8      |   |      |    | 176.3      |       |   | 6,216.0   |   |       | 175.0 |        |       |
| Interest expense                       |       | —  |         |       | —     |   |       | —  |       |   | (123.1       | )          |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
| Interest Income and other              |       | —  |         |       | —     |   |       | —  |       |   | 129.1        |       |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
|                                   | ** ** | **$**   | **8,965.7**  | ** ** | ** ** | **$**  | **—** |    | ** ** | **$**  | **8,965.7**  | ** ** | ** ** | **$**  | **171.9** | ** ** | ** ** | ** ** | **$**  | **5.9** |   | ** ** | ** ** | **$**  | **127.8** |    | ** ** | ** ** | **$**  | **176.3** |   | ** ** | **$** | **6,216.0** | ** ** | ** ** | **$**  | **175.0** |   |   |
| **Year Ended December 31,  2005** |       |    |         |       |       |   |       |    |       |   |         |       |       |   |      |       |       |       |   |    |   |       |       |   |      |    |       |       |   |
| OfficeMax, Contract                    |       | $       | 4,628.6      |       |       | $      | —     |    |       | $      | 4,628.6      |       |       | $      | 100.3     |       |       |       | $      | —  |   |       |       | $      | 66.3      |    |       |       | $      | 121.0     |   |       | $     | 1,515.2     |       |       | $      | —    |   |   |
| OfficeMax, Retail                      |       | 4,529.1 |         |       | —     |   |       | 4,529.1 |       |   | 27.9         |       |       |   | —    |       |       |       | 84.7   |    |   |       | 65.9       |   |      | 2,558.1 |       |       | — |      |   |
|                                   |       | 9,157.7 |         |       | —     |   |       | 9,157.7 |       |   | 128.2        |       |       |   | —    |       |       |       | 151.0  |    |   |       | 186.9      |   |      | 4,073.3 |       |       | — |      |   |
| Corporate and Other                    |       | —  |         |       | —     |   |       | —  |       |   | (118.5       | )          |       |   | 5.5       |       |       |       | 0.2    |    |   |       | 0.4        |   |      | 2,198.5 |       |       | 175.0  |      |   |
|                                   |       | $       | 9,157.7      |       |       | $      | —     |    |       | $      | 9,157.7      |       |       | $      | 9.7       |       |       |       | 5.5    |    |   |       | 151.2      |   |      |    | 187.3      |       |   | 6,271.8   |   |       | 175.0 |        |       |
| Assets held for sale                   |       | —  |         |       | —     |   |       | —  |       |   | —       |       |       |   | —    |       |       |       | — |    |   |       | —     |   |      | 0.3     |       |       | — |      |   |
| Interest expense                       |       | —  |         |       | —     |   |       | —  |       |   | (128.5       | )          |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
| Interest income and other              |       | —  |         |       | —     |   |       | —  |       |   | 95.6         |       |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
| Debt retirement expense                |       | —  |         |       | —     |   |       | —  |       |   | (14.4        | )          |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
|                                   | ** ** | **$**   | **9,157.7**  | ** ** | ** ** | **$**  | **—** |    | ** ** | **$**  | **9,157.7**  | ** ** | ** ** | **$**  | **(37.6** | **)**      | ** ** | ** ** | **$**  | **5.5** |   | ** ** | ** ** | **$**  | **151.2** |    | ** ** | ** ** | **$**  | **187.3** |   | ** ** | **$** | **6,272.1** | ** ** | ** ** | **$**  | **175.0** |   |   |
| **Year Ended December 31,  2004** |       |    |         |       |       |   |       |    |       |   |         |       |       |   |      |       |       |       |   |    |   |       |       |   |      |    |       |       |   |
| OfficeMax, Contract                    |       | $       | 4,368.8      |       |       | $      | 2.0        |    |       | $      | 4,370.8      |       |       | $      | 107.0     |       |       |       | $      | —  |   |       |       | $      | 66.7      |    |       |       | $      | 63.6      |   |       | $     | 1,578.1     |       |       | $      | —    |   |   |
| OfficeMax, Retail                      |       | 4,481.3 |         |       | —     |   |       | 4,481.3 |       |   | 22.7         |       |       |   | —    |       |       |       | 86.1   |    |   |       | 85.5       |   |      | 2,499.2 |       |       | — |      |   |
|                                   |       | 8,850.1 |         |       | 2.0        |   |       | 8,852.1 |       |   | 129.7        |       |       |   | —    |       |       |       | 152.8  |    |   |       | 149.1      |   |      | 4,077.3 |       |       | — |      |   |
| Boise Building Solutions               |       | 3,232.8 |         |       | 24.9       |   |       | 3,257.7 |       |   | 319.2        |       |       |   | 6.3       |       |       |       | 32.7   |    |   |       | 55.3       |   |      | —  |       |       | — |      |   |
| Boise Paper Solutions                  |       | 1,161.3 |         |       | 509.1      |   |       | 1,670.4 |       |   | 38.8         |       |       |   | —    |       |       |       | 157.2  |    |   |       | 88.0       |   |      | —  |       |       | — |      |   |
| Corporate and Other                    |       | 26.0    |         |       | 53.6       |   |       | 79.6    |       |   | 184.3        |       |       |   | —    |       |       |       | 12.3   |    |   |       | 5.8        |   |      | 3,535.9 |       |       | 175.9  |      |   |
|                                   |       | $       | 13,270.2     |       |       | $      | 589.6      |    |       | $      | 13,859.8     |       |       | $      | 672.0     |       |       |       | 6.3    |    |   |       | 355.0      |   |      |    | 298.2      |       |   | 7,613.2   |   |       | 175.9 |        |       |
| Assets held for sale                   |       | —  |         |       | —     |   |       | —  |       |   | —       |       |       |   | —    |       |       |       | — |    |   |       | —     |   |      | 24.1    |       |       |   |      |   |
| Intersegment eliminations              |       | —  |         |       | (589.6     | )      |       | (589.6  | )          |   | —       |       |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
| Interest expense                       |       | —  |         |       | —     |   |       | —  |       |   | (151.9       | )          |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
| Interest income and other              |       | —  |         |       |       |   |       |    |       |   | 15.5         |       |       |   |      |       |       |       |   |    |   |       |       |   |      |    |       |       |   |      |   |
| Debt retirement expense                |       | —  |         |       |       |   |       |    |       |   | (137.1       | )          |       |   |      |       |       |       |   |    |   |       |       |   |      |    |       |       |   |      |   |
| Timber notes securitization            |       | —  |         |       | —     |   |       | —  |       |   | (19.0        | )          |       |   | —    |       |       |       | — |    |   |       | —     |   |      | —  |       |       | — |      |   |
|                                   | ** ** | **$**   | **13,270.2** | ** ** | ** ** | **$**  | **—** |    | ** ** | **$**  | **13,270.2** | ** ** | ** ** | **$**  | **379.5** | ** ** | ** ** | ** ** | **$**  | **6.3** |   | ** ** | ** ** | **$**  | **355.0** |    | ** ** | ** ** | **$**  | **298.2** |   | ** ** | **$** | **7,637.3** | ** ** | ** ** | **$**  | **175.9** |   |   |

 

(a)             See Note 6,Other Operating, Net and Note 10, Investments in Affiliates, for anexplanation of items affecting the segments.

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***18.   Commitments and Guarantees***

*Commitments*

The Company hascommitments for minimum lease payments due under noncancelable leases and forthe repayment of outstanding long-term debt. In addition, the Company haspurchase obligations for goods and services and capital expenditures that wereentered into in the normal course of business.

Pursuant to an AdditionalConsideration Agreement between OfficeMax and Boise Cascade, L.L.C. related tothe Sale, the Company may be required to make substantial cash payments to, orreceive substantial cash payments from, Boise Cascade, L.L.C. Under theAdditional Consideration Agreement, the Sale proceeds may be adjusted upward ordownward based on paper prices during the six years following the Sale, subjectto annual and aggregate caps. Specifically, we have agreed to pay BoiseCascade, L.L.C. $710,000 for each dollar by which the average market price perton of a specified grade of cut-size office paper during any 12-month periodending on September 30 is less than $800. Boise Cascade, L.L.C. has agreedto pay us $710,000 for each dollar by which the average market price per tonexceeds $920. Under the terms of the agreement, neither party will be obligatedto make a payment in excess of $45 million in any one year. Payments byeither party are also subject to an aggregate cap of $125 million thatdeclines to $115 million in the fifth year and $105 million in thesixth year. (See Note 14, Financial Instruments, Derivatives and HedgingActivities, for more information related to the Additional ConsiderationAgreement).

In connection with theSale, the Company entered into a paper supply contract with affiliates of BoiseCascade, L.L.C. under which we are obligated to purchase our North Americanrequirements for cut-size office paper, to the extent Boise Cascade, L.L.C.produces such paper, until December 2012, at prices approximating marketlevels. The Company’s purchase obligations under the agreement will phase-outover a four-year period beginning one year after the delivery of notice oftermination, but not prior to December 31, 2012.

In accordance with the terms of a joint-ventureagreement between the Company and the minority owner of the Company’ssubsidiary in Mexico (OfficeMax de Mexico), the Company can be required topurchase the minority owner’s 49% interest in the subsidiary if certainearnings targets are achieved. At December 30, 2006 and throughout 2006,OfficeMax de Mexico had met these earnings targets. The earnings targets arecalculated quarterly on a rolling four-quarter basis. Accordingly, the targetscan be achieved in one quarter but not in the next. If the earnings targets areachieved and the minority owner elects to put its ownership interest to theCompany, the purchase price would be equal to fair value, calculated based onthe subsidiary’s earnings before interest, taxes and depreciation andamortization for the last four quarters, and the current market multiples forsimilar companies. The fair value purchase price at December 30, 2006 is estimatedto be $65 million to $70 million.

*Guarantees*

The Company providesguarantees, indemnifications and assurances to others, which constituteguarantees as defined under FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.”

Indemnificationobligations may arise from the Asset Purchase Agreement between OfficeMaxIncorporated, OfficeMax Southern Company, Minidoka Paper Company, ForestProducts Holdings, L.L.C. and Boise Land & Timber Corp. The terms ofthis agreement include purchase price adjustments, which could require theCompany to make additional payments in the future. Additionally, the Companyhas agreed to provide indemnification with respect to a variety of obligations.These indemnification obligations are subject, in some cases, to survivalperiods, deductibles and caps. At December 30, 2006, the Company is notaware of any material liabilities arising from these indemnifications.

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There are twelveoperating leases that have been assigned to other parties but for which theCompany remains contingently liable in the event of nonpayment by the otherparties. The lease terms vary and, assuming exercise of renewal options, extendthrough 2032. Annual rental payments under these leases are approximately$3.4 million.

The Company and its affiliates enter into a wide range ofindemnification arrangements in the ordinary course of business. These includetort indemnifications, tax indemnifications, officer and directorindemnifications against third-party claims arising out of arrangementsto provide services to the Company and indemnifications in merger andacquisition agreements. It is impossible to quantify the maximum potentialliability under these indemnifications. At December 30, 2006, the Companyis not aware of any material liabilities arising from these indemnifications.

***19.    Legal Proceedings and Contingencies***

OfficeMax Incorporatedand certain of its subsidiaries are named as defendants in a number oflawsuits, claims and proceedings. Some of these lawsuits and proceedings arose outof the operation of the paper and forest products assets prior to the closingof the Sale, for which OfficeMax agreed to retain responsibility. Also, as partof the Sale, the Company agreed to retain responsibility for all pending orthreatened proceedings and future proceedings alleging asbestos-relatedinjuries arising out of the operation of the paper and forest products assetsprior to the closing of the Sale. The Company does not believe any of theseretained proceedings are material to its business.

The Company has beennotified that it is a “potentially responsible party” under the ComprehensiveEnvironmental Response Compensation and Liability Act (“CERCLA”) or similarfederal and state laws, or has received a claim from a private party, withrespect to 12 active sites where hazardous substances or other contaminants areor may be located. All 12 active sites relate to operations either no longerowned by the Company or unrelated to its ongoing operations. In most cases, theCompany is one of many potentially responsible parties, and its allegedcontribution to these sites is relatively minor. For sites where a range ofpotential liability can be determined, the Company has established appropriatereserves. The Company believes it has minimal or no responsibility with regardto several other sites. The Company cannot predict with certainty the totalresponse and remedial costs, its share of the total costs, the extent to whichcontributions will be available from other parties or the amount of timenecessary to complete the cleanups. Based on its investigations; its experiencewith respect to cleanup of hazardous substances; the fact that expenditureswill, in many cases, be incurred over extended periods of time; and the numberof solvent potentially responsible parties; the Company does not believe thatthe known actual and potential response costs will, in the aggregate,materially affect its financial position or results of operations.

Over the past severalyears and continuing into 2006, the Company has been named a defendant in anumber of cases where the plaintiffs allege asbestos-related injuriesfrom exposure to asbestos products or exposure to asbestos while working at jobsites. The claims vary widely and often are not specific about the plaintiffs’contacts with the Company. None of the claims seeks damages from the Companyindividually, and the Company is generally one of numerous defendants. Many ofthe cases filed against us have been voluntarily dismissed, although theCompany has settled some cases. The settlements have been covered mostly byinsurance, and the Company believes any future settlements or judgments inthese cases would be similarly covered. To date, no asbestos case against theCompany has gone to trial, and the nature of these cases makes any predictionas to the outcome of pending litigation inherently subjective. At this time,however, the Company believes its involvement in asbestos litigation is notmaterial to either its financial position or its results of operations.

The Company and severalformer officers and/or directors of the Company or its predecessor aredefendants in a consolidated, putative class action proceeding (*Roth v. OfficeMax Inc., et. al,*U.S.District Court, Northern District of Illinois) alleging violations of theSecurities Exchange Act of 1934. The 

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Complaint alleges, in summary, that the Company failed todisclose (a) that vendor income had been improperly recorded, (b) thatthe Company lacked internal controls necessary to ensure the proper reportingof revenue and compliance with generally accepted accounting principles, and (c) thatthe Company’s 2004 and later results would be adversely affected by the Company’sallegedly improper practices. The relief sought includes unspecifiedcompensatory damages, interest and costs, including attorneys’ fees. On September 21,2005, the defendants filed a motion to dismiss the consolidated amendedcomplaint, which is pending. On September 12, 2006, the court granted thedefendant group’s joint motion to dismiss the consolidated amended complaint. On November 9,2006, the plaintiffs filed a purported amended complaint. On January 19,2007, the defendants filed a motion to dismiss the amended complaint, which ispending. The Company believes there are valid factual and legal defenses tothese claims and intends to vigorously defend against them.

In June 2005, the Company announced that the SECissued a formal order of investigation arising from the Company’s previously-announcedinternal investigation into its accounting for vendor income. The Companylaunched its internal investigation in December 2004 when the Companyreceived claims by a vendor to its retail business that certain employees actedinappropriately in requesting promotional payments and in falsifying supportingdocumentation. The internal investigation was conducted under the direction ofthe Company’s audit committee and was completed in March 2005. The Companyhas cooperated fully with the SEC. The Company has had no communication withthe SEC since August 2005.

Putative derivativeactions have been filed in the Circuit Courts of Cook County (*Homstrom v. Harad, et al.*) and DuPage County,Illinois (*Bryan v. Anderson, et al.*)against a number of current and former officers and/or directors of the Companyor its predecessor in connection with alleged misrepresentation of financialresults (and, in the case of one former director and officer, for allegedlyselling Company common stock while in possession of material, non-publicinformation concerning the Company’s financial position and future prospects).Both derivative actions assert claims for breach of fiduciary duty and unjustenrichment, and the *Homstrom*complaintalso includes claims for alleged abuse of control, mismanagement, and waste ofcorporate assets. The relief sought from the defendants includes recovery ofcosts incurred by the Company in its internal investigation and restatement,the disgorgement of compensation and, in the *Homstrom*case, the attorneys’ fees incurred by the Company in defending the *Roth* putative class action and the Company’sasserted exposure to a potentially substantial settlement or adverse judgmentin the *Roth* case. The Company isa nominal defendant in the putative derivative actions and no monetary reliefis sought from the Company. However, the Company has exposure in such cases foramounts it may be required to advance or incur on behalf of the individualdefendants under its indemnification obligations. On February 21, 2007, theBryan case was dismissed without prejudice.

The Company is also involved in other litigation andadministrative proceedings arising in the normal course of business. In theopinion of management, the Company’s recovery, if any, or liability, if any,under such pending litigation or administrative proceedings would notmaterially affect the Company’s financial position or results of operations.

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***20.   Quarterly Results of Operations (unaudited)***

Summarized quarterly financialdata is as follows:

| ** **                                                        | ** ** | **2006**                                                                                   | ** ** | **2005**      | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                        | ** ** | **First(a)**                                                                               | ** ** | **Second(b)** | ** ** | **Third(c)** | ** ** | **Fourth(d)** | ** ** | **First(e)** | ** ** | **Second(f)** | ** ** | **Third(g)** | ** ** | **Fourth(h)** | ** ** |
| ** **                                                        | ** ** | **(millions, except per-share and stock price information)** | ** ** |
| Sales                                                             |       | $                                                                                          | 2,424      |          |       | $ | 2,041 |   |   | $ | 2,244 |   |   | $ | 2,257 |   |   | $ | 2,323 |   |   | $ | 2,092 |   |   | $ | 2,288 |   |   | $ | 2,455 |   |   |
| Income (loss) from continuing operations                          |       | (14                                                                                        | )          |          | 27         |   |   | 31 |   |   | 54 |   |   | (1 | ) |   | (17 | ) |   | (.4 | ) |   | (23 | ) |   |
| Income (loss) from discontinued operations                        |       | (11                                                                                        | )          |          | —     |   |   | — |   |   | 4 |   |   | (4 | ) |   | (4 | ) |   | (3 | ) |   | (20 | ) |   |
| Net income (loss)                                                 |       | (25                                                                                        | )          |          | 27         |   |   | 31 |   |   | 58 |   |   | (5 | ) |   | (21 | ) |   | (4 | ) |   | (43 | ) |   |
| Net income (loss) per  common share from continuing operations(i) |       |                                                                                       |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                             |       | (.21                                                                                       | )          |          | .36        |   |   | .41 |   |   | .72 |   |   | (.03 | ) |   | (.23 | ) |   | (.02 | ) |   | (.33 | ) |   |
| Diluted                                                           |       | (.21                                                                                       | )          |          | .35        |   |   | .41 |   |   | .71 |   |   | (.03 | ) |   | (.23 | ) |   | (.02 | ) |   | (.33 | ) |   |
| Net income (loss) per  common share(i)                            |       |                                                                                       |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                             |       | (.37                                                                                       | )          |          | .36        |   |   | .41 |   |   | .76 |   |   | (.07 | ) |   | (.28 | ) |   | (.07 | ) |   | (.62 | ) |   |
| Diluted                                                           |       | (.37                                                                                       | )          |          | .35        |   |   | .41 |   |   | .76 |   |   | (.07 | ) |   | (.28 | ) |   | (.07 | ) |   | (.62 | ) |   |
| Common stock dividends paid per share                             |       | .15                                                                                        |       |          | .15        |   |   | .15 |   |   | .15 |   |   | .15 |   |   | .15 |   |   | .15 |   |   | .15 |   |   |
| Common stock prices(j)                                            |       |                                                                                       |       |          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High                                                              |       | 31.73                                                                                      |       |          | 44.73      |   |   | 45.38 |   |   | 51.80 |   |   | 34.84 |   |   | 34.12 |   |   | 33.60 |   |   | 32.99 |   |   |
| Low                                                               |       | 24.72                                                                                      |       |          | 30.42      |   |   | 38.78 |   |   | 40.26 |   |   | 27.82 |   |   | 29.50 |   |   | 27.11 |   |   | 24.20 |   |   |
|                                                                   |            |                                                                                            |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(a)             Includes$98.5 million of store closing and impairment charges, $15.7 million of chargesrelated to headquarters consolidation and $11.0 million of charges for thewrite-down of impaired assets at the Company’s Elma, Washingtonmanufacturing facility that is accounted for as a discontinued operation.

(b)            Includes$10.9 million of charges related to headquarters consolidation, $9.0 million ofincome related to favorable adjustments to facility closure reserves and $9.2million of income from adjustments to the estimated fair value of theAdditional Consideration Agreement we entered into in connection with the Sale.

(c)             Includes$11.4 million of charges related to headquarters consolidation, and $7.9million of charges related to the reorganization in our Contract segment.

(d)            Includes$7.9 million of charges related to headquarters consolidation, $2.4 million of chargesrelated to the reorganization in our Contract segment, including internationalrestructuring and asset write-offs, $38.8 million of income from adjustments tothe estimated fair value of the Additional Consideration Agreement we enteredinto in connection with the Sale, and $3.7 million of income tax benefitsrelated to the Company’s Elma, Washington manufacturing facility that isaccounted for as a discontinued operation.

(e)             Includes$12.2 million of costs related to the early retirement of debt,$11.3 million of charges related to the severance or relocation ofemployees and a $9.8 million charge related to a legal settlement.

(f)                Includes$5.5 million of charges related to the severance or relocation of employees and$3.9 million in non-recurring professional fees.

(g)            Includes$10.4 million of costs related to headquarters consolidation; and $2.9 million ofimpairment charges for capitalized software.

(h)             Includes$17.9 million of store closing and impairment charges, $14.5 million ofcosts related to headquarters consolidation, $5.4 million of costs relatedto international restructuring, $4.8 million of impairment charges forcapitalized software and a $28.2 million pre-tax charge for the write-downof impaired assets at the Company’s Elma, Washington manufacturing facilitythat is accounted for as a discontinued operation.

(i)                 Quartersadded together may not equal full year amount because each quarter iscalculated on a stand-alone basis.

(j)                TheCompany’s common stock (symbol OMX) is traded on the New York Stock Exchange.

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***Report of IndependentRegistered Public Accounting Firm***

The Board of Directors and ShareholdersOfficeMax Incorporated:

We have audited the accompanying consolidated balancesheets of OfficeMax Incorporated and subsidiaries as of December 30, 2006and December 31, 2005, and the related consolidated statements of income(loss), shareholders’ equity, and cash flows for each of the years in thethree-year period ended December 30, 2006. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of OfficeMax Incorporated and subsidiaries as of December 30,2006 and December 31, 2005, and the results of their operations and theircash flows for each of the years in the three-year period ended December 30,2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financialstatements, the Company adopted the provisions of Statements of FinancialAccounting Standards No. 123R, “Share-based Payment”, and No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R)”, in 2006.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of OfficeMax Incorporated’sinternal control over financial reporting as of December 30, 2006, basedon criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated February 28, 2007,expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.
| /s/ KPMG LLP |   |
|-------------------|--------|

 

Chicago, IllinoisFebruary 28, 2007

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***Report of Independent RegisteredPublic Accounting Firm***

The Board of Directors and ShareholdersOfficeMax Incorporated:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting (Item 9A(b)), that OfficeMax Incorporated and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 30,2006, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). OfficeMax Incorporated’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 30,2006, is fairly stated, in all material respects, based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Also, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 30,2006, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of the Company as of December 30,2006 and December 31, 2005, and the related consolidated statements ofincome (loss), shareholders’ equity, and cash flows for each of the years inthe three-year period ended December 30, 2006, and our report dated February 28,2007, expressed an unqualified opinion on those consolidated financialstatements.
| /s/ KPMG LLP |   |
|-------------------|--------|

 

Chicago, IllinoisFebruary 28, 2007

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***ITEM 9.***                       CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We have had no disagreementswith our independent registered public accounting firm regarding accounting orfinancial disclosure matters.

***ITEM 9A.   CONTROLSAND PROCEDURES***

(a)            *Evaluation of Disclosure Controls and Procedures*

As of the end of the period covered by this report,the chief executive officer and chief financial officer directed and supervisedan evaluation of the design and operation of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)). The evaluation wasconducted to determine whether the Company’s disclosure controls and procedureswere effective in bringing material information about the Company to theattention of senior management. Based on this evaluation, our chief executiveofficer and chief financial officer concluded that the Company’s disclosurecontrols and procedures were effective in alerting them in a timely manner tomaterial information that the Company is required to disclose in its filingswith the Securities and Exchange Commission.

(b)           *Management’s Report on Internal Control over Financial Reporting*

OfficeMax’s management is responsible for establishingand maintaining adequate internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934, as amended). Our internal control system wasdesigned to provide reasonable assurance to our management and Board of Directorsregarding the preparation and fair presentation of published financialstatements.

Our management, with the participation of our chiefexecutive officer and chief financial officer, assessed the effectiveness ofour internal control over financial reporting as of December 30, 2006. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework.*

Based on this assessment, management concluded that asof December 30, 2006, OfficeMax’s internal control over financialreporting was effective.

KPMG LLP, our independent registered publicaccounting firm, has issued an audit report on management’s assessment of ourinternal control over financial reporting. That report appears on page 96.

(c)            *Changes in Internal Control Over Financial Reporting*

There was no change in theCompany’s internal control over financial reporting, as defined in Rules 13a-15(f) and15d-1(f) of the Exchange Act, during the fourth fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

***ITEM 9B.   OTHERINFORMATION***

(a)            None.

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**PART III**

***ITEM 10.***   DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regardingdirectors and nominees for director is presented under the caption “Board ofDirectors” in our proxy statement. This information is incorporated byreference.

Our officers are elected bythe Board of Directors and hold office until a successor is chosen or qualifiedor until their earlier resignation or removal. Certain of our officers haveemployment agreements, which are described under the caption “CompensationDisclosure and Analysis” and under the caption “Estimated Termination Benefits—Mr.Duncan” in our proxy statement. This information is incorporated by reference.The following lists our executive officers covered by Section 16 of theSecurities and Exchange Act of 1934 and gives a brief description of theirbusiness experience as of February 27, 2007:

**Don Civgin,**45,was first elected an officer of the Company on October 3, 2005. Mr. Civginbecame executive vice president, finance of the Company on October 3,2005, and assumed the title of chief financial officer of the Company in November 2005.Prior to his election as executive vice president, finance of the Company, Mr. Civginserved as senior vice president and chief financial officer of General BindingCorporation, a designer, manufacturer and distributor of branded officeequipment, related supplies and laminating equipment and films, from January 2002to August 2005. From early 1997 to May 2001, Mr. Civgin wassenior vice president—finance and senior vice president—merchandisingoperations of Montgomery Ward.

**Phillip P. DePaul,**36,was first elected an officer of the Company on November 1, 2004. Mr. DePaulbecame the senior vice president and controller of the Company in 2004, andassumed the title of chief accounting officer of the Company in April 2006.Mr. DePaul previously served as senior vice president and controller ofOfficeMax, Inc. beginning in 2000, and as director of financial planningof OfficeMax, Inc. beginning in 1998.

**Sam Duncan,**55,joined our board of directors in 2005. Mr. Duncan became chairman,president and chief executive officer of the Company in 2005. Prior to hiselection as chief executive officer and president of the Company, Mr. Duncanwas president and chief executive officer of ShopKo Stores, Inc., a multi-departmentretailer, from October 2002 to April 2005. From 1992 to 2002, Mr. Duncanheld various merchandising and executive positions with Fred Meyer, Inc.(a division of The Kroger Co., a grocery retailer) including: president of FredMeyer from 2001 to October 2002 and president of Ralph’s Supermarkets from1998 to 2001. Mr. Duncan began his retail career in the supermarketindustry in 1969 with Albertson’s, Inc., where he held variousmerchandising positions until 1992.

**Michael D. Rowsey,**54,was first elected an officer of the Company on February 8, 2002. Mr. Rowseyhas served as president of the Company’s Contract division since 2004. Hepreviously served as Boise Office Solutions division vice president from 2000until 2001, and as division senior vice president in charge of logistics andstrategic planning until December 2003, when he was promoted to president—contract.

**Ryan Vero,**37,was first elected an officer of the Company on November 1, 2004. Mr. Veroserved as executive vice president, marketing of the Company from 2004 untilJune 27, 2005 when he became executive vice president and chiefmerchandising officer. Mr. Vero previously served as executive vicepresident, merchandising and marketing of OfficeMax, Inc. beginning in2001 and executive vice president, e-commerce/direct of OfficeMax, Inc.beginning in 1995.

Information concerning ourAudit Committee and our Audit Committee financial expert is set forth under thecaption “Audit Committee Report” in our proxy statement and is incorporated byreference.

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Information concerning theprocedures by which security holders may recommend nominees to our Board of Directorsis set forth under the caption “Shareholder Nominations for Directors” in ourproxy statement and is incorporated by reference.

Information concerningcompliance with Section 16 of the Securities Exchange Act of 1934 is setforth under the caption “Section 16(a) Beneficial Ownership ReportingCompliance” in our proxy statement and is incorporated by reference.

We have adopted a Code ofEthics that applies to all OfficeMax employees and directors, including oursenior financial officers. Copies of the Code are available, free of charge, onour website at www.officemax.com, by clicking on “About us,” “Investors” andthen “Code of Ethics.” You also may obtain copies of this Code by contactingour Investor Relations Department, 263 Shuman Boulevard, Naperville, Illinois60563, or by calling 630/864-6800. If we amend or grant a waiver of one or moreof the provisions of our Code of Ethics, we intend to disclose such amendmentsor waivers by posting the required information on our website at the addressabove.

***ITEM 11.   EXECUTIVECOMPENSATION***

Information concerningcompensation of OfficeMax’s executive officers and directors for the year endedDecember 30, 2006, is presented under the captions “CompensationDiscussion and Analysis,” “Summary Compensation Table,” “Award Tables,” “OtherCompensation and Benefit Plans,” “Estimated Current Value of Change in ControlBenefits,” “Estimated Termination Benefits,” and “Director Compensation” in ourproxy statement. This information is incorporated by reference. Informationregarding compensation committee interlocks is presented under the caption“Compensation Committee Interlocks and Insider Participation” in our proxystatement. This information is incorporated by reference. The report of ourExecutive Compensation Committee can be found under the caption “Compensation CommitteeReport” in our proxy. This information is incorporated by reference.

***ITEM 12.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS***

(a)            Informationconcerning the security ownership of certain beneficial owners as of December 30,2006, is set forth under the caption “Stock Ownership—Ownership of More Than 5%of OfficeMax Stock” in our proxy statement and is incorporated by reference.

(b)           Informationconcerning the security ownership of management as of December 30, 2006,is set forth under the caption “Stock Ownership—Directors and ExecutiveOfficers” in our proxy statement and is incorporated by reference.

(c)            Ourshareholders have approved all of the company’s equity compensation plans,including the Director Stock Compensation Plan (the “DSCP”) and 2003 OfficeMaxIncentive and Performance Plan (the “2003 Plan”), formerly the Boise Incentiveand Performance Plan. These plans are designed to further align our directors’and management’s interests with the Company’s long-term performance and thelong-term interests of our shareholders. In December 2003, ourshareholders also approved an amendment increasing the number of shares ofcommon stock available for issuance under the 2003 Plan. The following tablesummarizes the number of shares of our common stock that may be issued underour equity compensation plans as of December 30, 2006.

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| **Equity Compensation Plan Information**     | ** ** |
|-------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of Securities to Be  Issued Upon Exercise of  Outstanding Options,  Warrants, and Rights (#)** | ** ** | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants, and Rights ($)** | ** ** | **Number of Securities Remaining  Available for Future Issuance  Under Equity Compensation  Plans (Excluding Securities  Reflected in the First Column) (#)** | ** ** |
| Equity compensation plans approved by security  holders     |       |   | 3,432,740 | (1) |   |   | $ | 16.25439 |   |   |   | 3,730,266 | (2) |   |
| Equity compensation plans not approved by security  holders |       |   | — |   |   |   | — |   |   |   | — |   |   |
| **Total**                                                   | ** ** | ** ** | **3,432,740** |   | ** ** | ** ** | **$** | **16.25439** |   | ** ** | ** ** | **3,730,266** |   |   |

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(1)             Includes12,724 shares issuable under our Director Stock Compensation Plan, 36,000shares issuable under our Director Stock Option Plan, 1,382,264 shares issuableunder our Key Executive Stock Option Plan, and 2,001,752 shares issuable underthe OfficeMax Incentive and Performance Plan. The Director Stock Option Planand Key Executive Stock Option Plan have been replaced by the OfficeMaxIncentive and Performance Plan. None of the following are included in thischart: (a) interests in shares of common stock in the OfficeMax CommonStock Fund held by the trustee of the company’s 401(k) Savings Plan, (b) Series DPreferred Stock in the Employee Stock Ownership Plan (ESOP) fund (c) thedeferred stock unit components of the company’s 2001 Key Executive DeferredCompensation Plan or (d) interests in the company stock fund of theExecutive Savings Deferral Plan.

(2)             As ofDecember 30, 2006, 53,491 shares were issuable under the Director StockCompensation Plan and 3,676,775 shares were issuable under the OfficeMaxIncentive and Performance Plan.

***ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE***

Information concerning theindependence of our directors, certain relationships and related transactionsduring 2006 and our policies with respect to such transactions is set forthunder the captions “Director Independence” and “Related Transactions” in ourproxy statement and is incorporated by reference. In addition, in 2006, certainof the entities which own or owned more than five percent of our stock purchasedoffice supplies from us. These transactions were entered into in the ordinarycourse of business and at arms’ length negotiated rates. None of thesetransactions are material to our business or the business of the purchaser.

***ITEM 14.   PRINCIPALACCOUNTANT FEES AND SERVICES***

Information concerningprincipal accountant fees and services is set forth under the captions “ItemsYou May Vote On—Appointment of Independent Registered Public Accounting Firm”and “Audit Committee Report—Audit, Audit-Related, and Other NonauditServices” in our proxy statement and is incorporated by reference.

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**PART IV**

***ITEM 15. EXHIBITSAND FINANCIAL STATEMENT SCHEDULES***

(a)            The followingdocuments are filed as a part of this Form 10-K:

(1)           Consolidated FinancialStatements.

The Consolidated Financial Statements, the Notes to ConsolidatedFinancial Statements and the Report of Independent Registered Public AccountingFirm are presented in “Item 8. Financial Statements and Supplementary Data”of this Form 10-K.

·        ConsolidatedBalance Sheets as of December 30, 2006 and December 31, 2005.

·        ConsolidatedStatements of Income (Loss) for the years ended December 30, 2006, December 31,2005 and December 31, 2004.

·        ConsolidatedStatements of Cash Flows for the years ended December 30, 2006, December 31,2005 and December 31, 2004.

·        ConsolidatedStatements of Shareholders’ Equity for the years ended December 30, 2006, December 31,2005 and December 31, 2004.

·        Notesto Consolidated Financial Statements.

·        Report of IndependentRegistered Public Accounting Firm.

(2)           Financial StatementSchedules.

All financial statement schedules have been omittedbecause they are inapplicable, not required or shown in the financialstatements and notes in “Item 8. Financial Statements and Supplementary Data”of this Form 10-K.

(3)           Exhibits.

A list of the exhibits required to be filed as part ofthis report is set forth in the Index to Exhibits, which immediately precedessuch exhibits and is incorporated by reference.

(b)           Exhibits.

See Index to Exhibits.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                               | OfficeMax Incorporated |
|-------------------------------|------------------------|
|                          | By                     | /S/  SAM K. DUNCAN |
|                          |                   | Sam K. Duncan  Chief Executive Officer |
| Dated: February 28, 2007 |                   |   |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities indicated, on February 28, 2007.
|                                               | ** ** | **Signature**         | ** ** | **Capacity**                        |
|-----------------------------------------------|------------|-----------------------|------------|-------------------------------------|
| **(i) Principal Executive  Officer:**    |       |                  |
|                                          |       | /s/ SAM K. DUNCAN     |       | Chief Executive Officer             |
|                                          |       | Sam K. Duncan         |       |                                |
| **(ii) Principal Financial  Officer:**   |       |                  |
|                                          |       | /s/ DON CIVGIN        |       | Executive Vice President and  Chief |
|                                          |       | Don  Civgin           |       | Financial Officer                   |
| **(iii) Principal Accounting  Officer:** |       |                  |
|                                          |       | /s/ PHILLIP P. DEPAUL |       | Senior Vice President,  Controller  |
|                                          |       | Phillip  P. DePaul    |       | and Chief Accounting Officer        |
| **(iv) Directors:**                      |       |                  |
|                                          |       | /s/ DORRIT J. BERN    |       | /s/ SAM K. DUNCAN                   |
|                                          |       | Dorrit  J. Bern       |       | Sam  K. Duncan                      |
|                                          |       | /s/ WARREN F. BRYANT  |       | /s/ RAKESH GANGWAL                  |
|                                          |       | Warren  F. Bryant     |       | Rakesh  Gangwal                     |
|                                          |       | /s/ BRIAN C. CORNELL  |       | /s/ GARY G. MICHAEL                 |
|                                          |       | Brian  C. Cornell     |       | Gary  G. Michael                    |
|                                          |       | /s/ JOSEPH M. DEPINTO |       | /s/ FRANCESCA  RUIZ DE LUZURIAGA    |
|                                          |       | Joseph  M. DePinto    |       | Francesca Ruiz de Luzuriaga         |
|                                          |       |                  |       | /s/ DAVID M. SZYMANSKI              |
|                                          |       |                  |       | David  M. Szymanski                 |

 

102

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**Consent of Independent Registered Public Accounting Firm**

To the Board of Directors of OfficeMax Incorporated:

We consentto the incorporation by reference in the registration statements (Nos. 33-28595,33-21964, 33-31642, 333-105223, 333-37124, 333-86425,333-86427, 333-61106 and 333-110397) on Form S-8;and the registration statements (Nos. 333-41033, 333-74450 and 333-86362)on Form S-3 of OfficeMax Incorporated of our reports dated February 28,2007, with respect to the consolidated balance sheets of OfficeMax Incorporatedas of December 30, 2006 and December 31, 2005, and the relatedconsolidated statements of income (loss), shareholders’ equity, and cash flowsfor each of the years in the three-year period ended December 30,2006, management’s assessment of the effectiveness of internal control overfinancial reporting and the effectiveness of internal control over financialreporting, which reports appear in the December 30, 2006, annual report onForm 10-K of OfficeMax Incorporated.

Our reporton the Company’s consolidated financial statements refers to changes inaccounting for stock-based compensation and defined benefit and otherpostretirement plans during 2006.

|                                           |   | /s/ KPMG LLP |
|-------------------------------------------|--------|--------------|
| Chicago, Illinois  February 28, 2007 |   | KPMG LLP     |

 

103

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**OFFICEMAX INCORPORATED**

**INDEX TO EXHIBITS**

Filed with the Annual Report on Form 10-K for the Year EndedDecember 30, 2006

|                     | ** ** | ** **                   | ** ** | **Incorporated by Reference**                                                                                                                                                                                                           | ** ** |
|---------------------|------------|------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Exhibit  Number** | ** ** | **Exhibit Description** | ** ** | **Form**                                                                                                                                                                                                                                          | ** ** | **File  Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** | ** ** |
|                | 2          | .1                           |       | Agreement and Plan of  Merger dated as of July 13, 2003, among Boise Cascade Corporation (now  OfficeMax Incorporated), Challis Corporation, and OfficeMax, Inc.                                                                        |       | 8-K |   | 001-05057 |   |   | 2 |   |   | 7/14/03 |   |   |   |   |   |
|                | 2          | .2                           |       | Asset Purchase  Agreement dated July 26, 2004, between Boise Cascade Corporation (now  OfficeMax Incorporated), Boise Southern Company, Minidoka Paper Company and  Forest Products Holdings, L.L.C., and Boise Land & Timber Corp. |       | 8-K |   | 001-05057 |   |   | 2 |   |   | 7/28/04 |   |   |   |   |   |
|                | 3          | .1                           |       | Restated Certificate  of Incorporation, as restated to date                                                                                                                                                                                       |       | 8-K |   | 001-05057 |   |   | 3 | .1 |   | 4/24/06 |   |   |   |   |   |
|                | 3          | .2                           |       | Bylaws,  as amended October 20, 2006                                                                                                                                                                                                         |       | 8-K |   | 001-05057 |   |   | 3 | .1 |   | 10/25/06 |   |   |   |   |   |
|                | 4          | .1(1)                        |       | Trust Indenture  between Boise Cascade Corporation (now OfficeMax Incorporated) and Morgan  Guaranty Trust Company of New York, Trustee, dated October 1, 1985, as  amended                                                                  |       | S-3 |   | 33-5673 |   |   | 4 |   |   | 5/13/86 |   |   |   |   |   |
|                | 4          | .2                           |       | Loan and Security  Agreement dated as of June 24, 2005                                                                                                                                                                                       |       | 8-K |   | 001-05057 |   |   | 10 | .1 |   | 6/30/05 |   |   |   |   |   |
|                | 4          | .3                           |       | Renewed Rights  Agreement, as amended and restated as of December 12, 2003                                                                                                                                                                   |       | 10-K |   | 001-05057 |   |   | 4 | .3 |   | 3/2/04 |   |   |   |   |   |
|                | 9          |                         |       | Inapplicable                                                                                                                                                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                | 10         | .1(a)                        |       | Paper Purchase  Agreement between Boise White Paper, L.L.C., OfficeMax  Contract, Inc., and OfficeMax North America, Inc.                                                                                                          |       | 10-Q |   | 001-05057 |   |   | 10 | .1 |   | 11/9/04 |   |   |   |   |   |
|                | 10         | .2                           |       | Additional  Consideration Agreement between Boise Cascade Corporation (now OfficeMax  Incorporated) and Boise Cascade, L.L.C. dated October 29, 2004                                                                                    |       | 10-Q |   | 001-05057 |   |   | 10 | .2 |   | 11/9/04 |   |   |   |   |   |

104

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|        | 10 | .3           |   | Installment Note for  $559,500,000 between Boise Land & Timber, L.L.C. (Maker) and  Boise Cascade Corporation (now OfficeMax Incorporated) (Initial Holder) dated  October 29, 2004         |   | 10-Q |   | 001-05057 |   |   | 10 | .3  |   | 11/9/04 |   |   |   |   |   |
|--------|----|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|-----------|--------|--------|----|-----|--------|---------|--------|--------|--------|--------|--------|
|   | 10 | .4           |   | Installment Note for  $258,000,000 between Boise Land & Timber, L.L.C. (Maker) and  Boise Southern Company (Initial Holder) dated October 29, 2004                                          |   | 10-Q |   | 001-05057 |   |   | 10 | .4  |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .5           |   | Installment Note for  $817,500,000 between Boise Land & Timber II, L.L.C. (Maker)  and Boise Cascade Corporation (now OfficeMax Incorporated) (Initial Holder)  dated October 29, 2004 |   | 10-Q |   | 001-05057 |   |   | 10 | .5  |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .6           |   | Guaranty by Wachovia  Corporation dated October 29, 2004                                                                                                                                                  |   | 10-Q |   | 001-05057 |   |   | 10 | .6  |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .7           |   | Guaranty by Lehman  Brothers Holdings Inc. dated October 29, 2004                                                                                                                                    |   | 10-Q |   | 001-05057 |   |   | 10 | .7  |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .8†,(2) |   | Employment Agreement  between Boise Cascade Corporation (now OfficeMax Incorporated) and George J.  Harad dated October 29, 2004, as amended                                                              |   | 10-Q |   | 001-05057 |   |   | 10 | .10 |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .9           |   | Registration Rights  Agreement among Boise Cascade Corporation (now OfficeMax Incorporated),  Forest Products Holdings, L.L.C., and Boise Cascade  Holdings, L.L.C. dated October 29, 2004      |   | 10-Q |   | 001-05057 |   |   | 10 | .11 |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .10          |   | Registration Rights  Agreement among Kooskia Investment Corporation, Forest Products  Holdings, L.L.C., and Boise Land & Timber Holdings Corp., dated  October 29, 2004                     |   | 10-Q |   | 001-05057 |   |   | 10 | .12 |   | 11/9/04 |   |   |   |   |   |
|   | 10 | .11          |   | Boise Cascade  Holdings, L.L.C., Operating Agreement dated October 29, 2004                                                                                                                               |   | 10-Q |   | 001-05057 |   |   | 10 | .13 |   | 11/9/04 |   |   |   |   |   |

105

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|        | 10 | .12       |   | Securityholders  Agreement among Boise Cascade Corporation (now OfficeMax incorporated),  Forest Products Holdings, L.L.C., and Boise Cascade  Holdings, L.L.C., dated October 29, 2004                                                                                                                 |   | 10-Q |   | 001-05057 |   |   | 10 | .14 |   | 11/9/04  |   |   |   |   |   |
|--------|----|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|-----------|--------|--------|----|-----|--------|----------|--------|--------|--------|--------|--------|
|   | 10 | .13       |   | Stockholders  Agreement among Kooskia Investment Corporation, Forest Products  Holdings, L.L.C., and Boise Land & Timber Holdings Corp., dated  October 29, 2004                                                                                                                                    |   | 10-Q |   | 001-05057 |   |   | 10 | .15 |   | 11/9/04  |   |   |   |   |   |
|   | 10 | .14       |   | Purchase Agreement  dated December 13, 2004, between OMX Timber Finance  Investments I, LLC, OMX Timber Finance  Investments II, LLC, OfficeMax Incorporated, Wachovia Capital  Markets, LLC, and Lehman Brothers Inc.                                                              |   | 8-K  |   | 001-05057 |   |   | 10 | .1  |   | 12/17/04 |   |   |   |   |   |
|   | 10 | .15       |   | Indemnification  Agreement dated December 13, 2004, between Wachovia Corporation, Lehman  Brothers Holdings Inc., OMX Timber Finance Investments I, LLC,  OMX Timber Finance Investments II, LLC, OfficeMax Incorporated,  Wachovia Capital Markets, LLC, Lehman Brothers Inc. |   | 8-K  |   | 001-05057 |   |   | 10 | .2  |   | 12/17/04 |   |   |   |   |   |
|   | 10 | .16† |   | Executive Savings  Deferral Plan                                                                                                                                                                                                                                                                                       |   | 8-K  |   | 001-05057 |   |   | 10 | .2  |   | 12/15/04 |   |   |   |   |   |
|   | 10 | .17† |   | 2005 Deferred  Compensation Plan                                                                                                                                                                                                                                                                                       |   | 8-K  |   | 001-05057 |   |   | 10 | .3  |   | 12/15/04 |   |   |   |   |   |
|   | 10 | .18† |   | 2005 Directors  Deferred Compensation Plan                                                                                                                                                                                                                                                                             |   | 8-K  |   | 001-05057 |   |   | 10 | .4  |   | 12/15/04 |   |   |   |   |   |
|   | 10 | .19† |   | Directors  Compensation Summary Sheet                                                                                                                                                                                                                                                                                  |   | 8-K  |   | 001-05057 |   |   | 99 | .3  |   | 2/20/07  |   |   |   |   |   |
|   | 10 | .20† |   | Form of Director  Restricted Stock Award Agreement                                                                                                                                                                                                                                                                |   | 8-K  |   | 001-05057 |   |   | 10 | .6  |   | 12/15/04 |   |   |   |   |   |
|   | 10 | .21† |   | Form of  OfficeMax Incorporated Nonstatutory Stock Option Agreement                                                                                                                                                                                                                                               |   | 8-K  |   | 001-05057 |   |   | 10 | .1  |   | 1/6/05   |   |   |   |   |   |
|   | 10 | .22† |   | Executive Life  Insurance Program                                                                                                                                                                                                                                                                                      |   | 8-K  |   | 001-05057 |   |   | 10 | .1  |   | 2/16/05  |   |   |   |   |   |
|   | 10 | .23† |   | Officer Annual  Physical Program                                                                                                                                                                                                                                                                                       |   | 8-K  |   | 001-05057 |   |   | 10 | .2  |   | 2/16/05  |   |   |   |   |   |
|   | 10 | .24† |   | Financial Counseling  Program                                                                                                                                                                                                                                                                                          |   | 8-K  |   | 001-05057 |   |   | 10 | .3  |   | 2/16/05  |   |   |   |   |   |
|   | 10 | .25† |   | Form of Amended  2005 Annual Incentive Award Agreement                                                                                                                                                                                                                                                            |   | 10-K |   | 001-05057 |   |   | 10 | .29 |   | 3/16/05  |   |   |   |   |   |

106

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|        | 10 | .26† |   | 2004 Retention Bonus  Plan                                                                                                                                            |   | 10-K |   | 001-05057 |   |   | 10 | .30 |   | 3/16/05 |   |   |   |   |   |
|--------|----|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|-----------|--------|--------|----|-----|--------|---------|--------|--------|--------|--------|--------|
|   | 10 | .27† |   | Executive Officer  Mandatory Retirement Policy                                                                                                                        |   | 10-K |   | 001-05057 |   |   | 10 | .31 |   | 3/16/05 |   |   |   |   |   |
|   | 10 | .28† |   | Form of  Severance Agreement with Executive Officer (for executive officer not covered  by Supplement Early Retirement Plan)                                     |   | 10-K |   | 001-05057 |   |   | 10 | .32 |   | 3/16/05 |   |   |   |   |   |
|   | 10 | .29† |   | 1982 Executive  Officer Deferred Compensation Plan, as amended through September 26,  2003                                                                       |   | 10-K |   | 001-05057 |   |   | 10 | .4  |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .30† |   | Nonbusiness Use of  Corporate Aircraft Policy, as amended                                                                                                             |   | 10-K |   | 001-05057 |   |   | 10 | .13 |   | 3/14/94 |   |   |   |   |   |
|   | 10 | .31† |   | Supplemental Early  Retirement Plan for Executive Officers, as amended through September 26,  2003                                                               |   | 10-K |   | 001-05057 |   |   | 10 | .6  |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .32† |   | Boise Cascade  Corporation (now OfficeMax Incorporated) Supplemental Pension Plan, as  amended through September 26, 2003                                        |   | 10-K |   | 001-05057 |   |   | 10 | .7  |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .33† |   | Form of  Severance Agreement with Executive Officer (for executive officer covered by  Supplemental Early Retirement Plan)                                       |   | 10-K |   | 001-05057 |   |   | 10 | .37 |   | 3/16/05 |   |   |   |   |   |
|   | 10 | .34† |   | 1984 Key Executive  Stock Option Plan, as amended through September 26, 2003                                                                                     |   | 10-K |   | 001-05057 |   |   | 10 | .9  |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .35† |   | 1980 Split Dollar  Life Insurance Plan, as amended through September 25, 2003                                                                                    |   | 10-K |   | 001-05057 |   |   | 10 | .10 |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .36† |   | Form of  Agreement with Executive Officers, as amended through September 26, 2003  (for executive officers who were employees of Boise Cascade Corporation) |   | 10-K |   | 001-05057 |   |   | 10 | .11 |   | 3/2/04  |   |   |   |   |   |
|   | 10 | .37† |   | Supplemental  Healthcare Plan for Executive Officers, as amended through January 1,  2003                                                                        |   | 10-K |   | 001-05057 |   |   | 10 | .13 |   | 3/4/03  |   |   |   |   |   |
|   | 10 | .38† |   | Executive Officer  Severance Pay Policy, as amended                                                                                                                   |   | 8-K  |   | 001-05057 |   |   | 10 | .3  |   | 2/15/06 |   |   |   |   |   |
|   | 10 | .39† |   | Form of  Directors’ Indemnification Agreement, as revised September 26, 2003                                                                           |   | 10-K |   | 001-05057 |   |   | 10 | .15 |   | 3/2/04  |   |   |   |   |   |

107

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|        | 10 | .40†,(3) |   | Deferred Compensation  and Benefits Trust, as amended for the Form of Sixth Amendment dated  May 1, 2001                                                                            |   | 10-Q |   | 001-05057 |   |   | 10 |   |   | 11/13/01 |   |   |   |   |   |
|--------|----|---------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|--------|-----------|--------|--------|----|--------|--------|----------|--------|--------|--------|--------|--------|
|   | 10 | .41†     |   | Director Stock  Compensation Plan, as amended through September 26, 2003                                                                                                                 |   | 10-K |   | 001-05057 |   |   | 10 | .17    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .42†     |   | Directors Stock  Option Plan, as amended through September 26, 2003                                                                                                                      |   | 10-K |   | 001-05057 |   |   | 10 | .18    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .43†     |   | Form of  Agreement with Executive Officers, as amended through September 26, 2003  (for Boise Office Solutions employees who were executive officers of Boise  Cascade Corporation) |   | 10-K |   | 001-05057 |   |   | 10 | .22    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .44†     |   | 2001 Key Executive  Deferred Compensation Plan, as amended through September 26, 2003                                                                                                    |   | 10-K |   | 001-05057 |   |   | 10 | .23    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .45†     |   | 2001 Board of  Directors Deferred Compensation Plan, as amended through September 26,  2003                                                                                              |   | 10-K |   | 001-05057 |   |   | 10 | .24    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .46†     |   | Key Executive  Performance Unit Plan, as amended through September 26, 2003                                                                                                              |   | 10-K |   | 001-05057 |   |   | 10 | .25    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .47†     |   | 2003 Director Stock  Compensation Plan, as amended through September 26, 2003                                                                                                            |   | 10-K |   | 001-05057 |   |   | 10 | .26    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .48†     |   | 2003 Boise (now  OfficeMax) Incentive and Performance Plan, as amended through  December 12, 2003                                                                                        |   | 10-K |   | 001-05057 |   |   | 10 | .27    |   | 3/2/04   |   |   |   |   |   |
|   | 10 | .49†     |   | OfficeMax Cash  Incentive Plan (effective March 11, 2005) and form of 2005 Cash Incentive  Award Agreement                                                                               |   | 10-K |   | 001-05057 |   |   | 10 | .53    |   | 3/16/05  |   |   |   |   |   |
|   | 10 | .50†     |   | Form of 2005  Restricted Stock Unit Award Agreement                                                                                                                                      |   | 10-K |   | 001-05057 |   |   | 10 | .54    |   | 3/16/05  |   |   |   |   |   |
|   | 10 | .51†     |   | Settlement and  Release Agreement by and between Gary J. Peterson and OfficeMax  Contract, Inc. dated March 22, 2005                                                           |   | 8-K  |   | 001-05057 |   |   | 10 | .1     |   | 4/1/05   |   |   |   |   |   |
|   | 10 | .52†     |   | Employment Agreement  between OfficeMax Incorporated and Sam Duncan dated April 15, 2005                                                                                                 |   | 8-K  |   | 001-05057 |   |   | 10 | .1     |   | 4/20/05  |   |   |   |   |   |

108

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|        | 10 | .53† |   | Nonstatutory Stock  Option Award Agreement between OfficeMax Incorporated and Sam Duncan dated  April 18, 2005—70,000 shares  |   | 8-K |   | 001-05057 |   |   | 10     | .2     |   | 4/20/05 |   |   |   |   |   |
|--------|----|-----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|-----------|--------|--------|--------|--------|--------|---------|--------|--------|--------|--------|--------|
|   | 10 | .54† |   | Nonstatutory Stock  Option Award Agreement between OfficeMax Incorporated and Sam Duncan dated  April 18, 2005—180,000 shares |   | 8-K |   | 001-05057 |   |   | 10     | .3     |   | 4/20/05 |   |   |   |   |   |
|   | 10 | .55† |   | Restricted Stock Unit  Award Agreement between OfficeMax Incorporated and Sam Duncan dated  April 18, 2005—35,000 units       |   | 8-K |   | 001-05057 |   |   | 10     | .4     |   | 4/20/05 |   |   |   |   |   |
|   | 10 | .56† |   | Restricted Stock Unit  Award Agreement between OfficeMax Incorporated and Sam Duncan dated  April 18, 2005—15,000 units       |   | 8-K |   | 001-05057 |   |   | 10     | .5     |   | 4/20/05 |   |   |   |   |   |
|   | 10 | .57† |   | 2005 Annual Incentive  Award Agreement between OfficeMax Incorporated and Sam Duncan dated  April 18, 2005                         |   | 8-K |   | 001-05057 |   |   | 10     | .6     |   | 4/20/05 |   |   |   |   |   |
|   | 10 | .58       |   | Amended and Restated  Going Public Agreement dated as of May 17, 2005                                                              |   | 8-K |   | 001-05057 |   |   | 10     | .1     |   | 5/23/05 |   |   |   |   |   |
|   | 10 | .59† |   | Letter Agreement  between OfficeMax Incorporated and Christopher C. Milliken, effective  July 13, 2005                        |   | 8-K |   | 001-05057 |   |   | 10     | .1     |   | 7/19/05 |   |   |   |   |   |
|   | 10 | .60† |   | Form of 2005  Director Restricted Stock Unit Award Agreement                                                                       |   | 8-K |   | 001-05057 |   |   | 10     | .1     |   | 8/2/05  |   |   |   |   |   |
|   | 10 | .61† |   | Letter Agreement between  OfficeMax Incorporated and Don Civgin                                                                         |   | 8-K |   | 001-05057 |   |   | 10     | .1     |   | 10/7/05 |   |   |   |   |   |
|   | 10 | .62† |   | Restricted Stock Unit Award  Agreement between OfficeMax Incorporated and Don Civgin dated October 4,  2005                        |   | 8-K |   | 001-05057 |   |   | 10     | .2     |   | 10/7/05 |   |   |   |   |   |
|   | 10 | .63† |   | Nonstatutory Stock Option  Award Agreement between OfficeMax Incorporated and Don Civgin dated  October 4, 2005                    |   | 8-K |   | 001-05057 |   |   | 10     | .3     |   | 10/7/05 |   |   |   |   |   |
|   | 10 | .64† |   | Nondisclosure and  Noncompetition Agreement between OfficeMax Incorporated and Don Civgin dated  October 4, 2005                   |   | 8-K |   | 001-05057 |   |   | 10     | .4     |   | 10/7/05 |   |   |   |   |   |
|   | 10 | .65† |   | Amendment to the OfficeMax  Incorporated 2003 Director Stock Compensation Plan                                                          |   | 8-K |   | 001-05057 |   |   |   | — |   | 2/20/07 |   |   |   |   |   |

109

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|        | 10 | .66† |   | Amendment to OfficeMax  Incorporated Executive Savings Deferral Plan                    |   | 8-K    |   | 001-05057 |   |   | 99     | .2     |   | 12/14/05 |   |   |   |   |   |
|--------|----|-----------|--------|-----------------------------------------------------------------------------------------|--------|--------|--------|-----------|--------|--------|--------|--------|--------|----------|--------|--------|--------|--------|--------|
|   | 10 | .67† |   | Amendment to 2003 OfficeMax  Incentive and Performance Plan                             |   | 8-K    |   | 001-05057 |   |   | 99     | .3     |   | 12/14/05 |   |   |   |   |   |
|   | 10 | .68† |   | Form of 2006 Annual  Incentive Award Agreement                                     |   | 8-K    |   | 001-05057 |   |   | 10     | .1     |   | 2/15/06  |   |   |   |   |   |
|   | 10 | .69† |   | Form of 2006 Restricted  Stock Unit Award Agreement                                |   | 8-K    |   | 001-05057 |   |   | 10     | .2     |   | 2/15/06  |   |   |   |   |   |
|   | 10 | .70       |   | Fourth Amended and  Restated Receivables Sale Agreement, dated as of June 19, 2006 |   | 8-K    |   | 001-05057 |   |   | 99     | .1     |   | 6/23/06  |   |   |   |   |   |
|   | 10 | .71† |   | Form of 2006 Director  Restricted Stock Unit Award Agreement                            |   | 8-K    |   | 001-05057 |   |   | 99     | .1     |   | 8/2/06   |   |   |   |   |   |
|   | 10 | .72† |   | Form of 2007 Annual  Incentive Award Agreement                                          |   | 8-K    |   | 001-05057 |   |   | 99     | .1     |   | 2/20/07  |   |   |   |   |   |
|   | 10 | .73† |   | Form of 2007  Restricted Stock Unit Award Agreement                                     |   | 8-K    |   | 001-05057 |   |   | 99     | .2     |   | 2/20/07  |   |   |   |   |   |
|   | 10 | .74       |   | Amendment No. 2  to Loan and Security Agreement                                    |   | 8-K    |   | 001-05057 |   |   | 99     | .1     |   | 5/31/06  |   |   |   |   |   |
|   | 11 |      |   | Computation of Per  Share Earnings                                                      |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |
|   | 12 | .1        |   | Ratio of Earnings to Fixed  Charges                                                     |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |
|   | 12 | .2        |   | Ratio of Earnings to  Combined Fixed Charges and Preferred Dividend Requirements        |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |
|   | 13 |      |   | Inapplicable                                                                            |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 14 | (4)       |   | Code of Ethics                                                                          |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 16 |      |   | Inapplicable                                                                            |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 18 |      |   | Inapplicable                                                                            |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 21 |      |   | Significant subsidiaries of  the registrant                                             |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |
|   | 22 |      |   | Inapplicable                                                                            |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 23 |      |   | Consent of KPMG LLP,  independent registered public accounting firm (see page 103) |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |
|   | 24 |      |   | Inapplicable                                                                            |   |   |   |      |   |   |   |   |   |     |   |   |   |   |   |
|   | 31 | .1        |   | CEO Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002       |   |   |   |      |   |   |   |   |   |     |   |   | X      |   |   |

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|        | 31 | .2     |   | CFO Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                  |   |   |   |   |   |   |   |   |   |   |   |   | X |   |   |
|--------|----|--------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---|--------|--------|
|   | 32 |   |   | Section 906  Certifications of Chief Executive Officer and Chief Financial Officer of OfficeMax  Incorporated |   |   |   |   |   |   |   |   |   |   |   |   | X |   |   |

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†                    Indicates exhibits that constitute managementcontracts or compensatory plans or arrangements.

(a)            Certain information in this exhibit hasbeen omitted and filed separately with the Securities and Exchange Commissionpursuant to a confidential treatment request under Rule 24b-2 of theSecurities Exchange Act of 1934, as amended.

(1)            The Trust Indenture between Boise CascadeCorporation (now known as OfficeMax Incorporated) and Morgan Guaranty TrustCompany of New York, Trustee, dated October 1, 1985, as amended, wasfiled as exhibit 4 in the Registration Statement on Form S-3 No. 33-5673,filed May 13, 1986. The Trust Indenture has been supplemented on sevenoccasions as follows: The First Supplemental Indenture, dated December 20,1989, was filed as exhibit 4.2 in the Pre-Effective Amendment No. 1to the Registration Statement on Form S-3 No. 33-32584,filed December 20, 1989. The Second Supplemental Indenture, dated August 1,1990, was filed as exhibit 4.1 in our Current Report on Form 8-Kfiled on August 10, 1990. The Third Supplemental Indenture, dated December 5,2001, between Boise Cascade Corporation and BNY Western Trust Company, astrustee, to the Trust Indenture dated as of October 1, 1985, between BoiseCascade Corporation and U.S. Bank Trust National Association (as successorin interest to Morgan Guaranty Trust Company of New York) was filed asexhibit 99.2 in our Current Report on Form 8-K filed on December 10,2001. The Fourth Supplemental Indenture dated October 21, 2003, betweenBoise Cascade Corporation and U.S. Bank Trust National Association wasfiled as exhibit 4.1 in our Current Report on Form 8-K filed onOctober 20, 2003. The Fifth Supplemental Indenture dated September 16,2004, among Boise Cascade Corporation, U.S. Bank Trust NationalAssociation and BNY Western Trust Company was filed as exhibit 4.1 toour Current Report on Form 8-K filed on September 22, 2004. TheSixth Supplemental Indenture dated October 29, 2004, between OfficeMaxIncorporated and U.S. Bank Trust National Association was filed asexhibit 4.1 to our Current Report on Form 8-K filed on November 4,2004. The Seventh Supplemental Indenture, made as of December 22, 2004,between OfficeMax Incorporated and U.S. Bank Trust National Associationwas filed as exhibit 4.1 to our Current Report on Form 8-Kfiled on December 22, 2004. Each of the documents referenced in thisfootnote is incorporated by reference.

(2)            The First Amendment to EmploymentAgreement with George J. Harad was filed as exhibit 10.1 in ourCurrent Report on Form 8-K filed on December 15, 2004. Thedocument referenced in this footnote is incorporated by reference.

(3)            The Deferred Compensation and BenefitsTrust, as amended and restated as of December 13, 1996, was filed asexhibit 10.18 in our Annual Report on Form 10-K for the yearended December 31, 1996. Amendment No. 4, dated July 29, 1999,to the Deferred Compensation and Benefits Trust was filed as exhibit 10.18in our Annual Report on Form 10-K for the year ended December 31,1999. Amendment No. 5, dated December 6, 2000, to the DeferredCompensation and Benefits Trust was filed as exhibit 10.18 in our AnnualReport on Form 10-K for the year ended December 31, 2000.Amendment No. 6, dated May 1, 2001, to the Deferred Compensation andBenefits Trust was filed as exhibit 10 in our Quarterly Report on Form 10-Qfor the quarter ended September 30, 2001. Each of the documents referencedin this footnote is incorporated by reference.

(4)            Our Code of Ethics can be found on ourwebsite (www.officemax.com) by clicking on “About us,” “Investors” and then “Codeof Ethics.”

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