**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| ý                                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                    | ** ** | ** **                                                                                    |
| **For the quarterly period ended June 30,  2006**                  |
| ** **                                                              | ** ** | ** **                                                                                    |
| ** **                                                              | ** ** | or                                                                                            |
| **o**                                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                              | ** ** | ** **                                                                                    |
| **For the transition period from __________ to  __________ ** |

 

**CommissionFile Number:  333-122770**

**Boise CascadeHoldings, L.L.C.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    |   | **20-1478587**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**1111West Jefferson StreetP.O. Box 50Boise, Idaho  83728**

(Address of principalexecutive offices) (Zip Code)

 

**(208)384-6161**

(Registrant’stelephone number, including area code)

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes o     No ý

Indicate by checkmark if the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

Large acceleratedfiler  o                                    Accelerated filer  o                               Non-accelerated filer ý

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).      Yes o     No ý

As ofJuly 31, 2006, the registrant did not have any voting or nonvoting equity heldby nonaffiliates.

Indicate thenumber of shares outstanding of each of the issuer’s common stock, as of thelatest practicable date.

The registrant, alimited liability company, has no common stock outstanding. Equity units issuedand outstanding on June 30, 2006, were as follows:

| Series                      | ** ** | **Units Outstanding as of June 30, 2006** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------------|------------|
| Series A  Common Units |       |   66,000,000                                                       |       |
| Series B  Common Units |       | 547,663,475                                                             |       |
| Series C Common  Units |       |   39,741,640                                                       |       |

 

Theseunits are neither registered nor publicly traded.

 

----

 

**Table of Contents**
| **PART I—FINANCIAL INFORMATION** |       |                                                                                        |
|---------------------------------------|------------|---------------------------------------------------------------------------------------------|
|                                  |       |                                                                                        |   |   |   |   |
| Item 1.                               |       | Consolidated  Financial Statements                                                          |   |   |   | 1 |
|                                  |       | Notes  to Unaudited Quarterly Consolidated Financial Statements                             |   | 7 |
|                                  |       | 1.                                                                                          |   | Basis of  Presentation |   | 7 |
|                                  |       | 2.                                                                                          |   | Purchase  of OfficeMax’s Forest Products and Paper Assets |   | 7 |
|                                  |       | 3.                                                                                          |   | Purchase  of Central Texas Corrugated’s Assets |   | 8 |
|                                  |       | 4.                                                                                          |   | Transactions  With Related Parties |   | 9 |
|                                  |       | 5.                                                                                          |   | Vendor  and Customer Rebates and Allowances |   | 10 |
|                                  |       | 6.                                                                                          |   | Other  (Income) Expense, Net |   | 10 |
|                                  |       | 7.                                                                                          |   | Leases |   | 11 |
|                                  |       | 8.                                                                                          |   | Income Taxes |   | 11 |
|                                  |       | 9.                                                                                          |   | Receivables |   | 12 |
|                                  |       | 10.                                                                                         |   | Inventories |   | 12 |
|                                  |       | 11.                                                                                         |   | Goodwill  and Intangible Assets |   | 12 |
|                                  |       | 12.                                                                                         |   | Asset  Retirement Obligations |   | 13 |
|                                  |       | 13.                                                                                         |   | Debt |   | 14 |
|                                  |       | 14.                                                                                         |   | Financial  Instruments |   | 16 |
|                                  |       | 15.                                                                                         |   | Recently  Adopted Accounting Standards |   | 18 |
|                                  |       | 16.                                                                                         |   | Retirement  and Benefit Plans |   | 19 |
|                                  |       | 17.                                                                                         |   | Redeemable  Equity Units |   | 20 |
|                                  |       | 18.                                                                                         |   | Segment  Information |   | 20 |
|                                  |       | 19.                                                                                         |   | Commitments  and Guarantees |   | 23 |
|                                  |       | 20.                                                                                         |   | Consolidating  Guarantor and Nonguarantor Financial Information |   | 23 |
|                                  |       | 21.                                                                                         |   | Legal  Proceedings and Contingencies |   | 34 |
|                                  |       | 22.                                                                                         |   | Subsequent  Event |   | 34 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 2.                          |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   | 34 |
|                                  |       | Acquisition  of Assets From OfficeMax                                                       |   |   |   | 34 |
|                                  |       | Effects  of the Forest Products Acquisition                                                 |   |   |   | 35 |
|                                  |       | Purchase  of Central Texas Corrugated’s Assets                                         |   |   |   | 35 |
|                                  |       | Sale  of Minnesota, Dakota & Western Railway                                            |   |   |   | 36 |
|                                  |       | Our Segments                                                                                |   |   |   | 36 |
|                                  |       | Factors  That Affect Our Operating Results                                                  |   |   |   | 37 |
|                                  |       | Results of  Operations                                                                      |   |   |   | 42 |
|                                  |       | Operational  Outlook                                                                        |   |   |   | 47 |
|                                  |       | Liquidity  and Capital Resources                                                            |   |   |   | 47 |
|                                  |       | Contractual  Obligations                                                                    |   |   |   | 51 |
|                                  |       | Off-Balance-Sheet  Activities                                                               |   |   |   | 51 |
|                                  |       | Guarantees                                                                                  |   |   |   | 51 |
|                                  |       | Inflationary  and Seasonal Influences                                                       |   |   |   | 52 |
|                                  |       | Environmental                                                                               |   |   |   | 52 |
|                                  |       | Collective  Bargaining Agreements                                                           |   |   |   | 52 |
|                                  |       | Critical  Accounting Estimates                                                              |   |   |   | 52 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 3.                          |       | Quantitative  and Qualitative Disclosures About Market Risks                                |   |   |   | 53 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 4.                          |       | Controls  and Procedures                                                                    |   |   |   | 55 |
|                                  |       |                                                                                        |   |   |   |   |
| **PART II—OTHER INFORMATION**    | ** ** | ** **                                                                                  |
| ** **                            | ** ** | ** **                                                                                  | ** ** | ** ** | ** ** | ** ** |
| Item 1.                          |       | Legal  Proceedings                                                                          |   |   |   | 56 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 1A.                         |       | Risk Factors                                                                                |   |   |   | 56 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 1B.                         |       | Unresolved  Staff Comments                                                                  |   |   |   | 56 |
|                                  |       |                                                                                        |   |   |   |   |
| Item  2.                              |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |   |   | 56 |
|                                  |       |                                                                                        |   |   |   |   |
| Item  3.                              |       | Defaults  Upon Senior Securities                                                            |   |   |   | 57 |
|                                  |       |                                                                                        |   |   |   |   |
| Item  4.                              |       | Submission  of Matters to a Vote of Securityholders                                         |   |   |   | 57 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 5.                               |       | Other  Information                                                                          |   |   |   | 57 |
|                                  |       |                                                                                        |   |   |   |   |
| Item 6.                          |       | Exhibits                                                                                    |   |   |   | 57 |
|                                       |            |                                                                                             |  |  |  |  |  |  |

 

Allreports we file with the Securities and Exchange Commission (SEC) are availablefree of charge via Electronic Data Gathering Analysis and Retrieval (EDGAR)through the SEC website at www.sec.gov. We also provide copies of our SECfilings at no charge upon request and make electronic copies of our reportsavailable through our website at www.bc.com as soon as reasonably practicableafter filing such material with the SEC.

ii

----

 

**PART1—FINANCIAL INFORMATION**

 

 

***ITEM 1.          CONSOLIDATEDFINANCIAL STATEMENTS***

 

**BoiseCascade Holdings, L.L.C.Consolidated Statements of Income (Loss)**(unaudited)
| ** **                                      | ** ** | **Three Months Ended  June 30** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**                                | ** ** |
| **Sales**                                       | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                              | 1,415,784  |   | $ | 1,352,466 |   |
| Related parties                                 |       | 144,005                                        |       | 142,145 |   |
|                                            |       | 1,559,789                                      |       | 1,494,611 |   |
|                                            |       |                                           |       |   |   |
| **Costs and expenses**                          | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Materials, labor, and  other operating expenses |       | 1,360,280                                      |       | 1,299,409 |   |
| Depreciation,  amortization, and depletion      |       | 38,459                                         |       | 31,712 |   |
| Selling and distribution  expenses              |       | 71,607                                         |       | 64,426 |   |
| General and  administrative expenses            |       | 26,158                                         |       | 18,036 |   |
| Other (income) expense,  net                    |       | 3,233                                          |       | 3,661 |   |
|                                            |       | 1,499,737                                      |       | 1,417,244 |   |
|                                            |       |                                           |       |   |   |
| **Income from operations**                      |       | 60,052                                         |       | 77,367 |   |
|                                            |       |                                           |       |   |   |
| Foreign exchange gain  (loss)                   |       | 1,360                                          |       | (248 | ) |
| Change in fair value of  interest rate swaps    |       | —                                         |       | (5,314 | ) |
| Interest expense                                |       | (28,610                                        | )          | (74,365 | ) |
| Interest income                                 |       | 934                                            |       | 434 |   |
|                                            |       | (26,316                                        | )          | (79,493 | ) |
| ** **                                      | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| **Income (loss) before income  taxes**          |       | 33,736                                         |       | (2,126 | ) |
| Income tax provision                            |       | (305                                           | )          | (12,343 | ) |
| **Net income (loss)**                           | ** ** | **$**                                          | **33,431** | ** ** | **$** | **(14,469** | **)** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

1

----

 

**Boise CascadeHoldings, L.L.C.Consolidated Statements of Income**(unaudited)
| ** **                                      | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**                              | ** ** |
| **Sales**                                       | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                            | 2,753,282  |   | $ | 2,634,401 |   |
| Related parties                                 |       | 276,770                                      |       | 292,481 |   |
|                                            |       | 3,030,052                                    |       | 2,926,882 |   |
|                                            |       |                                         |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 2,673,002                                    |       | 2,520,067 |   |
| Fiber costs from  related parties               |       | —                                       |       | 17,609 |   |
| Depreciation,  amortization, and depletion      |       | 75,116                                       |       | 62,349 |   |
| Selling and  distribution expenses              |       | 142,684                                      |       | 126,762 |   |
| General and  administrative expenses            |       | 47,620                                       |       | 37,240 |   |
| Other (income)  expense, net                    |       | 1,108                                        |       | 3,788 |   |
|                                            |       | 2,939,530                                    |       | 2,767,815 |   |
|                                            |       |                                         |       |   |   |
| **Income  from operations**                     |       | 90,522                                       |       | 159,067 |   |
|                                            |       |                                         |       |   |   |
| Foreign exchange  gain (loss)                   |       | 1,739                                        |       | (1,041 | ) |
| Change in fair  value of interest rate swaps    |       | —                                       |       | 9,886 |   |
| Interest expense                                |       | (58,786                                      | )          | (106,444 | ) |
| Interest income                                 |       | 1,538                                        |       | 1,784 |   |
|                                            |       | (55,509                                      | )          | (95,815 | ) |
| ** **                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| **Income  before income taxes**                 |       | 35,013                                       |       | 63,252 |   |
| Income tax  provision                           |       | (1,523                                       | )          | (12,982 | ) |
| **Net  income**                                 | ** ** | **$**                                        | **33,490** | ** ** | **$** | **50,270** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

2

----

 

**Boise Cascade Holdings, L.L.C.Consolidated Balance Sheets**(unaudited)
| ** **                                       | ** **   | **June 30,** | ** **    | **December 31,** | ** **   |
|--------------------------------------------------|--------------|-------------------|---------------|-----------------------|--------------|
| ** **                                       | ** **   | **2006**          | ** **    | **2005**              | ** **   |
| ** **                                       | ** **   | **(thousands)**   | ** **    |
| **ASSETS**                                       | ** **   | ** **        | ** **    | ** **            | ** **   |
| ** **                                       | ** **   | ** **        | ** **    | ** **            | ** **   |
| **Current**                                      | ** **   | ** **        | ** **    | ** **            | ** **   |
| Cash and cash  equivalents                       |         | $                 | 79,919        |                  | $            | 88,171 |   |
| Receivables                                      |         |              |          |                  |         |
| Trade, less allowances of $1,767 and $1,947 |         | 423,561           |          | 338,821               |         |
| Related parties                                  |         | 39,500            |          | 43,010                |         |
| Other                                            |         | 13,391            |          | 20,980                |         |
| Inventories                                      |         | 658,462           |          | 633,783               |         |
| Other                                            |         | 17,671            |          | 10,694                |         |
|                                             |         | 1,232,504         |          | 1,135,459             |         |
|                                             |         |              |          |                  |         |
| **Property**                                     | *** *** | *** ***      | *** ***  | *** ***          | *** *** |
| Property and  equipment                          |         |              |          |                  |         |
| Land and land improvements                       |         | 73,221            |          | 79,420                |         |
| Buildings and improvements                       |         | 228,021           |          | 226,232               |         |
| Machinery and equipment                          |         | 1,376,655         |          | 1,331,292             |         |
|                                             |         | 1,677,897         |          | 1,636,944             |         |
|                                             |         |              |          |                  |         |
| Accumulated  depreciation                        |         | (208,282          | )             | (139,890              | )            |
|                                             |         | 1,469,615         |          | 1,497,054             |         |
| Fiber farms and  timber deposits                 |         | 41,417            |          | 52,236                |         |
|                                             |         | 1,511,032         |          | 1,549,290             |         |
|                                             |         |              |          |                  |         |
| **Deferred  financing costs**                    |         | 34,552            |          | 37,778                |         |
| **Goodwill**                                     |         | 21,846            |          | 15,101                |         |
| **Intangible  assets**                           |         | 39,579            |          | 31,804                |         |
| **Other  assets**                                |         | 33,374            |          | 44,231                |         |
| **Total  assets**                                | ** **   | **$**             | **2,872,887** | ** **            | **$**        | **2,813,663** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

3

----

 

**Boise Cascade Holdings, L.L.C.Consolidated Balance Sheets (Continued)**(unaudited)
| ** **                                                                                                                                         | ** **   | **June 30,**                                            | ** **    | **December 31,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------|---------------|-----------------------|--------------|
| ** **                                                                                                                                         | ** **   | **2006**                                                     | ** **    | **2005**              | ** **   |
| ** **                                                                                                                                         | ** **   | **(thousands, except for equity units)** | ** **    |
| **LIABILITIES  AND CAPITAL**                                                                                                                       | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| ** **                                                                                                                                         | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| **Current**                                                                                                                                        | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Accounts payable                                                                                                                                   |         | $                                                            | 402,798       |                  | $            | 383,207 |   |
| Accrued  liabilities                                                                                                                               |         |                                                         |          |                  |         |
| Compensation and benefits                                                                                                                          |         | 105,420                                                      |          | 106,289               |         |
| Interest payable                                                                                                                                   |         | 11,747                                                       |          | 10,630                |         |
| Other                                                                                                                                              |         | 58,600                                                       |          | 46,244                |         |
|                                                                                                                                               |         | 578,565                                                      |          | 546,370               |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Debt**                                                                                                                                           | *** *** | *** ***                                                 | *** ***  | *** ***          | *** *** |
| Long-term debt                                                                                                                                     |         | 1,345,000                                                    |          | 1,365,800             |         |
| Note payable to  related party, net                                                                                                                |         | 278,637                                                      |          | 270,854               |         |
|                                                                                                                                               |         | 1,623,637                                                    |          | 1,636,654             |         |
| **Other**                                                                                                                                          | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Compensation and  benefits                                                                                                                         |         | 133,495                                                      |          | 121,269               |         |
| Other long-term  liabilities                                                                                                                       |         | 35,674                                                       |          | 31,937                |         |
|                                                                                                                                               |         | 169,169                                                      |          | 153,206               |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Redeemable  equity units**                                                                                                                       | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Series B  equity units – 17,306,874 and 17,296,624 units outstanding                                                                |         | 9,699                                                        |          | 9,508                 |         |
| Series C  equity units – 39,741,640 and 32,173,830 units outstanding                                                                |         | 4,862                                                        |          | 2,904                 |         |
|                                                                                                                                               |         | 14,561                                                       |          | 12,412                |         |
| ** **                                                                                                                                         | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| **Commitments  and contingent liabilities**                                                                                                        |         |                                                         |          |                  |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Capital**                                                                                                                                        | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Series A  equity units – no par value; 66,000,000 units authorized and outstanding                                                  |         | 41,467                                                       |          | 39,885                |         |
| Series B  equity units – no par value; 550,000,000 and 549,000,000 units  authorized; 530,356,601 and 530,356,601 units outstanding |         | 436,789                                                      |          | 417,601               |         |
| Series C  equity units – no par value; 44,000,000 and 38,165,775 units authorized                                                   |         | 8,699                                                        |          | 7,535                 |         |
| **Total  capital**                                                                                                                                 |         | 486,955                                                      |          | 465,021               |         |
| **Total  liabilities and capital**                                                                                                                 | ** **   | **$**                                                        | **2,872,887** | ** **            | **$**        | **2,813,663** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

4

----

 

**Boise Cascade Holdings, L.L.C.Consolidated Statements of Cash Flows**(unaudited)
| ** **                                                                             | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**                              | ** ** |
| **Cash  provided by (used for) operations**                                            | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Net income                                                                             |       | $                                            | 33,490     |   | $ | 50,270 |   |
| Items in net  income not using (providing) cash                                        |       |                                         |       |   |   |
| Depreciation, depletion, and amortization of deferred  financing costs and other costs |       | 77,567                                       |       | 110,845 |   |
| Related-party interest expense                                                         |       | 8,922                                        |       | 8,315 |   |
| Deferred income tax provision                                                          |       | —                                       |       | 8,681 |   |
| Pension and other postretirement benefit expense                                       |       | 13,977                                       |       | 14,266 |   |
| Gain on changes in retiree healthcare programs                                         |       | (3,741                                       | )          | — |   |
| Change in fair value of interest rate swaps                                            |       | —                                       |       | (9,886 | ) |
| Management equity units expense                                                        |       | 1,965                                        |       | 1,562 |   |
| Other                                                                                  |       | (90                                          | )          | 1,636 |   |
| Decrease  (increase) in working capital, net of acquisitions                           |       |                                         |       |   |   |
| Receivables                                                                            |       | (63,154                                      | )          | (89,370 | ) |
| Inventories                                                                            |       | (18,820                                      | )          | (34,009 | ) |
| Accounts payable and accrued liabilities                                               |       | 34,670                                       |       | 67,184 |   |
| Pension and  other postretirement benefit payments                                     |       | (463                                         | )          | (315 | ) |
| Income taxes  payable                                                                  |       | —                                       |       | 3,591 |   |
| Other                                                                                  |       | (1,251                                       | )          | 561 |   |
| Cash provided by operations                                                            |       | 83,072                                       |       | 133,331 |   |
|                                                                                   |       |                                         |       |   |   |
| **Cash  provided by (used for) investment**                                            | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Expenditures for  property and equipment                                               |       | (71,344                                      | )          | (73,289 | ) |
| Acquisitions of  businesses and facilities                                             |       | (42,549                                      | )          | — |   |
| Sales of assets                                                                        |       | 27,744                                       |       | 11,672 |   |
| Repayment of  note receivable from related party, net                                  |       | —                                       |       | 157,509 |   |
| Other                                                                                  |       | 1,737                                        |       | (251 | ) |
| Cash provided by (used for) investment                                                 |       | (84,412                                      | )          | 95,641 |   |
|                                                                                   |       |                                         |       |   |   |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                                   | ** ** | ** ** | ** ** |
| Issuances of  long-term debt                                                           |       | 238,300                                      |       | 840,000 |   |
| Payments of  long-term debt                                                            |       | (259,100                                     | )          | (1,332,100 | ) |
| Tax distributions  to members                                                          |       | (10,725                                      | )          | (19,604 | ) |
| Note payable to  related party, net                                                    |       | (1,139                                       | )          | 251,312 |   |
| Proceeds from  changes to interest rate swaps                                          |       | 25,620                                       |       | — |   |
| Other                                                                                  |       | 132                                          |       | (2,727 | ) |
| Cash used for financing                                                                |       | (6,912                                       | )          | (263,119 | ) |
|                                                                                   |       |                                         |       |   |   |
| **Decrease  in cash and cash equivalents**                                             |       | (8,252                                       | )          | (34,147 | ) |
|                                                                                   |       |                                         |       |   |   |
| **Balance  at beginning of the period**                                                |       | 88,171                                       |       | 163,345 |   |
|                                                                                   |       |                                         |       |   |   |
| **Balance  at end of the period**                                                      | ** ** | **$**                                        | **79,919** | ** ** | **$** | **129,198** | ** ** |
|                                                                                   |       |                                         |       |   |   |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

5

----

 

**Boise Cascade Holdings, L.L.C.Consolidated Statements of Capital**(unaudited)
| ** **                                                   | ** ** | **Series A  Equity Units** | ** ** | **Series B  Equity Units** | ** ** | **Series C  Equity Units** | ** **  | **Total**  | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|-------------|------------|------------|
| ** **                                                   | ** ** | **Units**                            | ** ** | **Amount**                           | ** ** | **Units**                            | ** **  | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| ** **                                                   | ** ** | **(thousands)**                      | ** ** |
| ** **                                                   | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                           |       | 66,000                               |       | $                                    | 36,868     |                                 | 530,357     |       | $          | 322,718 |   | — |   | $ | — |   | $ | 359,586 |   |
| ** **                                                   | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                               |       | —                               |       | —                               |        | 121,367    |       | — |   | — |   | 121,367 |   |
| Other  comprehensive income (a) (b)                | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flow hedges                                             |       | —                               |       | —                               |       | —                               |        | 7,269      |       | — |   | — |   | 7,269 |   |
| Minimum pension liability adjustment                         |       | —                               |       | —                               |       | —                               |        | (58        | )          | — |   | — |   | (58 | ) |
| Paid-in-kind  dividend                                       |       | —                               |       | 3,017                                |       | —                               |        | (3,017     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                |       | —                               |       | —                               |       | —                               |        | (23,143    | )          | — |   | — |   | (23,143 | ) |
| Allocation of  profit interest to Series C equity units |       | —                               |       | —                               |       | —                               |        | (7,535     | )          | — |   | 7,535 |   | — |   |
| Balance at  December 31, 2005 (c)                  |       | 66,000                               |       | 39,885                               |       | 530,357                              |        | 417,601    |       | — |   | 7,535 |   | 465,021 |   |
| ** **                                                   | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                               |       | —                               |       | —                               |        | 33,490     |       | — |   | — |   | 33,490 |   |
| Other  comprehensive income (a) (b)                | ** ** | ** **                           | ** ** | ** **                           | ** ** | ** **                           | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flow hedges                                             |       | —                               |       | —                               |       | —                               |        | (802       | )          | — |   | — |   | (802 | ) |
| Paid-in-kind  dividend                                       |       | —                               |       | 1,582                                |       | —                               |        | (1,582     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                |       | —                               |       | —                               |       | —                               |        | (10,725    | )          | — |   | — |   | (10,725 | ) |
| Adjust  redeemable equity units to redemption value          |       | —                               |       | —                               |       | —                               |        | (29        | )          | — |   | — |   | (29 | ) |
| Allocation of  profit interest to Series C equity units |       | —                               |       | —                               |       | —                               |        | (1,164     | )          | — |   | 1,164 |   | — |   |
| **Balance  at June 30, 2006 (c)**                  | ** ** | **66,000**                           | ** ** | **$**                                | **41,467** | ** **                           | **530,357** | ** ** | **$**      | **436,789** | ** ** | **—** | ** ** | **$** | **8,699** | ** ** | **$** | **486,955** | ** ** |

 

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(a)                                  Total comprehensive income for the three andsix months ended June 30, 2006, was $24.7 million and$32.7 million, and $(18.5) million and $47.4 million for thethree and six months ended June 30, 2005.

(b)                                 Total other comprehensive income for the threeand six months ended June 30, 2006, was $(8.8) million and$(0.8) million, compared with $(4.1) million and $(2.9) millionfor the three and six months ended June 30, 2005.

(c)                                  Accumulated other comprehensive income atJune 30, 2006, and December 31, 2005, was $12.7 million and$13.5 million, respectively.

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

6

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***Notes to Unaudited QuarterlyConsolidated Financial Statements***

***1.             Basis ofPresentation***

As used in theseconsolidated financial statements, the terms “Boise” and “we” refer to BoiseCascade Holdings, L.L.C., and its consolidated subsidiaries and their predecessorsin interest. Our operations began on October 29, 2004, when we acquiredthe forest products and paper assets of OfficeMax (the Forest ProductsAcquisition). Before the Forest Products Acquisition, OfficeMax was known asBoise Cascade Corporation. We acquired the names “Boise” and “Boise Cascade” aspart of the Forest Products Acquisition. We acquired OfficeMax’s forestproducts and paper assets, other than its timberland operations, for anaggregate purchase price of $2.2 billion, including approximately$140 million of related fees and expenses. Concurrently with the ForestProducts Acquisition, Boise Land & Timber Holdings Corp. (TimberHoldings), an entity that is majority-owned by our majority owner, ForestProducts Holdings, L.L.C. (FPH), acquired OfficeMax’s timberlandoperations.

We are a diversifiedNorth American paper and forest products company headquartered in Boise, Idaho.We operate our business in the following five reportable segments: BuildingMaterials Distribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other. See Note 18, Segment Information, for additionalinformation about our reportable segments.

The quarterlyconsolidated financial statements have not been audited by an independentregistered public accounting firm but, in the opinion of management, includeall adjustments, consisting only of normal, recurring adjustments, necessary topresent fairly the results for the periods presented. Net income for the threeand six months ended June 30, 2006 and 2005, involved estimates andaccruals. Actual results may vary from those estimates. Quarterly results arenot necessarily indicative of results that may be expected for the full year.

Certain amounts in prioryears’ consolidated financial statements have been reclassified to conform withthe current period’s presentation. These reclassifications did not affect netincome (loss).

***2.***             ***Purchase of OfficeMax’s ForestProducts and Paper Assets***

On October 29, 2004,we acquired OfficeMax’s forest products and paper assets, other than itstimberland operations, for an aggregate purchase price of $2.2 billion,including approximately $140 million of related fees and expenses. SeeNote 2, Purchase of OfficeMax’s Forest Products and Paper Assets, of theNotes to Consolidated Financial Statements in “Item 8. ConsolidatedFinancial Statements and Supplementary Data” of our 2005 Annual Report onForm 10-K for more information.

We accounted for theForest Products Acquisition using the purchase method of accounting. Weallocated the assets acquired and liabilities assumed based on their estimatedfair values at the acquisition date. The excess of the purchase price over thefair value of assets acquired and liabilities assumed was allocated togoodwill. See Note 11, Goodwill and Intangible Assets, for moreinformation.

*RestructuringActivities*

In connection with theForest Products Acquisition, we evaluated the acquired facilities andorganizational structure. In accordance with the provisions of Emerging IssuesTask Force (EITF) 95-3, Recognition of Liabilities in ConnectionWith a Purchase Business Combination, exit activities related to the ForestProducts Acquisition increased goodwill. We had one year from the acquisitiondate to develop our restructuring plans and adjust goodwill.

At June 30, 2006, wehad approximately $1.8 million of restructuring reserves related toseverance costs recorded in “Accrued liabilities, Compensation and benefits”and $0.1 million was recorded in “Accrued liabilities, Other.” Most of theseverance costs related to costs for 350 employees. At June 30, 2006,we had terminated approximately 320 employees. Of the $1.9 millionremaining restructuring reserve, $1.5 million is recorded in our Papersegment, and $0.4 million is in Corporate and Other. Most of the remainingcosts will be paid during 2006. Restructuring reserve liability accountactivity related to these charges is as follows:

7

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|                                                  | ** ** | **Severance**   | ** ** | **Other**  | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|------------|------------|-----------|------------|
| ** **                                       | ** ** | **(thousands)** | ** ** |
|                                             |       |            |       |       |       |      |       |
| 2004  restructuring reserve                      |       | $               | 13,768     |       | $          | 501       |       | $ | 14,269 |   |
| Charges against  reserve                         |       | (1,012          | )          | (1         | )          | (1,013    | )          |
| Restructuring  reserve at December 31, 2004 |       | 12,756          |       | 500        |       | 13,256    |       |
|                                             |       |            |       |       |       |      |       |
| Additions to  restructuring reserve              |       | 6,913           |       | 221        |       | 7,134     |       |
| Charges against  reserve                         |       | (16,162         | )          | (593       | )          | (16,755   | )          |
| Restructuring  reserve at December 31, 2005 |       | 3,507           |       | 128        |       | 3,635     |       |
|                                             |       |            |       |       |       |      |       |
| Charges against  reserve                         |       | (1,697          | )          | (11        | )          | (1,708    | )          |
| Restructuring reserve  at June 30, 2006     | ** ** | **$**           | **1,810**  | ** ** | **$**      | **117**   | ** ** | **$** | **1,927** | ** ** |

 

***3.******                                     ******Purchase of Central Texas Corrugated’s Assets***

On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for an aggregatepurchase price of $43.8 million, including fees and expenses, but beforeworking capital adjustments. In 2006, we paid approximately $42.5 millionof cash for the acquisition, which is net of a $2.0 million holdback thatis payable in five years. At June 30, 2006, we recorded the$1.3 million discounted holdback in “Other long-term liabilities” on ourConsolidated Balance Sheet. CTC manufactures corrugated sheets that it sellsprimarily to regional independents and full-line container plants in Texas,Louisiana, Arkansas, and Mexico. CTC is located close to our mill in DeRidder,Louisiana, which produces linerboard used in CTC’s manufacturing processes.

We accounted for theacquisition using the purchase method of accounting. As a result, the purchaseprice was allocated to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date of theacquisition. The following table summarizes the estimated fair value of theassets acquired and liabilities assumed as of February 1, 2006. Theinitial purchase price allocations may be adjusted within one year of thepurchase date for changes in estimates of the fair value of assets acquired andliabilities assumed.
|                         | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **(thousands)**            | ** ** |
|                    |       |                       |       |
| Current assets          |       | $                          | 16,407     |   |
| Property and  equipment |       | 15,368                     |       |
| Goodwill                |       | 7,046                      |       |
| Intangible  assets      |       | 9,400                      |       |
| Other assets            |       | 66                         |       |
| Assets acquired         |       | 48,287                     |       |
|                    |       |                       |       |
| Current  liabilities    |       | 4,438                      |       |
| Liabilities assumed     |       | 4,438                      |       |
|                    |       |                       |       |
| Net assets  acquired    | ** ** | **$**                      | **43,849** | ** ** |

 

The excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill. We recorded $7.0 million of goodwill in ourPackaging & Newsprint segment. See Note 11, Goodwill and Intangible Assets,for the purchase price adjustments that have decreased the recorded amount ofgoodwill since the acquisition date.

8

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The amount allocated tointangible assets was attributed to the following categories of intangibles:
|                         | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **(thousands)**            | ** ** |
|                    |       |                       |       |
| Trade names             |       | $                          | 1,800      |   |
| Customer  relationships |       | 6,400                      |       |
| Noncompete  agreements  |       | 1,200                      |       |
|                    | ** ** | **$**                      | **9,400**  | ** ** |

 

Intangible assets are amortized over their expected useful lives.The trade name asset represents the fair value of the Central Texas Corrugatedname and is amortized over five years. Customer relationships are amortizedover ten years, and the noncompete agreements are amortized over four years.

Pro forma results ofoperations have not been presented because the effects of the acquisition werenot material.

***4.             Transactions WithRelated Parties***

At June 30, 2006,and December 31, 2005, we had a $278.6 million and a$270.9 million note payable to a subsidiary of Timber Holdings recorded as“Note payable to related party, net” on the Consolidated Balance Sheets. Formore information, see Note 13, Debt. Also included in “Note payable torelated party, net” was $27.8 million and $18.9 million of accruedinterest expense at June 30, 2006, and December 31, 2005.

During each of theperiods presented, we sold paper and paper products to OfficeMax at salesprices that were designed to approximate market prices. For the three and sixmonths ended June 30, 2006, sales to OfficeMax were $144.0 millionand $276.8 million. For the three and six months ended June 30, 2005,sales to OfficeMax were $142.1 million and $292.5 million. Thesesales are included in “Sales, Related parties” in the Consolidated Statementsof Income (Loss).

In 2005, we purchasedfiber from related parties at prices that approximated market prices. Duringthe three and six months ended June 30, 2005, fiber purchases from BoiseLand & Timber Corp., a subsidiary of Timber Holdings, were zero and $17.6 million.The costs associated with these purchases are recorded as “Fiber costs fromrelated parties” in the Consolidated Statement of Income. On February 4,2005, Timber Holdings sold all of its timberlands.

The asset purchaseagreement entered into in connection with the purchase of OfficeMax’s forestproducts and paper assets contains customary representations, warranties, andcovenants, including an obligation by OfficeMax to indemnify us for breaches ofrepresentations, warranties, and covenants. OfficeMax’s indemnificationobligations with respect to such breaches generally survived untilApril 29, 2006, with indemnification obligations with respect to breachesrelating to employee and environmental law matters surviving untilOctober 29, 2009. OfficeMax’s indemnification obligations for breaches ofrepresentations, warranties, and covenants are, with certain exceptions,subject to a deductible of $20.7 million and an aggregate cap of$248.9 million. We are also indemnified with respect to certain pre-ForestProducts Acquisition liabilities, including environmental, asbestos, tax,benefits, and other legacy liabilities.

The majority of ourbusinesses and assets are held and operated by limited liability companies,which are not subject to entity-level federal income taxation. We make cashdistributions to permit the members of Boise and affiliates to pay taxes.During the six months ended June 30, 2006 and 2005, we paid FPH$10.7 million and $19.6 million. FPH in turn paid $9.4 millionand $13.7 million to Madison Dearborn Partners (MDP), our equity sponsor,and $1.1 million and $2.0 million to management investors. During thesix months ended June 30, 2006 and 2005, we also paid $0.2 millionand $3.9 million to OfficeMax. These payments represented cash paid tofund their tax obligations related to their investments in us.

9

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***5.             Vendorand Customer Rebates and Allowances***

We receive rebates andallowances from our vendors under a number of different programs, includingvendor marketing programs. At June 30, 2006, and December 31, 2005,we had $2.6 million and $3.6 million, respectively, of vendor rebatesand allowances recorded in “Receivables, Other” on the Consolidated BalanceSheets. These rebates and allowances are accounted for in accordance with EITF 02-16,Accounting by a Customer (Including a Reseller) for Certain ConsiderationReceived From a Vendor. Rebates and allowances received from our vendors arerecognized as a reduction of “Materials, labor, and other operating expenses”when the product is sold, unless the rebates and allowances are linked to aspecific incremental cost to sell a vendor’s product. Amounts received fromvendors that are linked to specific selling and distribution expenses arerecognized as a reduction of “Selling and distribution expenses” in the periodthe expense is incurred.

Included in the vendorrebate programs referred to above are various volume purchase rebate programs.These programs generally include annual purchase targets and may offerincreasing tiered rebates based on our reaching defined purchase levels. Forsuch tiered rebate programs, the company calculates an estimated considerationbased on the probability of the rebate being earned during the year. We reviewsales projections and related purchases on a quarterly basis and adjust theestimated consideration accordingly. We record consideration received for theseprograms as a reduction of “Materials, labor, and other operating expenses” asthe related inventory is sold.

We also provide rebatesto our customers based on the volume of their purchases. We provide the rebatesto increase the sell-through of our products. The rebates provided to ourcustomers are accounted for in accordance with EITF 01-09, Accounting forConsideration Given by a Vendor to a Customer. At June 30, 2006, andDecember 31, 2005, we had $25.5 million and $23.7 million,respectively, of rebates payable to our customers recorded in “Accruedliabilities, Other” on the Consolidated Balance Sheets.

***6.             Other (Income) Expense, Net***

“Other (income) expense,net” includes miscellaneous income and expense items. The components of “Other(income) expense, net” in the Consolidated Statements of Income (Loss) are asfollows:
| ** **                                  | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(thousands)**                                | ** ** |
|                                        |       |                                           |       |                                         |       |   |   |   |   |
| Changes in  retiree healthcare programs (a) |       | $                                              | —     |                                         | $          | — |   | $ | (3,741 | ) | $ | — |   |
| Loss on sales of  assets, net (b)           |       | 822                                            |       | 67                                           |       | 2,408 |   | 286 |   |
| Offering and  project costs (c)             |       | 2,135                                          |       | 3,600                                        |       | 2,135 |   | 3,600 |   |
| Other, net                                  |       | 276                                            |       | (6                                           | )          | 306 |   | (98 | ) |
| ** **                                  | ** ** | **$**                                          | **3,233**  | ** **                                   | **$**      | **3,661** | ** ** | **$** | **1,108** | ** ** | **$** | **3,788** | ** ** |

 

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(a)                                  In first quarter 2006, we communicated to our hourly employees at ourSt. Helens, Oregon, pulp and paper mill and our Salem, Oregon, convertingoperations changes to our retiree healthcare programs. We discontinuedhealthcare coverage for post-65 retirees and eliminated the company subsidy forsome of our pre-65 hourly retirees. As a result of this change, we recorded a$3.7 million gain in our Consolidated Statement of Income for the sixmonths ended June 30, 2006.

(b)                                 The six months ended June 30, 2006,includes a $1.7 million loss related to the sale of our headquartersbuilding in Boise, Idaho.

(c)                                  Represents expenses for the write-off of costsincurred in connection with the canceled initial public offering and otherspecial projects.

10

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***7.             Leases***

We did not have anycapital leases during any of the periods presented. We lease a portion of ourdistribution centers as well as other property and equipment under operatingleases. For purposes of determining straight-line rent expense, the lease termis calculated from the date we first take possession of the facility, includingany periods of free rent and any option periods we are reasonably assured ofexercising. Straight-line rent expense is also adjusted to reflect anyallowances or reimbursements provided by the lessor. Rental expense foroperating leases was $6.2 million and $3.9 million for the threemonths ended June 30, 2006 and 2005, and $11.2 million and$8.3 million for the six months ended June 30, 2006 and 2005.

Sublease rental incomewas not material in any of the periods presented. For operating leases withremaining terms of more than one year, the minimum lease payment requirementsare $8.7 million for the remainder of 2006, $16.7 million in 2007,$15.2 million in 2008, $14.1 million in 2009, and $13.3 millionin 2010, with total payments thereafter of $63.2 million. These futureminimum lease payment requirements have not been reduced by sublease rentalsdue in the future under noncancelable subleases. Minimum sublease incomereceived in the future is not expected to be material.

In first quarter 2006, we sold our headquarters building in Boise,Idaho, for $27.2 million, net of related fees and expenses, and recorded a$1.7 million loss in “Other (income) expense, net” in our ConsolidatedStatement of Income. The proceeds were used to pay down our Tranche D termloan, which decreased payments due in 2011 by that amount. In connection withthe sale, we leased back 65% of the building over a staggered lease term of tento 12 years. The lease is accounted for as an operating lease. The minimumlease payment requirements related to the transaction are included in theminimum lease payments disclosed above.

Substantially all leaseagreements have fixed payment terms based on the passage of time. Some leaseagreements provide us with the option to purchase the leased property.Additionally, some agreements contain renewal options averagingnine years, with fixed payment terms similar to those in the originallease agreements.

***8.             Income Taxes***

On May 9, 2005, we converted to aC corporation from a limited liability company. On December 20, 2005,acting pursuant to a Rescission Agreement among our shareholders, we rescindedour conversion to C corporation status by filing a conversion certificate withthe Delaware Secretary of State that restored our status as a limited liabilitycompany. For the period of May 9 through June 30, 2005, we recordedincome tax expense at an estimated annual effective tax provision rate of 41%.The effect of establishing deferred taxes upon conversion to a corporation wasnot material to income tax expense.

As a result of the rescission, at June 30, 2006, the majorityof our businesses and assets are held and operated by limited liabilitycompanies, which are not subject to entity-level federal income taxation. Thetaxes in respect to these operations are payable by our equity holders inaccordance with their respective ownership percentages. We make cashdistributions to permit the members of Boise and affiliates to pay these taxes.For both the three and six months ended June 30, 2006, we made$10.7 million of cash distributions to permit our equity holders to paythese taxes. We paid $10.2 million and $19.6 million for the sameperiods in 2005. Both our senior credit facilities and the indenture governingour notes permit these distributions.

During the three and six months ended June 30, 2006, oureffective tax rates for our separate subsidiaries that are taxed as acorporation were 40.9% and 41.8%. During the three and six months endedJune 30, 2006, we received $0.3 million and $6.0 million offederal and state income tax refunds as a result of rescinding ourC corporation status, and the taxable corporations paid $2.0 millionand $3.3 million of taxes.

11

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***9.             Receivables***

We have a large, diversified customer base. A large portion of ouruncoated free sheet and office paper sales volume is sold to OfficeMax. Wemarket our newsprint through Abitibi-Consolidated (Abitibi) pursuant to anarrangement whereby Abitibi purchases all of the newsprint we produce at aprice equal to the price at which Abitibi sells newsprint produced at its millslocated in the southern United States, less associated expenses and a sales andmarketing discount. Sales to OfficeMax and Abitibi-Consolidated representconcentrations in the volumes of business transacted and concentrations ofcredit risk.

A large portion of our receivables are used to secure ourborrowings under the accounts receivable securitization program described inNote 13, Debt.

***10.          Inventories***

Inventories include thefollowing:
|                                     | ** ** | **June 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | **(thousands)**         | ** **  |
|                                |       |                    |        |                        |       |
| Finished goods  and work in process |       | $                       | 453,059     |                        | $          | 414,035 |   |
| Logs                                |       | 36,079                  |        | 62,839                      |       |
| Other raw  materials and supplies   |       | 169,324                 |        | 156,909                     |       |
| ** **                          | ** ** | **$**                   | **658,462** | ** **                  | **$**      | **633,783** | ** ** |

 

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

Goodwill represents theexcess of purchase price and related costs over the value assigned to the nettangible and intangible assets of businesses acquired. We account for goodwillin accordance with the provisions of Statement of Financial AccountingStandards (SFAS) No. 142, Goodwill and Other Intangible Assets. SFASNo. 142 requires us to assess our acquired goodwill and intangible assetswith indefinite lives for impairment at least annually in the absence of anindicator of possible impairment and immediately upon an indicator of possibleimpairment. We assess goodwill and intangible assets with indefinite lives inthe fourth quarter of each year using a fair-value-based approach. We alsoevaluate the remaining useful lives of our finite-lived purchased intangibleassets to determine whether any adjustments to the useful lives are necessary.These intangible assets are discussed in detail below. We completed our annualassessment in accordance with SFAS No. 142 in fourth quarter 2005 anddetermined that there was no impairment.

We account foracquisitions using the purchase method of accounting. As a result, we allocatethe purchase price to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date ofacquisition. In accordance with SFAS No. 141, Business Combinations, wehave one year from the purchase date to record changes in estimates of the fairvalue of assets acquired and liabilities assumed. During the six months endedJune 30, 2006, we recorded $0.3 million of net purchase priceadjustments that decreased the recorded amount of goodwill. The adjustmentswere for fair value adjustments related to our acquisition of Central TexasCorrugated (CTC).

12

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Changes in the carryingamount of our goodwill by segment are as follows:
| ** **                                         | ** ** | **Building  Materials  Distribution** | ** ** | **Wood   Products** | ** ** | **Paper** | ** ** | **Packaging &**

**Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-----------|------------|------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **(thousands)**                       | ** ** |
|                                               |       |                                  |       |                     |       |      |       |                               |       |                      |       |      |       |
| Balance at  December 31, 2005                 |       | $                                     | 5,593      |                     | $          | 6,577     |       | $                                  | 1,341      |                      | $          | 1,590     |       | $ | — |   | $ | 15,101 |   |
|                                               |       |                                  |       |                     |       |      |       |                               |       |                      |       |      |       |
| Goodwill  acquired during the period (Note 3) |       | —                                |       | —                   |       | —    |       | 7,046                              |       | —                    |       | 7,046     |       |
| Purchase price  adjustments                        |       | —                                |       | —                   |       | —    |       | (301                               | )          | —                    |       | (301      | )          |
| Balance at  June 30, 2006                     | ** ** | **$**                                 | **5,593**  | ** **               | **$**      | **6,577** | ** ** | **$**                              | **1,341**  | ** **                | **$**      | **8,335** | ** ** | **$** | **—** | ** ** | **$** | **21,846** | ** ** |

 

Intangible assetsrepresent the values assigned to trade names and trademarks, customerrelationships, noncompete agreements, and technology. The Central TexasCorrugated trade name is amortized over five years. All other trade namesand trademark assets have an indefinite life and are not amortized. Customerrelationships are amortized over five to ten years, noncompete agreements areamortized over four years, and technology is amortized over three to fiveyears. Intangible assets consisted of the following:
|                             | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                             | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | **(thousands)**                                             | ** ** |
|                        |       |                                                        |       |   |   |   |   |
| Trade names and  trademarks |       | $                                                           | 24,700     |   | $ | (155 | ) | $ | 24,545 |   |
| Customer  relationships     |       | 13,400                                                      |       | (2,695 | ) | 10,705 |   |
| Noncompete  agreements      |       | 1,200                                                       |       | (128 | ) | 1,072 |   |
| Technology                  |       | 5,080                                                       |       | (1,823 | ) | 3,257 |   |
|                        | ** ** | **$**                                                       | **44,380** | ** ** | **$** | **(4,801** | **)** | **$** | **39,579** | ** ** |

 
|                             | ** ** | **Year Ended December 31, 2005** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                      | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | **(thousands)**                                      | ** ** |
|                        |       |                                                 |       |   |   |   |   |
| Trade names and  trademarks |       | $                                                    | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer  relationships     |       | 6,800                                                |       | (1,588 | ) | 5,212 |   |
| Technology                  |       | 5,080                                                |       | (1,288 | ) | 3,792 |   |
| ** **                  | ** ** | **$**                                                | **34,680** | ** ** | **$** | **(2,876** | **)** | **$** | **31,804** | ** ** |

 

Intangible assetamortization expense was $1.1 million and $1.9 million for the threeand six months ended June 30, 2006, and $0.7 million and$1.3 million for the same periods in 2005. The estimated amortizationexpense is $2.1 million for the remainder of 2006 and $4.5 million,$4.2 million, $3.4 million, $1.1 million, and $0.5 millionin 2007, 2008, 2009, 2010, and 2011, respectively.

***12.          Asset Retirement Obligations***

We account for asset retirementobligations in accordance with SFAS No. 143, Accounting for AssetRetirement Obligations, and FASB Interpretation (FIN) No. 47, Accountingfor Conditional Asset Retirement Obligations — An Interpretation of FinancialAccounting Standards Board (FASB) Statement No. 143. We accrue for assetretirement obligations in the period in which they are incurred if sufficientinformation is available to reasonably estimate the fair value of theobligation. When we record the liability, we capitalize the cost by increasingthe carrying amount of the related long-lived asset. Over time, the liabilityis accreted to its settlement value, and the capitalized cost is depreciatedover the useful life of the related asset. Upon settlement of the liability, wewill recognize a gain or loss for any difference between the settlement amountand the liability recorded. On a pro forma basis, if the provisions ofFIN No. 47 had been in effect during all of 2005, our net incomewould not have changed materially.

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At June 30, 2006, and December 31,2005, we had $12.8 million and $11.5 million of asset retirementobligations recorded in “Other, Other long-term liabilities,” on ourConsolidated Balance Sheets. These liabilities related primarily to landfillclosure and closed-site monitoring costs. The liabilities are based on the bestestimate of current costs and are updated periodically to reflect currenttechnology, laws and regulations, inflation, and other economic factors. We donot have any assets legally restricted for purposes of settling asset retirementobligations. The table below describes changes to our asset retirementobligations for the six months ended June 30, 2006, and the year endedDecember 31, 2005:
|                                                     | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(thousands)**         | ** ** |
|                                                |       |                    |       |                        |       |
| Asset retirement  obligation at beginning of period |       | $                       | 11,484     |                        | $          | 10,286 |   |
| Liabilities  incurred                               |       | 859                     |       | —                      |       |
| Net transition  adjustment                          |       | —                  |       | 485                         |       |
| Accretion  expense                                  |       | 480                     |       | 789                         |       |
| Payments                                            |       | (14                     | )          | (76                         | )          |
| Asset retirement  obligation at end of period       | ** ** | **$**                   | **12,809** | ** **                  | **$**      | **11,484** | ** ** |

 

We have additional asset retirementobligations with indeterminate settlement dates. The fair value of these assetretirement obligations cannot be estimated due to the lack of sufficientinformation to estimate the settlement dates of the obligations. These assetretirement obligations include, for example, (i) removal and disposal ofpotentially hazardous materials on equipment and/or an operating facility ifthe equipment and/or facilities were to undergo major maintenance, renovation,or demolition; (ii) wastewater treatment ponds that may be required to bedrained and/or cleaned if the related operating facility is closed; and(iii) storage sites or owned facilities for which removal and/or disposalof chemicals and other related materials are required if the operating facilityis closed. We will recognize a liability in the period in which sufficientinformation becomes available to reasonably estimate the fair value of theseobligations.

***13.          Debt***

At June 30, 2006,and December 31, 2005, our long-term debt consisted of the following:
|                                                 | ** ** | **June 30,  2006** | ** **    | **December 31,   2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|---------------|-----------------------------------|------------|
| ** **                                      | ** ** | **(thousands)**         | ** **    |
|                                            |       |                    |          |                              |       |
| Revolving credit  facility, due 2010            |       | $                       | —        |                              | $          | — |   |
| Tranche D  term loan, due 2011             |       | 550,000                 |          | 635,800                           |       |
| Senior unsecured  floating-rate notes, due 2012 |       | 250,000                 |          | 250,000                           |       |
| 7.125% senior  subordinated notes, due 2014     |       | 400,000                 |          | 400,000                           |       |
| Borrowings  secured by receivables              |       | 145,000                 |          | 80,000                            |       |
|                                            |       | 1,345,000               |          | 1,365,800                         |       |
| Note payable to  related party, net, due 2009   |       | 278,637                 |          | 270,854                           |       |
| ** **                                      | ** ** | **$**                   | **1,623,637** | ** **                        | **$**      | **1,636,654** | ** ** |

 

*SeniorSecured Credit Facilities*

Boise Cascade, L.L.C. (Boise LLC) and affiliates have a $475.0million senior secured revolving credit facility (due in 2010) and an $840.0million Tranche D term loan (due in 2011). These borrowings represent oursenior secured credit facilities (the Facilities).

Our revolving creditfacility agreement permits us to borrow up to $475.0 million for generalcorporate purposes. At June 30, 2006, we had no borrowings outstandingunder our revolving credit facility; however, $56.6 million of letters ofcredit were considered a draw on the revolver, reducing our borrowing capacityto $418.4 million. Borrowings under our revolving credit facility arebased on the prime rate, the federal funds effective rate, or the LondonInterbank Offered Rate (LIBOR). Pricing is subject to quarterly adjustmentbased on the ratio of our total indebtedness to our last four quarters ofconsolidated earnings before interest, taxes, depreciation, and amortization(EBITDA). The range of borrowing costs

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under the pricing grid is:  (i) the higher of prime plus 0.50% to1.25% or the federal funds effective rate plus 1.00% to 1.75% or(ii) LIBOR plus 1.50% to 2.25%. For the six months endedJune 30, 2006, and the year ended December 31, 2005, the average interestrate for our borrowings under the revolver was 6.0% and 5.1%. Letters of creditare subject to a 0.25% fronting fee payable to the issuing bank and a feepayable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under our revolving credit facility and thedaily average amount available for drawing under the outstanding letters ofcredit. The minimum and maximum borrowings under the revolver were zero and$30.0 million during the six months ended June 30, 2006, and zero and$126.5 million for the same period in 2005. The weighted average amountsof borrowings outstanding under the revolver during the six months endedJune 30, 2006 and 2005, were $1.5 million and $22.4 million. Therevolving credit facility provides for a commitment fee of 0.50% per annumpayable to the lenders on the average daily unused portion of the revolvingcredit facility. We also have a swingline option under the revolver, whichallows us to borrow at negotiated rates up to an aggregate of$40.0 million from individual banks that are parties to the agreement.Swingline borrowings are considered borrowings under the revolving creditfacility agreement.

At June 30, 2006,and December 31, 2005, we had $550.0 million and $635.8 millionoutstanding under the Tranche D term loan, and our borrowing rates were6.8% and 5.8%. Borrowings under the Tranche D term loan are based on (i)the higher of the prime rate plus 0.75% or the federal funds effective rateplus 1.25% or (ii) LIBOR plus 1.75%. As a result of a $200.0 millionprepayment in October 2005, we are not required to make scheduled principalpayments on the Tranche D term loan until 2011, at which time theprincipal balance is due. However, during the six months ended June 30,2006, we prepaid $85.8 million on our Tranche D term loan, with$27.2 million of proceeds from the sale of our headquarters building inBoise, Idaho, $25.6 million of proceeds from unwinding and resetting thefixed interest rate we pay under our interest rate swap agreements,$25.0 million of lower-cost receivable securitization borrowings, andother operating cash flows.

Borrowings under theFacilities are subject to financial covenants and restrictions, including aminimum interest expense coverage ratio, maximum leverage ratio, andlimitations on capital expenditures.

*SeniorNotes*

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Forest Products Acquisition. In July 2005, we completed an exchangeoffer whereby all of our senior unsecured floating-rate notes and seniorsubordinated notes were exchanged for publicly traded, registered securitieswith identical terms (other than terms relating to registration rights) to thenotes issued in October 2004. We may redeem all or part of the notes at anytime at redemption prices defined in the indenture. If we sell specific assets orexperience specific kinds of changes in control, we must offer to purchase thenotes. The senior unsecured floating-rate notes bear interest at a floatingrate equal to LIBOR plus 2.9%. At June 30, 2006, and December 31,2005, our borrowing rates for the $250.0 million senior unsecuredfloating-rate notes were 8.0% and 7.0%.

*Borrowings Secured by Receivables*

In October2005, our wholly owned subsidiary, Boise LLC, and several of its subsidiaries,including Birch Creek Investments, L.L.C. (Birch Creek), entered into anaccounts receivable securitization program with Bank of America NationalAssociation and Calyon New York Branch (the Investors). Under this three-yearprogram, Boise LLC sells its interest in a defined pool of accounts receivablegenerated by its domestic operations on a revolving basis to Birch Creek, afully consolidated, wholly owned, special-purpose subsidiary. In turn, BirchCreek sells the receivables to the affiliates of the Investors. Because BoiseLLC has the right to repurchase the sold receivables, sales of receivablesunder the program are accounted for as a secured borrowing. At June 30,2006, and December 31, 2005, we had $145.0 million and$80.0 million outstanding under our accounts receivable securitizationprogram. The receivables outstanding and the corresponding debt are included as“Receivables” and “Long-term debt,” respectively, on our Consolidated BalanceSheets. We record the financing costs associated with the program in “Interestexpense” in our Consolidated Statements of Income. The cost of funds under thisprogram varies based on changes in interest rates. At June 30, 2006, andDecember 31, 2005, the interest rates for borrowings secured byreceivables were 5.3% and 4.3%.

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Under the accounts receivablesecuritization program, the maximum borrowing amount is subject to change basedon the level of eligible receivables and restrictions on concentrations ofreceivables and cannot exceed $250 million. The accounts receivablesecuritization program contains the same financial covenants as our seniorsecured credit facilities.

*NotePayable to Related Party, Net*

At June 30, 2006, we had a$278.6 million note payable to a subsidiary of Timber Holdings recorded as“Note payable to related party, net” on our Consolidated Balance Sheet. Theamount of this note payable was $270.9 million at December 31, 2005.The note is subject to adjustment based on transactions between the subsidiaryand us. Effective April 1, 2006, we amended and restated our note payableto Timber Holdings. Our borrowing rate under the amended and restated note is5%, and the note matures March 31, 2009. Included in “Note payable torelated party, net” was $27.8 million and $18.9 million of accruedinterest expense related to the note at June 30, 2006, and December 31,2005, respectively. Timber Holdings is a guarantor of our debt; seeNote 20, Consolidating Guarantor and Nonguarantor Financial Information.

*Other*

We have entered intointerest rate swaps to hedge the majority of the cash flow risk from the variableinterest payments on our variable-rate debt. These swaps gave us an effectiveinterest rate on all of our variable-rate debt of 6.6% and 5.3% atJune 30, 2006, and December 31, 2005, respectively. For additionalinformation on our interest rate swaps, see Note 14, FinancialInstruments.

We paid approximately$85.9 million of fees and expenses associated with our senior securedcredit facilities, our senior unsecured floating-rate notes, and our seniorsubordinated notes, which we entered into in October 2004. The fees are beingamortized over the terms of the loans, which range from six to ten years. AtJune 30, 2006, and December 31, 2005, we had $34.6 million and$37.8 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan in second quarter 2005, we recorded a$43.0 million charge for the write-off of the deferred financing costs in “Interestexpense” in our Consolidated Statements of Income (Loss).

At June 30, 2006,and December 31, 2005, our average effective interest rates, including theeffect of our interest rate swaps, on all of our debt except for our notepayable to related party, net, were 6.7% and 5.8%.

Cash payments forinterest, net of interest capitalized, were $29.8 million and$45.6 million for the three and six months ended June 30, 2006, and$30.0 million and $48.9 million for the three and six months endedJune 30, 2005.

***14.          Financial Instruments***

We are exposed to riskssuch as changes in interest rates, energy prices, and foreign currency exchangerates. We employ a variety of practices to manage these risks, includingoperating and financing activities and, where deemed appropriate, the use ofderivative instruments. Derivative instruments are used only for riskmanagement purposes and not for speculation or trading. Derivatives are suchthat a specific debt instrument, contract, or anticipated purchase determinesthe amount, maturity, and other specifics of the hedge. If a derivative contractis entered into, we either determine that it is an economic hedge or wedesignate the derivative as a cash flow or fair value hedge. We formallydocument all relationships between hedging instruments and the hedged item, aswell as our risk management objectives and strategy for undertaking varioushedged transactions. For those derivatives designated as cash flow or fairvalue hedges, we formally assess, both at the hedge’s inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in the hedged items. The ineffectiveportion of hedging transactions is recognized in income (loss).

In accordance with SFASNo. 133, Accounting forDerivative Instruments and Hedging Activities, as amended, we record allderivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. The fair value of these instruments is determined bythird parties. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income,” as appropriate. The gain orloss on derivatives designated as cash flow hedges is included in “Other

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comprehensive income” in the period in which changesin fair value occur and is reclassified to income (loss) in the period in whichthe hedged item affects income (loss), and any ineffectiveness is recognizedcurrently in our Consolidated Statements of Income (Loss). The gain or loss onderivatives designated as fair value hedges and the offsetting gain or loss onthe hedged item attributable to the hedged risk are included in income (loss)in the period in which changes in fair value occur. The gain or loss onderivatives that have not been designated as hedging instruments is included inincome (loss) in the period in which changes in fair value occur.

*Interest Rate Risk*

Our debt is predominantlyvariable-rate. We manage interest rate risk on our variable-rate debt byentering into interest rate swaps. At June 30, 2006, the estimated currentmarket value of our fixed-rate debt, including our note payable to relatedparty, based on then-current interest rates for similar obligations with likematurities, was approximately $72.8 million less than the amount reportedon our Consolidated Balance Sheet.

*Swaps onour Facilities. *Ourobligations under our senior secured credit facilities and senior notes exposeus to changes in short-term interest rates since interest rates on this debtare variable. In November 2004, we entered into four interest rate swapswith a total notional amount of $550 million to hedge the exposure tointerest rate fluctuations associated with our Tranche B term loan (whichwas paid in full in April 2005). The swaps on $300 million of ourTranche B term loan were fixed at an average pay rate of 3.3% and wouldhave expired in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche B term loan,these interest rate swaps were no longer considered hedges of the variableinterest payments on that loan. As a result, during first quarter 2005, werecorded the fair value of the interest rate swaps, or $15.2 million, in “Changein fair value of interest rate swaps” in our Consolidated Statement of Income.In second quarter 2005, we redesignated the $550 million of interest rateswaps as hedges of the cash flow from the LIBOR-based variable interestpayments on amounts borrowed under the Facilities, and prior to the redesignation,we recognized $5.3 million of noncash expense in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Loss. The net$9.9 million of value that was recorded in “Other assets” on ourConsolidated Balance Sheet results in higher interest expense over theremaining life of the interest rate swaps. Changes in the fair value of theinterest rate swaps were recorded in “Other comprehensive income.” Amountsrealized during the period were reclassified to “Interest expense” as interestexpense was recognized on the LIBOR-based debt. Ineffectiveness related to theredesignated hedges was not significant. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rateof 4.9% at December 31, 2005. At December 31, 2005, the fair marketvalue of these instruments was $16.9 million, which we recorded in “Otherassets” on our Consolidated Balance Sheet.

In April 2006, weterminated our 3.3% $300 million interest rate swap agreements that hedged ourexposure to interest rate fluctuations associated with our Facilities. Inaddition, we reset the fixed interest rate we pay on the remaining $250 millionof interest rate swap agreements under our Facilities from 3.5% to 4.75%. Thereset interest rate swaps with a total notional amount of $250 million gave usan effective interest rate of 6.4% on that debt at June 30, 2006. At June 30,2006, the fair market value of these instruments was $4.4 million, which werecorded in “Other assets” on our Consolidated Balance Sheet. There was noineffectiveness related to the hedges.

*Swaps onour senior unsecured floating-rate notes. *In November 2004, we entered into two 3.7% interestrate swaps with an aggregate notional amount of $250 million to hedge theexposure to floating-rate interest rate risks associated with our seniorunsecured floating-rate notes, which gave us an effective interest rate on thatdebt of 6.6% at December 31, 2005. In April 2006, we reset the fixedinterest rate we pay on the $250 million of interest rate swap agreementsto 4.75%, which gave us an effective interest rate on our senior unsecuredfloating-rate notes of 7.6% at June 30, 2006. These swaps expire inOctober 2009. These swaps were designated as cash flow hedges. Accordingly, changesin the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt. Therewas no ineffectiveness related to these hedges. At June 30, 2006, andDecember 31, 2005, the fair market values of these instruments were$5.8 million and $9.3 million, which we recorded in “Other assets” onour Consolidated Balance Sheets.

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*Other. *In exchange for the termination of andrate resets on our interest rate swap agreements described above, we received$25.6 million which we used to make prepayments on our Tranche D termloan. We will reclassify the $25.6 million of “Accumulated othercomprehensive income” as a reduction of interest expense over the periods thepreviously hedged interest payments affect earnings.

For the three and sixmonths ended June 30, 2006, amounts reclassified to “Interest expense” forall of our cash flow hedges decreasedinterest expense $1.9 million and $4.0 million, compared with a$2.2 million and $4.1 million increase in interest expense for thesame periods in 2005. At June 30, 2006, assuming no change in interestrates, $5.6 million would be reclassified as a decrease in interest expenseduring the remainder of 2006.

*Energy Risk*

We enter into natural gasswaps to hedge the variable cash flow risk of natural gas purchases to a fixedprice. As of June 30, 2006, we had entered into swap agreements to hedgethe variable cash flow risk of natural gas purchases for the period of July2006 through February 2007. We designated all of the swaps as cashflow hedges. Accordingly, changes in the fair value of these swaps wererecorded in “Other comprehensive income.” Amounts realized during the periodwere reclassified to “Materials, labor, and other operating expenses” in ourConsolidated Statements of Income (Loss) as natural gas was consumed. Amountsreclassified in the three months ended June 30, 2006, decreased “Materials,labor, and other operating expenses” $0.1 million, and amountsreclassified in the six months ended June 30, 2006, increased theseexpenses $0.1 million. Assuming natural gas prices follow the futurescurve in effect at June 30, 2006, $11.1 million would be reclassifiedas an increase in “Materials,labor, and other operating expenses” during the remainder of 2006. AtJune 30, 2006, and December 31, 2005, the fair market values of theseinstruments were a negative $9.8 million and $0.1 million, which werecorded in “Accrued liabilities, Other” on our Consolidated Balance Sheets.Ineffectiveness related to these hedges was not significant.

*Foreign Currency Risk*

We occasionally enter into foreignexchange contracts to hedge against fluctuations in foreign currency exchangerates. These contracts allow us to hedge certain transactions, includingpurchases denominated in foreign currencies, which allows us to manage thevolatility associated with these transactions and to protect us from currencyfluctuations between the contract date and ultimate settlement of the hedgedtransaction.

In second quarter 2006, we entered into a series of forward foreignexchange contracts to hedge our commitment to purchase capital equipmentdenominated in euros. These contracts are for a total amount of12.4 million euros with settlement dates which began in April 2006 andextend through April 2007. We are accounting for these as fair value hedges andrecognize any gains or losses from remeasuring the forward contracts at fairvalue in the Consolidated Statements of Income (Loss). We also adjust thecommitment for the capital equipment purchase for any gains or lossesattributable to fluctuations in foreign currency exchange rates. AtJune 30, 2006, the fair market value of these contracts was $0.2 million,which we recorded in “Receivables, Other,” and we recorded the same amount forthe increase in the purchase commitment in “Accounts payable” on ourConsolidated Balance Sheet.

***15.          RecentlyAdopted Accounting Standards***

In February 2006, the FASB issued FASBStaff Position (FSP) SFAS No. 123(R)-4, Classification ofOptions and Similar Instruments Issued as Employee Compensation That Allow forCash Settlement upon the Occurrence of a Contingent Event. SFAS No. 123(R)-4requires companies to assess the probability that a contingent cash settlementevent will occur when it determines the classification of options or othersimilar instruments issued as part of employee compensation arrangements.Because Forest Products Holdings’, (our equity sponsor) redemption and theexpected parallel redemptions of the Series B and Series C equityunits granted to our employees under the Management Equity Agreement are acontingent event outside employees’ control and not currently deemed probableof occurring, we account for the units using equity plan accounting inaccordance with SFAS No. 123(R)-4.

In September 2005, theFASB’s EITF reached a consensus on EITF 04-13, Accounting for Purchasesand Sales of Inventory With the Same Counterparty. The consensus identifies circumstances

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under which two or more transactions involvinginventory with the same counterparty should be viewed as a single nonmonetarytransaction within the scope of Accounting Principles Board (APB) Opinion No.29, Accounting for Nonmonetary Transactions. We adopted this standard effectiveJanuary 2006, and it required us to report our inventory buy/sell transactionsin our Packaging & Newsprint and Paper segments on a net basis in ourConsolidated Statement of Income. Previously, in accordance with EITF 99-19,Reporting Revenue Gross as a Principal Versus Net as an Agent, and StaffAccounting Bulletin (SAB) No. 104, Revenue Recognition, we recorded sales andpurchases related to our inventory buy/sell arrangements on a gross basis. Thisconsensus had no impact on net income. Had this consensus previously been ineffect, it would have reduced sales $21.1 million and $42.1 million for thethree and six months ended June 30, 2005, and would have reduced “Materials,labor, and other operating expenses” by about the same amount. In accordancewith the provisions of EITF 04-13, prior period financial information has notbeen reclassified to conform with the current period’s presentation.

In March 2005, the FASB issued FINNo. 47, Accounting for Conditional Asset Retirement Obligations — AnInterpretation of FASB Statement No. 143. FIN No. 47 clarifiesthat the term “conditional asset retirement obligation,” as used in SFASNo. 143, Accounting for Asset Retirement Obligations, refers to a legalobligation to perform an asset retirement activity in which the timing and/ormethod of settlement is conditional on a future event that may or may not bewithin the control of the entity. FIN No. 47 also clarifies when an entitywould have sufficient information to reasonably estimate the fair value of anasset retirement obligation. We adopted FIN No. 47 in December 2005,and it did not have a material impact on our financial position or results ofoperations. For more information, see Note 12, Asset Retirement Obligations.

In November 2004, the FASB issued SFASNo. 151, Inventory Costs — An Amendment of Accounting Research Bulletin(ARB) No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARBNo. 43, Chapter 4, Inventory Pricing, to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage). Among other provisions, the new rule requires that itemssuch as idle facility expense, excessive spoilage, double freight, andrehandling costs be recognized as current-period charges regardless of whetherthey meet the criterion of “so abnormal” as stated in ARB No. 43.Additionally, SFAS No. 151 requires that the allocation of fixedproduction overheads to the costs of conversions be based on normal capacity ofthe production facilities. The provisions of SFAS No. 151 are effectivefor inventory costs incurred during fiscal years beginning afterSeptember 15, 2005. We adopted this standard effective January 1,2006, and it did not have a material impact on our financial position orresults of operations.

***16.          Retirement and Benefit Plans***

The following tablepresents the components of net periodic pension and postretirement benefitcosts in accordance with revised SFAS No. 132, Employers’ DisclosuresAbout Pensions and Other Postretirement Benefits:
| ** **                                     | ** ** | **Pension Benefits**                      | ** ** | **Other Benefits**                        | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended  June 30** | ** ** | **Three Months Ended  June 30** | ** ** |
| ** **                                     | ** ** | **2006**                                       | ** ** | **2005**                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                | ** ** |
|                                           |       |                                           |       |                                           |       |   |   |   |   |
| Service cost                                   |       | $                                              | 6,219      |                                           | $          | 6,363 |   | $ | 53 |   | $ | 162 |   |
| Interest cost                                  |       | 8,446                                          |       | 7,703                                          |       | 91 |   | 266 |   |
| Expected return  on plan assets                |       | (8,555                                         | )          | (7,585                                         | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 69                                             |       | 94                                             |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 112                                            |       | —                                         |       | — |   | — |   |
| Company-sponsored  plans                       |       | 6,291                                          |       | 6,575                                          |       | 144 |   | 428 |   |
| Multiemployer  pension plans                   |       | 125                                            |       | 133                                            |       | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                                          | **6,416**  | ** **                                     | **$**      | **6,708** | ** ** | **$** | **144** | ** ** | **$** | **428** | ** ** |

 

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| ** **                                     | ** ** | **Pension Benefits**                    | ** ** | **Other Benefits**                      | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **Six Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
| ** **                                     | ** ** | **2006**                                     | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(thousands)**                              | ** ** |
|                                           |       |                                         |       |                                         |       |   |   |   |   |
| Service cost                                   |       | $                                            | 12,438     |                                         | $          | 12,725 |   | $ | 107 |   | $ | 321 |   |
| Interest cost                                  |       | 16,892                                       |       | 15,407                                       |       | 185 |   | 535 |   |
| Expected return  on plan assets                |       | (17,111                                      | )          | (15,169                                      | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 139                                          |       | 187                                          |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 224                                          |       | —                                       |       | — |   | — |   |
| Plan  settlement/curtailment expense           |       | 821                                          |       | —                                       |       | — |   | — |   |
| Company-sponsored  plans                       |       | 13,403                                       |       | 13,150                                       |       | 292 |   | 856 |   |
| Multiemployer  pension plans                   |       | 282                                          |       | 260                                          |       | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                                        | **13,685** | ** **                                   | **$**      | **13,410** | ** ** | **$** | **292** | ** ** | **$** | **856** | ** ** |

 

In 2006, we arenot required to make a minimum contribution to our pension plans; however, wemay elect to make voluntary contributions.

***17.          Redeemable Equity Units***

In April 2006, two of our key managerspurchased, pursuant to the terms of a Management Equity Agreement (EquityPlan), a total of 0.3 million 2006 Series B equity units in FPH at $2.00per unit. Those who purchased FPH’s Series B equity units also received a grantof 5.3 million of FPH’s Series C equity units (profits interests).The 2006 Series C equity units represent the right to participate inprofits after the holders of the FPH Series B and 2004 Series C equity unitsreceive a specified threshold return as defined in the Equity Plan. Inaddition, in April 2006, FPH issued 2.6 million 2006 Series C equityunits of FPH to two other key managers and our four nonaffiliated directors forno consideration.

The 2006 equity units vest on the same dates the units issued in 2004 vest.We did not recognize compensation expense on the date of grant for the 2006Series B equity units because the fair value of the units issued by FPHwas equal to or less than the amount each employee was required to pay. Werecognize compensation expense for the fair value of the 2006 Series Cequity units over the vesting periods. During the three and six months endedJune 30, 2006, we recognized $0.2 million of compensation expenserelated to the 2006 Series C equity unit grants.

***18.        Segment Information***

There are no differencesin our basis of segmentation or in our basis of measurement of segment profitor loss from those disclosed in Note 16 of “Item 8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K.

20

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An analysis of ouroperations by segment is as follows:

 
| ** **                       | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------|-------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                       | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                       | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| **Three Months Ended** | ** ** | ** **     | ** **  | **Related** | ** ** | ** **        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| **June 30, 2006**      | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **Intersegment**  | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(f)**    | ** ** |
| ** **                       | ** ** | **(millions)** | ** **  |
| ** **                       |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
| Building Materials  Distribution |       | $              | 832.7       |        | $          | —            |       | $          | —     |       | $          | 832.7             |       | $          | 25.3       |   | $ | 2.4 |   | $ | 27.7 |   |
| Wood Products                    |       | 182.8          |        | —      |       | 131.9             |       | 314.7      |       | 17.2       |       | 6.7               |       | 23.9       |       |
| Paper                            |       | 223.4          |        | 144.0       |       | 14.3              |       | 381.7      |       | 16.5       |       | 15.5              |       | 32.0       |       |
| Packaging &  Newsprint  |       | 172.1          |        | —      |       | 18.7              |       | 190.8      | (a)        | 13.8       |       | 12.7              |       | 26.5       |       |
| Corporate and Other              |       | 4.8            |        | —      |       | 11.8              |       | 16.6       |       | (11.4      | )          | 1.2               |       | (10.2      | )          |
|                             |       | 1,415.8        |        | 144.0       |       | 176.7             |       | 1,736.5    |       | 61.4       |       | 38.5              |       | 99.9       |       |
| Intersegment  eliminations       |       | —         |        | —      |       | (176.7            | )          | (176.7     | )          | —     |       | —            |       | —     |       |
| Interest expense                 |       | —         |        | —      |       | —            |       | —     |       | (28.6      | )          | —            |       | —     |       |
| Interest income                  |       | —         |        | —      |       | —            |       | —     |       | 0.9        |       | —            |       | —     |       |
| ** **                       | ** ** | **$**          | **1,415.8** | ** **  | **$**      | **144.0**         | ** ** | **$**      | **—** | ** ** | **$**      | **1,559.8**       | ** ** | **$**      | **33.7**   | ** ** | **$** | **38.5** | ** ** | **$** | **99.9** | ** ** |

 
| ** **                                       | ** ** | **Sales**      | ** **  | **Income  (Loss) ** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------|-------------|--------------------------|------------|----------------------------------|------------|------------|------------|
| **Three Months Ended**                 | ** ** | ** **     | ** **  | **Related **        | ** ** | ** **                       | ** ** | ** ** | ** ** | **Before ** | ** ** | **and ** | ** ** | **EBITDA** | ** ** |
| **June 30, 2005**                      | ** ** | **Trade**      | ** **  | **Party**                | ** ** | **Intersegment**                 | ** ** | **Total**  | ** ** | **Taxes (c)** | ** ** | **Depletion** | ** ** | **(c) (f)** | ** ** |
| ** **                                       | ** ** | **(millions)** | ** **  |
| ** **                                       | ** ** | ** **     | ** **  | ** **               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building Materials  Distribution                 |       | $              | 795.7       |                     | $          | —                           |       | $          | 0.3        |   | $ | 796.0 |   | $ | 21.0 |   | $ | 2.3 |   | $ | 23.3 |   |
| Wood Products                                    |       | 206.3          |        | —                   |       | 128.7                            |       | 335.0      |       | 31.3 |   | 5.3 |   | 36.7 |   |
| Paper                                            |       | 198.9          |        | 142.1                    |       | 11.7                             |       | 352.7      |       | 27.1 |   | 13.3 |   | 40.5 |   |
| Packaging &  Newsprint                  |       | 147.5          |        | —                   |       | 20.3                             |       | 167.8      |       | 10.1 |   | 9.3 |   | 19.3 |   |
| Corporate and Other                              |       | 4.1            |        | —                   |       | 12.2                             |       | 16.3       |       | (12.4 | ) | 1.5 |   | (11.0 | ) |
|                                             |       | 1,352.5        |        | 142.1                    |       | 173.2                            |       | 1,667.8    |       | 77.1 |   | 31.7 |   | 108.8 |   |
| Intersegment  eliminations                       |       | —         |        | —                   |       | (173.2                           | )          | (173.2     | )          | — |   | — |   | — |   |
| Change in fair value of  interest rate swaps (d) |       | —         |        | —                   |       | —                           |       | —     |       | (5.3 | ) | — |   | — |   |
| Interest expense (e)                             |       | —         |        | —                   |       | —                           |       | —     |       | (74.3 | ) | — |   | — |   |
| Interest income                                  |       | —         |        | —                   |       | —                           |       | —     |       | 0.4 |   | — |   | — |   |
| ** **                                       | ** ** | **$**          | **1,352.5** | ** **               | **$**      | **142.1**                        | ** ** | **$**      | **—** | ** ** | **$** | **1,494.6** | ** ** | **$** | **(2.1** | **)** | **$** | **31.7** | ** ** | **$** | **108.8** | ** ** |

 
| ** **                       | ** ** | **Sales**      | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|----------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| **Six Months Ended**   | ** ** | ** **     | ** **  | **Related**        | ** ** | ** **                       | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| **June 30, 2006**      | ** ** | **Trade**      | ** **  | **Party**          | ** ** | **Intersegment**                 | ** ** | **Total**  | ** ** | ** Taxes** | ** ** | **Depletion** | ** ** | **(f)** | ** ** |
| ** **                       | ** ** | **(millions)** | ** **  |
| ** **                       | ** ** | ** **     | ** **  | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building Materials  Distribution |       | $              | 1,594.5     |               | $          | —                           |       | $          | —     |   | $ | 1,594.5 |   | $ | 43.9 |   | $ | 4.8 |   | $ | 48.7 |   |
| Wood Products                    |       | 368.8          |        | —             |       | 258.5                            |       | 627.3      |       | 36.0 |   | 13.0 |   | 49.0 |   |
| Paper                            |       | 449.2          |        | 276.8              |       | 26.1                             |       | 752.1      |       | 13.9 |   | 30.1 |   | 44.0 |   |
| Packaging &  Newsprint  |       | 331.2          |        | —             |       | 38.4                             |       | 369.6      | (a)        | 16.2 |   | 24.8 |   | 40.9 |   |
| Corporate and  Other             |       | 9.6            |        | —             |       | 22.9                             |       | 32.5       |       | (17.7 | )(b) | 2.4 |   | (15.2 | ) |
|                             |       | 2,753.3        |        | 276.8              |       | 345.9                            |       | 3,376.0    |       | 92.3 |   | 75.1 |   | 167.4 |   |
| Intersegment  eliminations       |       | —         |        | —             |       | (345.9                           | )          | (345.9     | )          | — |   | — |   | — |   |
| Interest expense                 |       | —         |        | —             |       | —                           |       | —     |       | (58.8 | ) | — |   | — |   |
| Interest income                  |       | —         |        | —             |       | —                           |       | —     |       | 1.5 |   | — |   | — |   |
| ** **                       | ** ** | **$**          | **2,753.3** | ** **         | **$**      | **276.8**                        | ** ** | **$**      | **—** | ** ** | **$** | **3,030.1** | ** ** | **$** | **35.0** | ** ** | **$** | **75.1** | ** ** | **$** | **167.4** | ** ** |

 

21

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| ** **                                       | ** ** | **Sales**      | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| **Six Months Ended**                   | ** ** | ** **     | ** **  | **Related**        | ** ** | ** **                       | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| **June 30, 2005**                      | ** ** | **Trade**      | ** **  | **Party**          | ** ** | **Intersegment**                 | ** ** | **Total**  | ** ** | **Taxes (c)** | ** ** | **Depletion** | ** ** | **(c) (f)** | ** ** |
| ** **                                       | ** ** | **(millions)** | ** **  |
| ** **                                       | ** ** | ** **     | ** **  | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                 |       | $              | 1,491.9     |               | $          | —                           |       | $          | 0.3        |   | $ | 1,492.2 |   | $ | 45.4 |   | $ | 4.3 |   | $ | 49.7 |   |
| Wood Products                                    |       | 414.1          |        | —             |       | 243.3                            |       | 657.4      |       | 64.4 |   | 10.6 |   | 75.0 |   |
| Paper                                            |       | 394.7          |        | 292.5              |       | 23.4                             |       | 710.6      |       | 56.4 |   | 26.3 |   | 82.7 |   |
| Packaging &  Newsprint                  |       | 321.9          |        | —             |       | 39.6                             |       | 361.5      |       | 14.6 |   | 18.5 |   | 33.0 |   |
| Corporate and  Other                             |       | 11.8           |        | —             |       | 23.9                             |       | 35.7       |       | (22.8 | ) | 2.6 |   | (20.0 | ) |
|                                             |       | 2,634.4        |        | 292.5              |       | 330.5                            |       | 3,257.4    |       | 158.0 |   | 62.3 |   | 220.4 |   |
| Intersegment  eliminations                       |       | —         |        | —             |       | (330.5                           | )          | (330.5     | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate swaps (d) |       | —         |        | —             |       | —                           |       | —     |       | 9.9 |   | — |   | — |   |
| Interest expense  (e)                            |       | —         |        | —             |       | —                           |       | —     |       | (106.4 | ) | — |   | — |   |
| Interest income                                  |       | —         |        | —             |       | —                           |       | —     |       | 1.8 |   | — |   | — |   |
| ** **                                       | ** ** | **$**          | **2,634.4** | ** **         | **$**      | **292.5**                        | ** ** | **$**      | **—** | ** ** | **$** | **2,926.9** | ** ** | **$** | **63.3** | ** ** | **$** | **62.3** | ** ** | **$** | **220.4** | ** ** |

 

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(a)           Includes the impact of adopting EITF 04-13effective January 1, 2006, which required us to report our inventorybuy/sell transactions with the same counterparty on a net basis. SeeNote 15, Recently Adopted Accounting Standards.

(b)           Includes a $3.7 million gain for changesin our retiree healthcare programs and a $1.7 million loss related to thesale of our headquarters building.

(c)           Includes $3.6 million for the write-off of costsincurred in connection with the canceled initial public offering.

(d)           Includes the change in the fair value of interest rateswaps related to our amended and restated senior credit facilities.

(e)           Includes the write-off of $43.0 million of deferredfinancing costs resulting from the repayment of the Tranche B term loan.

(f)            EBITDA represents income (loss) before interest(interest expense, interest income, and change in fair value of interest rateswaps), income tax provision (benefit), and depreciation, amortization, anddepletion. EBITDA is the primary measure used by our chief operating decisionmakers to evaluate segment operating performance and to decide how to allocateresources to segments. We believe EBITDA is useful to investors because itprovides a means to evaluate the operating performance of our segments and ourcompany on an ongoing basis using criteria that are used by our internaldecision makers and because it is frequently used by investors and otherinterested parties in the evaluation of companies with substantial financialleverage. We believe EBITDA is a meaningful measure because it presents a transparentview of our recurring operating performance and allows management to readilyview operating trends, perform analytical comparisons, and identify strategiesto improve operating performance. For example, we believe that the inclusion ofitems such as taxes, interest expense, and interest income distorts management’sability to assess and view the core operating trends in our segments. EBITDA,however, is not a measure of our liquidity or financial performance undergenerally accepted accounting practices (GAAP) and should not be considered asan alternative to net income (loss), income (loss) from operations, or anyother performance measure derived in accordance with GAAP or as an alternativeto cash flow from operating activities as a measure of our liquidity. The useof EBITDA instead of net income (loss) or segment income (loss) has limitationsas an analytical tool, including the inability to determine profitability; theexclusion of interest expense, interest income, change in the fair value of interestrate swaps, and associated significant cash requirements; and the exclusion ofdepreciation, amortization, and depletion, which represent significant andunavoidable operating costs, given the level of our indebtedness and thecapital expenditures needed to maintain our businesses. Management compensatesfor these limitations by relying on our GAAP results. Our measures of EBITDAare not necessarily comparable to other similarly titled captions of othercompanies due to potential inconsistencies in the methods of calculation.

22

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The following is areconciliation of net income to EBITDA:
|                                              | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(millions)**                                 | ** ** |
|                                         |       |                                           |       |                                         |       |   |   |   |   |
| Net income  (loss)                           |       | $                                              | 33.4       |                                         | $          | (14.5 | ) | $ | 33.5 |   | $ | 50.3 |   |
| Change in fair  value of interest rate swaps |       | —                                         |       | 5.3                                          |       | — |   | (9.9 | ) |
| Interest expense                             |       | 28.6                                           |       | 74.3                                         |       | 58.8 |   | 106.4 |   |
| Interest income                              |       | (0.9                                           | )          | (0.4                                         | )          | (1.5 | ) | (1.8 | ) |
| Income tax  provision                        |       | 0.3                                            |       | 12.3                                         |       | 1.5 |   | 13.0 |   |
| Depreciation,  amortization, and depletion   |       | 38.5                                           |       | 31.7                                         |       | 75.1 |   | 62.3 |   |
| EBITDA                                       | ** ** | **$**                                          | **99.9**   | ** **                                   | **$**      | **108.8** | ** ** | **$** | **167.4** | ** ** | **$** | **220.4** | ** ** |

 

***19.******          Commitmentsand Guarantees***

*Commitments*

As discussed in Notes 1, 6, and 11 of“Item 8. Consolidated Financial Statements and Supplementary Data” in our 2005Annual Report on Form 10-K, we have commitments for timber contracts, leases,and long-term debt. In addition, we have purchase obligations for goods andservices, capital expenditures, and raw materials entered into in the normalcourse of business. Except as disclosed below, at June 30, 2006, therehave been no material changes to our contractual obligations outside the normalcourse of business.

During the six months ended June 30,2006, we increased the amount of borrowings secured under our accountsreceivable securitization program from $80.0 million at December 31,2005, to $145.0 million at June 30, 2006. Additionally, we prepaid$85.8 million on our Tranche D term loan, with $27.2 million ofproceeds from the sale of our headquarters building in Boise, Idaho,$25.6 million of proceeds from unwinding and resetting the fixed interestrate we pay under our interest rate swap agreements, $25.0 million oflower-cost receivable securitization borrowings, and other operating cashflows.

# *Guarantees*

Weprovide guarantees, indemnifications, and assurances to others, whichconstitute guarantees as defined under FIN No. 45, Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others. Note 17, Commitments and Guarantees,of “Item 8. Consolidated Financial Statements and Supplementary Data” in our2005 Annual Report on Form 10-K, describes the nature of our guarantees,including the approximate terms of the guarantees, how the guarantees arose,the events or circumstances that would require us to perform under theguarantees, and the maximum potential undiscounted amounts of future paymentswe could be required to make. There have been no material changes to theguarantees disclosed in our 2005 Annual Report on Form 10-K.

***20.******         ******Consolidating Guarantor and Nonguarantor Financial Information***

Thefollowing consolidating financial information presents the Statements of Income(Loss), Balance Sheets, and Cash Flows related to our business. The seniornotes are guaranteed on a senior basis, and the senior subordinated notes areguaranteed on a senior subordinated basis, in each case jointly and severallyby Boise, Timber Holdings, and each of their existing and future subsidiaries(other than the co-issuers, Boise LLC and Boise Cascade FinanceCorporation). The nonguarantors include our foreign subsidiaries and BirchCreek. Other than the consolidated financial statements and footnotes for BoiseCascade Holdings, L.L.C., and Boise Land & Timber Holdings Corp.,financial statements and other disclosures concerning the guarantors have notbeen presented because management believes that such information is notmaterial to investors. See Exhibit 99 of this Form 10-Q for BoiseLand & Timber Holdings Corp. consolidated financial statements andnotes to consolidated financial statements.

23

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** **

**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Income (Loss)For the Three Months Ended June 30, 2006**
| ** **                                                                           | ** ** | **Boise   Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                       | ** ** |
| **Sales**                                                                            | ** ** | ** **                                            | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                                     | —     |                                    | $          | —                            |       | $                                       | 1,393,678  |             | $          | 22,106           |       | $ | — |   | $ | 1,415,784 |   |
| Intercompany                                                                         |       | —                                                |       | 1,711                                   |       | 3                                 |       | 19,135                                  |       | (20,849          | )          | —           |       |
| Related parties                                                                      |       | —                                                |       | —                                  |       | 144,005                           |       | —                                  |       | —           |       | 144,005          |       |
|                                                                                 |       | —                                                |       | 1,711                                   |       | 1,537,686                         |       | 41,241                                  |       | (20,849          | )          | 1,559,789        |       |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                            | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                                |       | 1,779                                   |       | 1,337,033                         |       | 35,572                                  |       | (14,104          | )          | 1,360,280        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                                |       | 901                                     |       | 36,499                            |       | 1,059                                   |       | —           |       | 38,459           |       |
| Selling and  distribution expenses                                                   |       | —                                                |       | —                                  |       | 71,030                            |       | 577                                     |       | —           |       | 71,607           |       |
| General and  administrative expenses                                            |       | —                                                |       | 11,408                                  |       | 20,811                            |       | 684                                     |       | (6,745           | )          | 26,158           |       |
| Other (income)  expense, net                                                         |       | —                                                |       | 2,409                                   |       | 52                                |       | 772                                     |       | —           |       | 3,233            |       |
|                                                                                 |       | —                                                |       | 16,497                                  |       | 1,465,425                         |       | 38,664                                  |       | (20,849          | )          | 1,499,737        |       |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                                |       | (14,786                                 | )          | 72,261                            |       | 2,577                                   |       | —           |       | 60,052           |       |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                                |       | 5,435                                   |       | 426                               |       | (4,501                                  | )          | —           |       | 1,360            |       |
| Interest expense                                                                     |       | —                                                |       | (25,618                                 | )          | —                            |       | (2,992                                  | )          | —           |       | (28,610          | )          |
| Interest  expense—intercompany                                                  |       | —                                                |       | (137                                    | )          | —                            |       | (4,103                                  | )          | 4,240            |       | —           |       |
| Interest income                                                                      |       | —                                                |       | 853                                     |       | 61                                |       | 20                                      |       | —           |       | 934              |       |
| Interest  income—intercompany                                                   |       | —                                                |       | 66                                      |       | 4,174                             |       | —                                  |       | (4,240           | )          | —           |       |
|                                                                                 |       | —                                                |       | (19,401                                 | )          | 4,661                             |       | (11,576                                 | )          | —           |       | (26,316          | )          |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                                |       | (34,187                                 | )          | 76,922                            |       | (8,999                                  | )          | —           |       | 33,736           |       |
| Income tax  provision                                                                |       | —                                                |       | (3                                      | )          | (302                              | )          | —                                  |       | —           |       | (305             | )          |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                                |       | (34,190                                 | )          | 76,620                            |       | (8,999                                  | )          | —           |       | 33,431           |       |
|                                                                                 |       |                                                  |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 33,431                                                |       | 67,621                                  |       | —                            |       | —                                  |       | (101,052         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                                 | **33,431** | ** **                              | **$**      | **33,431**                        | ** ** | **$**                                   | **76,620** | ** **       | **$**      | **(8,999**       | **)**      | **$** | **(101,052** | **)** | **$** | **33,431** | ** ** |

 

24

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**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Income (Loss)For the Three Months Ended June 30, 2005**

** **
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise   Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **  |
| **Sales**                                                                            | ** ** | ** **                                      | ** **  | ** **                   | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                               | —      |                         | $          | —                      |       | $                                 | 1,330,476  |             | $          | 21,990           |       | $ | — |   | $ | 1,352,466 |   |
| Intercompany                                                                         |       | —                                          |        | —                       |       | 4,477                       |       | 15,661                            |       | (20,138          | )          | —           |       |
| Related parties                                                                      |       | —                                          |        | —                       |       | 142,145                     |       | —                            |       | —           |       | 142,145          |       |
|                                                                                 |       | —                                          |        | —                       |       | 1,477,098                   |       | 37,651                            |       | (20,138          | )          | 1,494,611        |       |
|                                                                                 |       |                                            |        |                         |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                      | ** **  | ** **                   | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                          |        | 88                           |       | 1,281,651                   |       | 37,808                            |       | (20,138          | )          | 1,299,409        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |        | 1,114                        |       | 29,780                      |       | 818                               |       | —           |       | 31,712           |       |
| Selling and  distribution expenses                                                   |       | —                                          |        | —                       |       | 63,913                      |       | 513                               |       | —           |       | 64,426           |       |
| General and administrative expenses                                             |       | —                                          |        | 8,215                        |       | 9,793                       |       | 28                                |       | —           |       | 18,036           |       |
| Other (income)  expense, net                                                         |       | —                                          |        | 3,610                        |       | (1,140                      | )          | 1,191                             |       | —           |       | 3,661            |       |
|                                                                                 |       | —                                          |        | 13,027                       |       | 1,383,997                   |       | 40,358                            |       | (20,138          | )          | 1,417,244        |       |
|                                                                                 |       |                                            |        |                         |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |        | (13,027                      | )          | 93,101                      |       | (2,707                            | )          | —           |       | 77,367           |       |
|                                                                                 |       |                                            |        |                         |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |        | (160                         | )          | (127                        | )          | 39                                |       | —           |       | (248             | )          |
| Change in fair  value of interest rate swaps                                         |       | —                                          |        | (5,314                       | )          | —                      |       | —                            |       | —           |       | (5,314           | )          |
| Interest expense                                                                     |       | —                                          |        | (74,363                      | )          | —                      |       | (2                                | )          | —           |       | (74,365          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |        | (52                          | )          | —                      |       | (267                              | )          | 319              |       | —           |       |
| Interest income                                                                      |       | —                                          |        | 346                          |       | 71                          |       | 17                                |       | —           |       | 434              |       |
| Interest  income—intercompany                                                   |       | —                                          |        | 281                          |       | 38                          |       | —                            |       | (319             | )          | —           |       |
| ** **                                                                           |       | —                                          |        | (79,262                      | )          | (18                         | )          | (213                              | )          | —           |       | (79,493          | )          |
| ** **                                                                           | ** ** | ** **                                      | ** **  | ** **                   | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |        | (92,289                      | )          | 93,083                      |       | (2,920                            | )          | —           |       | (2,126           | )          |
| Income tax  provision                                                                |       | (11,859                                         | )           | (82                          | )          | (383                        | )          | (19                               | )          | —           |       | (12,343          | )          |
| ** **                                                                           | ** ** | ** **                                      | ** **  | ** **                   | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (11,859                                         | )           | (92,371                      | )          | 92,700                      |       | (2,939                            | )          | —           |       | (14,469          | )          |
| ** **                                                                           | ** ** | ** **                                      | ** **  | ** **                   | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Equity in  net income (loss) of affiliates**                                       |       | (2,610                                          | )           | 89,761                       |       | —                      |       | —                            |       | (87,151          | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                           | **(14,469** | **)**                        | **$**      | **(2,610**                  | **)**      | **$**                             | **92,700** | ** **       | **$**      | **(2,939**       | **)**      | **$** | **(87,151** | **)** | **$** | **(14,469** | **)** |

 

25

----

 

**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Income (Loss) For the Six Months Ended June 30, 2006**
| ** **                                                                           | ** ** | **Boise   Cascade  Holdings,  L.L.C.   (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                             | ** ** |
| **Sales**                                                                            | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                                           | —     |                                    | $          | —                            |       | $                                 | 2,719,977   |             | $          | 33,305           |       | $ | — |   | $ | 2,753,282 |   |
| Intercompany                                                                         |       | —                                                      |       | 2,567                                   |       | 1,236                             |       | 38,824                            |        | (42,627          | )          | —           |       |
| Related parties                                                                      |       | —                                                      |       | —                                  |       | 276,770                           |       | —                            |        | —           |       | 276,770          |       |
|                                                                                 |       | —                                                      |       | 2,567                                   |       | 2,997,983                         |       | 72,129                            |        | (42,627          | )          | 3,030,052        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                                      |       | 1,394                                   |       | 2,639,433                         |       | 62,042                            |        | (29,867          | )          | 2,673,002        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                                      |       | 1,867                                   |       | 71,185                            |       | 2,064                             |        | —           |       | 75,116           |       |
| Selling and  distribution expenses                                                   |       | —                                                      |       | —                                  |       | 141,498                           |       | 1,186                             |        | —           |       | 142,684          |       |
| General and  administrative expenses                                            |       | —                                                      |       | 20,501                                  |       | 38,628                            |       | 1,251                             |        | (12,760          | )          | 47,620           |       |
| Other (income)  expense, net                                                         |       | —                                                      |       | 347                                     |       | (888                              | )          | 1,649                             |        | —           |       | 1,108            |       |
|                                                                                 |       | —                                                      |       | 24,109                                  |       | 2,889,856                         |       | 68,192                            |        | (42,627          | )          | 2,939,530        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                                      |       | (21,542                                 | )          | 108,127                           |       | 3,937                             |        | —           |       | 90,522           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                                      |       | 4,693                                   |       | 403                               |       | (3,357                            | )           | —           |       | 1,739            |       |
| Interest expense                                                                     |       | —                                                      |       | (53,787                                 | )          | —                            |       | (4,999                            | )           | —           |       | (58,786          | )          |
| Interest  expense—intercompany                                                  |       | —                                                      |       | (246                                    | )          | —                            |       | (8,512                            | )           | 8,758            |       | —           |       |
| Interest income                                                                      |       | —                                                      |       | 1,386                                   |       | 119                               |       | 33                                |        | —           |       | 1,538            |       |
| Interest  income—intercompany                                                   |       | —                                                      |       | 113                                     |       | 8,645                             |       | —                            |        | (8,758           | )          | —           |       |
|                                                                                 |       | —                                                      |       | (47,841                                 | )          | 9,167                             |       | (16,835                           | )           | —           |       | (55,509          | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                                      |       | (69,383                                 | )          | 117,294                           |       | (12,898                           | )           | —           |       | 35,013           |       |
| Income tax  provision                                                                |       | —                                                      |       | (5                                      | )          | (1,518                            | )          | —                            |        | —           |       | (1,523           | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                                      |       | (69,388                                 | )          | 115,776                           |       | (12,898                           | )           | —           |       | 33,490           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                              |        |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 33,490                                                      |       | 102,878                                 |       | —                            |       | —                            |        | (136,368         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                                       | **33,490** | ** **                              | **$**      | **33,490**                        | ** ** | **$**                             | **115,776** | ** **       | **$**      | **(12,898**      | **)**      | **$** | **(136,368** | **)** | **$** | **33,490** | ** ** |

 

26

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**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Income (Loss) For the Six Months Ended June 30, 2005**

** **
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                               | —     |                          | $          | —                      |       | $                                 | 2,600,440   |             | $          | 33,961           |       | $ | — |   | $ | 2,634,401 |   |
| Intercompany                                                                         |       | —                                          |       | —                        |       | 4,477                       |       | 28,264                            |        | (32,741          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                        |       | 292,481                     |       | —                            |        | —           |       | 292,481          |       |
|                                                                                 |       | —                                          |       | —                        |       | 2,897,398                   |       | 62,225                            |        | (32,741          | )          | 2,926,882        |       |
|                                                                                 |       |                                            |       |                          |       |                        |       |                              |        |             |       |             |       |
| **Costs and expenses**                                                               | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Materials, labor, and  other operating expenses                                      |       | —                                          |       | 88                            |       | 2,490,006                   |       | 62,714                            |        | (32,741          | )          | 2,520,067        |       |
| Fiber costs from  related parties                                                    |       | —                                          |       | —                        |       | 17,609                      |       | —                            |        | —           |       | 17,609           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 1,836                         |       | 58,927                      |       | 1,586                             |        | —           |       | 62,349           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                        |       | 125,782                     |       | 980                               |        | —           |       | 126,762          |       |
| General and  administrative expenses                                            |       | —                                          |       | 17,343                        |       | 19,869                      |       | 28                                |        | —           |       | 37,240           |       |
| Other (income) expense,  net                                                         |       | —                                          |       | 3,650                         |       | (1,922                      | )          | 2,060                             |        | —           |       | 3,788            |       |
|                                                                                 |       | —                                          |       | 22,917                        |       | 2,710,271                   |       | 67,368                            |        | (32,741          | )          | 2,767,815        |       |
|                                                                                 |       |                                            |       |                          |       |                        |       |                              |        |             |       |             |       |
| **Income (loss) from operations**                                                    |       | —                                          |       | (22,917                       | )          | 187,127                     |       | (5,143                            | )           | —           |       | 159,067          |       |
|                                                                                 |       |                                            |       |                          |       |                        |       |                              |        |             |       |             |       |
| Foreign exchange gain  (loss)                                                        |       | —                                          |       | 40                            |       | (231                        | )          | (850                              | )           | —           |       | (1,041           | )          |
| Change in fair value of  interest rate swaps                                         |       | —                                          |       | 9,886                         |       | —                      |       | —                            |        | —           |       | 9,886            |       |
| Interest expense                                                                     |       | —                                          |       | (106,441                      | )          | —                      |       | (3                                | )           | —           |       | (106,444         | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (55                           | )          | —                      |       | (381                              | )           | 436              |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 1,618                         |       | 139                         |       | 27                                |        | —           |       | 1,784            |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 381                           |       | 55                          |       | —                            |        | (436             | )          | —           |       |
| ** **                                                                           |       | —                                          |       | (94,571                       | )          | (37                         | )          | (1,207                            | )           | —           |       | (95,815          | )          |
| ** **                                                                           | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Income (loss) before income  taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (117,488                      | )          | 187,090                     |       | (6,350                            | )           | —           |       | 63,252           |       |
| Income tax provision                                                                 |       | (11,859                                         | )          | (94                           | )          | (980                        | )          | (49                               | )           | —           |       | (12,982          | )          |
| ** **                                                                           | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Income (loss) before equity in  net income (loss) of affiliates**                  |       | (11,859                                         | )          | (117,582                      | )          | 186,110                     |       | (6,399                            | )           | —           |       | 50,270           |       |
| ** **                                                                           | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Equity in net income (loss) of  affiliates**                                       |       | 62,129                                          |       | 179,711                       |       | —                      |       | —                            |        | (241,840         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                           | **50,270** | ** **                    | **$**      | **62,129**                  | ** ** | **$**                             | **186,110** | ** **       | **$**      | **(6,399**       | **)**      | **$** | **(241,840** | **)** | **$** | **50,270** | ** ** |

 

27

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**Boise CascadeHoldings, L.L.C., and SubsidiariesConsolidating Balance Sheets June 30, 2006**
| ** **                       | ** ** | **Boise  Cascade   Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------------------------------------|-------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **(thousands)**                                       | ** **  |
| **ASSETS**                       | ** ** | ** **                                            | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                             |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| **Current**                      | ** ** | ** **                                            | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents       |       | $                                                     | —      |                              | $          | 76,253                      |       | $                                 | 32            |             | $          | 3,634            |       | $ | — |   | $ | 79,919 |   |
| Receivables                      |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| Trade, less allowances           |       | —                                                |        | —                            |       | 8,032                       |       | 415,529                           |          | —           |       | 423,561          |       |
| Intercompany                     |       | —                                                |        | —                            |       | 1,204                       |       | 1,787                             |          | (2,991           | )          | —           |       |
| Related parties                  |       | —                                                |        | —                            |       | 4,284                       |       | 35,216                            |          | —           |       | 39,500           |       |
| Other                            |       | —                                                |        | 996                               |       | 9,206                       |       | 3,189                             |          | —           |       | 13,391           |       |
| Inventories                      |       | —                                                |        | 17                                |       | 633,604                     |       | 24,841                            |          | —           |       | 658,462          |       |
| Other                            |       | —                                                |        | 5,992                             |       | 10,862                      |       | 817                               |          | —           |       | 17,671           |       |
|                             |       | —                                                |        | 83,258                            |       | 667,224                     |       | 485,013                           |          | (2,991           | )          | 1,232,504        |       |
|                             |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| **Property**                     | ** ** | ** **                                            | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment          |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| Land and land improvements       |       | —                                                |        | —                            |       | 72,553                      |       | 668                               |          | —           |       | 73,221           |       |
| Buildings and improvements       |       | —                                                |        | 864                               |       | 218,565                     |       | 8,592                             |          | —           |       | 228,021          |       |
| Machinery and equipment          |       | —                                                |        | 10,361                            |       | 1,330,702                   |       | 35,592                            |          | —           |       | 1,376,655        |       |
|                             |       | —                                                |        | 11,225                            |       | 1,621,820                   |       | 44,852                            |          | —           |       | 1,677,897        |       |
|                             |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| Accumulated  depreciation        |       | —                                                |        | (2,646                            | )          | (193,194                    | )          | (12,442                           | )             | —           |       | (208,282         | )          |
|                             |       | —                                                |        | 8,579                             |       | 1,428,626                   |       | 32,410                            |          | —           |       | 1,469,615        |       |
|                             |       |                                                  |        |                              |       |                        |       |                              |          |             |       |             |       |
| Fiber farms and  timber deposits |       | —                                                |        | —                            |       | 29,494                      |       | 11,923                            |          | —           |       | 41,417           |       |
|                             |       | —                                                |        | 8,579                             |       | 1,458,120                   |       | 44,333                            |          | —           |       | 1,511,032        |       |
| ** **                       | ** ** | ** **                                            | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Deferred  financing costs**    |       | —                                                |        | 34,147                            |       | —                      |       | 405                               |          | —           |       | 34,552           |       |
| **Goodwill**                     |       | —                                                |        | —                            |       | 21,846                      |       | —                            |          | —           |       | 21,846           |       |
| **Intangible  assets**           |       | —                                                |        | —                            |       | 39,579                      |       | —                            |          | —           |       | 39,579           |       |
| **Investments  in affiliates**   |       | 501,516                                               |        | 573,464                           |       | —                      |       | —                            |          | (1,074,980       | )          | —           |       |
| **Other  assets**                |       | —                                                |        | 16,363                            |       | 13,960                      |       | 3,051                             |          | —           |       | 33,374           |       |
| **Total assets**                 | ** ** | **$**                                                 | **501,516** | ** **                        | **$**      | **715,811**                 | ** ** | **$**                             | **2,200,729** | ** **       | **$**      | **532,802**      | ** ** | **$** | **(1,077,971** | **)** | **$** | **2,872,887** | ** ** |

 

28

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**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets June 30, 2006 (Continued)**
| ** **                                  | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **(thousands)**                                 | ** **  |
| **LIABILITIES  AND CAPITAL**                | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                                 | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Accounts payable                            |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                                       |       | $                                               | —      |                        | $          | 26,516                      |       | $                                 | 371,887       |             | $          | 4,395            |       | $ | — |   | $ | 402,798 |   |
| Intercompany                                |       | —                                          |        | —                      |       | 1,787                       |       | 1,204                             |          | (2,991           | )          | —           |       |
| Accrued  liabilities                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and benefits                   |       | —                                          |        | 48,659                      |       | 55,668                      |       | 1,093                             |          | —           |       | 105,420          |       |
| Interest payable                            |       | —                                          |        | 10,720                      |       | —                      |       | 1,027                             |          | —           |       | 11,747           |       |
| Other                                       |       | —                                          |        | 13,350                      |       | 38,787                      |       | 6,463                             |          | —           |       | 58,600           |       |
|                                        |       | —                                          |        | 99,245                      |       | 468,129                     |       | 14,182                            |          | (2,991           | )          | 578,565          |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                    | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Long-term debt                              |       | —                                          |        | 1,200,000                   |       | —                      |       | 145,000                           |          | —           |       | 1,345,000        |       |
| Note payable to  related party, net         |       | —                                          |        | 278,637                     |       | —                      |       | —                            |          | —           |       | 278,637          |       |
|                                        |       | —                                          |        | 1,478,637                   |       | —                      |       | 145,000                           |          | —           |       | 1,623,637        |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                                   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                  |       | —                                          |        | 133,495                     |       | —                      |       | —                            |          | —           |       | 133,495          |       |
| Other long-term  liabilities                |       | —                                          |        | 22,744                      |       | 12,930                      |       | —                            |          | —           |       | 35,674           |       |
|                                        |       | —                                          |        | 156,239                     |       | 12,930                      |       | —                            |          | —           |       | 169,169          |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**               |       | —                                          |        | (1,519,826                  | )          | 1,227,189                   |       | 292,637                           |          | —           |       | —           |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**                | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series B equity units                  |       | 9,699                                           |        | —                      |       | —                      |       | —                            |          | —           |       | 9,699            |       |
| Series C equity units                  |       | 4,862                                           |        | —                      |       | —                      |       | —                            |          | —           |       | 4,862            |       |
| Redeemable equity units                     |       | —                                          |        | 14,561                      |       | —                      |       | —                            |          | (14,561          | )          | —           |       |
|                                        |       | 14,561                                          |        | 14,561                      |       | —                      |       | —                            |          | (14,561          | )          | 14,561           |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Commitments  and contingent liabilities** | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                 | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity  units                      |       | 41,467                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 41,467           |       |
| Series B equity  units                      |       | 436,789                                         |        | —                      |       | —                      |       | —                            |          | —           |       | 436,789          |       |
| Series C equity  units                      |       | 8,699                                           |        | —                      |       | —                      |       | —                            |          | —           |       | 8,699            |       |
| Subsidiary  equity                          |       | —                                          |        | 486,955                     |       | 492,481                     |       | 80,983                            |          | (1,060,419       | )          | —           |       |
| **Total  capital**                          |       | 486,955                                         |        | 486,955                     |       | 492,481                     |       | 80,983                            |          | (1,060,419       | )          | 486,955          |       |
| **Total liabilities and capital**           | ** ** | **$**                                           | **501,516** | ** **                  | **$**      | **715,811**                 | ** ** | **$**                             | **2,200,729** | ** **       | **$**      | **532,802**      | ** ** | **$** | **(1,077,971** | **)** | **$** | **2,872,887** | ** ** |

 

29

----

 

**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets December 31, 2005**

 
| ** **                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------------------------------|-------------|-----------------------------------|------------|-----------------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **(thousands)**                                 | ** **  |
| **ASSETS**                       | ** ** | ** **                                      | ** **  | ** **                        | ** ** | ** **                        | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                             |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| **Current**                      | ** ** | ** **                                      | ** **  | ** **                        | ** ** | ** **                        | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents       |       | $                                               | —      |                              | $          | 85,469                            |       | $                                 | 34            |             | $          | 2,668            |       | $ | — |   | $ | 88,171 |   |
| Receivables                      |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| Trade, less allowances           |       | —                                          |        | —                            |       | 2,668                             |       | 336,153                           |          | —           |       | 338,821          |       |
| Intercompany                     |       | —                                          |        | —                            |       | 1,204                             |       | 1,284                             |          | (2,488           | )          | —           |       |
| Related parties                  |       | —                                          |        | —                            |       | 3,335                             |       | 39,675                            |          | —           |       | 43,010           |       |
| Other                            |       | —                                          |        | 7,318                             |       | 10,570                            |       | 3,092                             |          | —           |       | 20,980           |       |
| Inventories                      |       | —                                          |        | 124                               |       | 610,418                           |       | 23,241                            |          | —           |       | 633,783          |       |
| Other                            |       | —                                          |        | 6,967                             |       | 3,195                             |       | 532                               |          | —           |       | 10,694           |       |
|                             |       | —                                          |        | 99,878                            |       | 631,424                           |       | 406,645                           |          | (2,488           | )          | 1,135,459        |       |
|                             |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| **Property**                     | ** ** | ** **                                      | ** **  | ** **                        | ** ** | ** **                        | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment          |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| Land and land improvements       |       | —                                          |        | 6,881                             |       | 71,874                            |       | 665                               |          | —           |       | 79,420           |       |
| Buildings and improvements       |       | —                                          |        | 23,343                            |       | 194,518                           |       | 8,371                             |          | —           |       | 226,232          |       |
| Machinery and equipment          |       | —                                          |        | 9,508                             |       | 1,287,320                         |       | 34,464                            |          | —           |       | 1,331,292        |       |
|                             |       | —                                          |        | 39,732                            |       | 1,553,712                         |       | 43,500                            |          | —           |       | 1,636,944        |       |
|                             |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| Accumulated  depreciation        |       | —                                          |        | (2,579                            | )          | (126,805                          | )          | (10,506                           | )             | —           |       | (139,890         | )          |
|                             |       | —                                          |        | 37,153                            |       | 1,426,907                         |       | 32,994                            |          | —           |       | 1,497,054        |       |
|                             |       |                                            |        |                              |       |                              |       |                              |          |             |       |             |       |
| Fiber farms and  timber deposits |       | —                                          |        | —                            |       | 40,955                            |       | 11,281                            |          | —           |       | 52,236           |       |
|                             |       | —                                          |        | 37,153                            |       | 1,467,862                         |       | 44,275                            |          | —           |       | 1,549,290        |       |
| ** **                       | ** ** | ** **                                      | ** **  | ** **                        | ** ** | ** **                        | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Deferred  financing costs**    |       | —                                          |        | 37,294                            |       | —                            |       | 484                               |          | —           |       | 37,778           |       |
| **Goodwill**                     |       | —                                          |        | —                            |       | 15,101                            |       | —                            |          | —           |       | 15,101           |       |
| **Intangible  assets**           |       | —                                          |        | —                            |       | 31,804                            |       | —                            |          | —           |       | 31,804           |       |
| **Investments  in affiliates**   |       | 477,433                                         |        | 470,587                           |       | —                            |       | —                            |          | (948,020         | )          | —           |       |
| **Other  assets**                |       | —                                          |        | 33,237                            |       | 7,903                             |       | 3,091                             |          | —           |       | 44,231           |       |
| **Total assets**                 | ** ** | **$**                                           | **477,433** | ** **                        | **$**      | **678,149**                       | ** ** | **$**                             | **2,154,094** | ** **       | **$**      | **454,495**      | ** ** | **$** | **(950,508** | **)** | **$** | **2,813,663** | ** ** |

 

30

----

 

**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets December 31, 2005 (Continued)**
| ** **                                  | ** ** | **Boise  Cascade  Holdings,   L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **(thousands)**                                       | ** **  |
| **LIABILITIES  AND CAPITAL**                | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                                 | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Accounts payable                            |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                                       |       | $                                                     | —      |                        | $          | 39,517                      |       | $                                 | 340,772       |             | $          | 2,918            |       | $ | — |   | $ | 383,207 |   |
| Intercompany                                |       | —                                                |        | —                      |       | 1,284                       |       | 1,204                             |          | (2,488           | )          | —           |       |
| Accrued  liabilities                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and benefits                   |       | —                                                |        | 42,240                      |       | 63,078                      |       | 971                               |          | —           |       | 106,289          |       |
| Interest payable                            |       | —                                                |        | 9,945                       |       | —                      |       | 685                               |          | —           |       | 10,630           |       |
| Other                                       |       | —                                                |        | 4,036                       |       | 38,469                      |       | 3,739                             |          | —           |       | 46,244           |       |
|                                        |       | —                                                |        | 95,738                      |       | 443,603                     |       | 9,517                             |          | (2,488           | )          | 546,370          |       |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                    | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Long-term debt,  less current portion  |       | —                                                |        | 1,285,800                   |       | —                      |       | 80,000                            |          | —           |       | 1,365,800        |       |
| Note payable to  related party, net         |       | —                                                |        | 270,854                     |       | —                      |       | —                            |          | —           |       | 270,854          |       |
|                                        |       | —                                                |        | 1,556,654                   |       | —                      |       | 80,000                            |          | —           |       | 1,636,654        |       |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                                   | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                  |       | —                                                |        | 121,269                     |       | —                      |       | —                            |          | —           |       | 121,269          |       |
| Other long-term  liabilities                |       | —                                                |        | 19,612                      |       | 12,325                      |       | —                            |          | —           |       | 31,937           |       |
|                                        |       | —                                                |        | 140,881                     |       | 12,325                      |       | —                            |          | —           |       | 153,206          |       |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**               |       | —                                                |        | (1,592,557                  | )          | 1,322,896                   |       | 269,661                           |          | —           |       | —           |       |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**                | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series B equity units                  |       | 9,508                                                 |        | —                      |       | —                      |       | —                            |          | —           |       | 9,508            |       |
| Series C equity units                  |       | 2,904                                                 |        | —                      |       | —                      |       | —                            |          | —           |       | 2,904            |       |
| Redeemable equity units                     |       | —                                                |        | 12,412                      |       | —                      |       | —                            |          | (12,412          | )          | —           |       |
|                                        |       | 12,412                                                |        | 12,412                      |       | —                      |       | —                            |          | (12,412          | )          | 12,412           |       |
|                                        |       |                                                  |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Commitments  and contingent liabilities** | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                 | ** ** | ** **                                            | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity  units                      |       | 39,885                                                |        | —                      |       | —                      |       | —                            |          | —           |       | 39,885           |       |
| Series B equity  units                      |       | 417,601                                               |        | —                      |       | —                      |       | —                            |          | —           |       | 417,601          |       |
| Series C equity  units                      |       | 7,535                                                 |        | —                      |       | —                      |       | —                            |          | —           |       | 7,535            |       |
| Subsidiary  equity                          |       | —                                                |        | 465,021                     |       | 375,270                     |       | 95,317                            |          | (935,608         | )          | —           |       |
| **Total  capital**                          |       | 465,021                                               |        | 465,021                     |       | 375,270                     |       | 95,317                            |          | (935,608         | )          | 465,021          |       |
| **Total liabilities and capital**           | ** ** | **$**                                                 | **477,433** | ** **                  | **$**      | **678,149**                 | ** ** | **$**                             | **2,154,094** | ** **       | **$**      | **454,495**      | ** ** | **$** | **(950,508** | **)** | **$** | **2,813,663** | ** ** |

 

31

----

 

**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Six Months Ended June 30, 2006**

** **
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                      |       | $                                               | 33,490     |                              | $          | 33,490                      |       | $                                 | 115,776    |             | $          | (12,898          | )          | $ | (136,368 | ) | $ | 33,490 |   |
| Items in net  income (loss) not using (providing) cash                                 |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Equity in net (income) loss of affiliates                                              |       | (33,490                                         | )          | (102,878                          | )          | —                      |       | —                            |       | 136,368          |       | —           |       |
| Depreciation, depletion, and amortization of deferred  financing costs and other costs |       | —                                          |       | 4,232                             |       | 71,184                      |       | 2,151                             |       | —           |       | 77,567           |       |
| Related-party interest expense                                                         |       | —                                          |       | 9,055                             |       | —                      |       | 8,512                             |       | (8,645           | )          | 8,922            |       |
| Related-party interest income                                                          |       | —                                          |       | —                            |       | (8,645                      | )          | —                            |       | 8,645            |       | —           |       |
| Pension and other postretirement benefit expense                                       |       | —                                          |       | 13,977                            |       | —                      |       | —                            |       | —           |       | 13,977           |       |
| Gain on changes in retiree healthcare programs                                         |       | —                                          |       | (3,741                            | )          | —                      |       | —                            |       | —           |       | (3,741           | )          |
| Management equity units expense                                                   |       | —                                          |       | 1,965                             |       | —                      |       | —                            |       | —           |       | 1,965            |       |
| Other                                                                                  |       | —                                          |       | (3,044                            | )          | (403                        | )          | 3,357                             |       | —           |       | (90              | )          |
| Decrease  (increase) in working capital, net of acquisitions                           |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                          |       | 6,825                             |       | 5,538                       |       | (75,517                           | )          | —           |       | (63,154          | )          |
| Inventories                                                                            |       | —                                          |       | 107                               |       | (17,327                     | )          | (1,600                            | )          | —           |       | (18,820          | )          |
| Accounts payable and accrued liabilities                                          |       | —                                          |       | (10,889                           | )          | 40,878                      |       | 4,681                             |       | —           |       | 34,670           |       |
| Pension and other  postretirement benefit payments                                     |       | —                                          |       | (463                              | )          | —                      |       | —                            |       | —           |       | (463             | )          |
| Other                                                                                  |       | —                                          |       | 9,458                             |       | (10,424                     | )          | (285                              | )          | —           |       | (1,251           | )          |
| Cash provided by (used for) operations                                                 |       | —                                          |       | (41,906                           | )          | 196,577                     |       | (71,599                           | )          | —           |       | 83,072           |       |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                          |       | —                                          |       | (1,577                            | )          | (68,503                     | )          | (1,264                            | )          | —           |       | (71,344          | )          |
| Acquisitions of  businesses and facilities                                             |       | —                                          |       | —                            |       | (42,549                     | )          | —                            |       | —           |       | (42,549          | )          |
| Sales of assets                                                                        |       | —                                          |       | 27,744                            |       | —                      |       | —                            |       | —           |       | 27,744           |       |
| Investments in  related parties                                                        |       | 10,570                                          |       | 102,878                           |       | —                      |       | —                            |       | (113,448         | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 4,576                             |       | 1,360                       |       | (4,199                            | )          | —           |       | 1,737            |       |
| Cash provided by (used for) investment                                            |       | 10,570                                          |       | 133,621                           |       | (109,692                    | )          | (5,463                            | )          | (113,448         | )          | (84,412          | )          |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                           |       | —                                          |       | 68,300                            |       | —                      |       | 170,000                           |       | —           |       | 238,300          |       |
| Payments of  long-term debt                                                            |       | —                                          |       | (154,100                          | )          | —                      |       | (105,000                          | )          | —           |       | (259,100         | )          |
| Tax distributions  to members                                                          |       | (10,725                                         | )          | —                            |       | —                      |       | —                            |       | —           |       | (10,725          | )          |
| Tax distributions  to Boise Cascade Holdings, L.L.C.                                   |       | —                                          |       | (10,725                           | )          | —                      |       | —                            |       | 10,725           |       | —           |       |
| Note payable to  related party, net                                                    |       | —                                          |       | (1,139                            | )          | —                      |       | —                            |       | —           |       | (1,139           | )          |
| Proceeds from  changes in interest rate swaps                                          |       | —                                          |       | 25,620                            |       | —                      |       | —                            |       | —           |       | 25,620           |       |
| Proceeds from  equity units issued, net of repurchases                                 |       | 155                                             |       | —                            |       | —                      |       | —                            |       | (155             | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 132                               |       | —                      |       | —                            |       | —           |       | 132              |       |
| Cash provided by (used for) financing                                             |       | (10,570                                         | )          | (71,912                           | )          | —                      |       | 65,000                            |       | 10,570           |       | (6,912           | )          |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                                          |       | (29,019                           | )          | (86,887                     | )          | 13,028                            |       | 102,878          |       | —           |       |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                             |       | —                                          |       | (9,216                            | )          | (2                          | )          | 966                               |       | —           |       | (8,252           | )          |
| **Balance  at beginning of the period**                                                |       | —                                          |       | 85,469                            |       | 34                          |       | 2,668                             |       | —           |       | 88,171           |       |
| **Balance at end of the period**                                                       | ** ** | **$**                                           | **—** | ** **                        | **$**      | **76,253**                  | ** ** | **$**                             | **32**     | ** **       | **$**      | **3,634**        | ** ** | **$** | **—** | ** ** | **$** | **79,919** | ** ** |

 

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**Boise Cascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Six Months Ended June 30, 2005**

** **
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                       | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                      |       | $                                               | 50,270     |                        | $          | 62,129                      |       | $                                 | 186,110    |             | $          | (6,399           | )          | $ | (241,840 | ) | $ | 50,270 |   |
| Items in net  income not using (providing) cash                                        |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net income (loss) of affiliates                                              |       | (62,129                                         | )          | (179,711                    | )          | —                      |       | —                            |       | 241,840          |       | —           |       |
| Depreciation, depletion, and amortization of deferred  financing costs and other costs |       | —                                          |       | 50,332                      |       | 58,927                      |       | 1,586                             |       | —           |       | 110,845          |       |
| Related-party interest expense                                                         |       | —                                          |       | 8,315                       |       | —                      |       | —                            |       | —           |       | 8,315            |       |
| Deferred income tax provision                                                          |       | 8,681                                           |       | —                      |       | —                      |       | —                            |       | —           |       | 8,681            |       |
| Pension and other postretirement benefit expense                                       |       | —                                          |       | 14,266                      |       | —                      |       | —                            |       | —           |       | 14,266           |       |
| Change in fair value of interest rate swaps                                            |       | —                                          |       | (9,886                      | )          | —                      |       | —                            |       | —           |       | (9,886           | )          |
| Management equity units expense                                                   |       | —                                          |       | 1,562                       |       | —                      |       | —                            |       | —           |       | 1,562            |       |
| Other                                                                                  |       | —                                          |       | 555                         |       | 231                         |       | 850                               |       | —           |       | 1,636            |       |
| Decrease  (increase) in working capital                                                |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | (2,724                                          | )          | (45,194                     | )          | (39,187                     | )          | (4,989                            | )          | 2,724            |       | (89,370          | )          |
| Inventories                                                                            |       | —                                          |       | (5,126                      | )          | (24,705                     | )          | (4,178                            | )          | —           |       | (34,009          | )          |
| Accounts payable and accrued liabilities                                          |       | —                                          |       | 42,884                      |       | 23,824                      |       | 3,200                             |       | (2,724           | )          | 67,184           |       |
| Pension and other  postretirement benefit payments                                     |       | —                                          |       | (315                        | )          | —                      |       | —                            |       | —           |       | (315             | )          |
| Income taxes  payable                                                                  |       | 2,724                                           |       | —                      |       | 861                         |       | 6                                 |       | —           |       | 3,591            |       |
| Other                                                                                  |       | —                                          |       | 2,570                       |       | (1,680                      | )          | (329                              | )          | —           |       | 561              |       |
| Cash provided by (used for) operations                                                 |       | (3,178                                          | )          | (57,619                     | )          | 204,381                     |       | (10,253                           | )          | —           |       | 133,331          |       |
|                                                                                   |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                       | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                          |       | —                                          |       | (3,247                      | )          | (64,929                     | )          | (5,113                            | )          | —           |       | (73,289          | )          |
| Sales of assets                                                                        |       | —                                          |       | —                      |       | 11,672                      |       | —                            |       | —           |       | 11,672           |       |
| Repayment of note  receivable from related party                                       |       | —                                          |       | 157,509                     |       | —                      |       | —                            |       | —           |       | 157,509          |       |
| Investment in  related party                                                           |       | 22,782                                          |       | 179,711                     |       | —                      |       | —                            |       | (202,493         | )          | —           |       |
| Other                                                                                  |       | —                                          |       | (142                        | )          | 407                         |       | (516                              | )          | —           |       | (251             | )          |
| Cash provided by (used for) investment                                            |       | 22,782                                          |       | 333,831                     |       | (52,850                     | )          | (5,629                            | )          | (202,493         | )          | 95,641           |       |
|                                                                                   |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                           |       | —                                          |       | 840,000                     |       | —                      |       | —                            |       | —           |       | 840,000          |       |
| Payments of  long-term debt                                                            |       | —                                          |       | (1,332,100                  | )          | —                      |       | —                            |       | —           |       | (1,332,100       | )          |
| Tax distributions  to members                                                          |       | (19,604                                         | )          | —                      |       | —                      |       | —                            |       | —           |       | (19,604          | )          |
| Tax distributions  to Boise Cascade Holdings, L.L.C.                                   |       | —                                          |       | (19,604                     | )          | —                      |       | —                            |       | 19,604           |       | —           |       |
| Note payable to  related party, net                                                    |       | —                                          |       | 251,312                     |       | —                      |       | —                            |       | —           |       | 251,312          |       |
| Other                                                                                  |       | —                                          |       | (3,181                      | )          | —                      |       | —                            |       | 454              |       | (2,727           | )          |
| Cash provided by (used for) financing                                             |       | (19,604                                         | )          | (263,573                    | )          | —                      |       | —                            |       | 20,058           |       | (263,119         | )          |
|                                                                                   |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                                          |       | (45,831                     | )          | (151,535                    | )          | 14,931                            |       | 182,435          |       | —           |       |
| ** **                                                                             | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Decrease  in cash and cash equivalents**                                        |       | —                                          |       | (33,192                     | )          | (4                          | )          | (951                              | )          | —           |       | (34,147          | )          |
| **Balance  at beginning of the period**                                                |       | —                                          |       | 160,559                     |       | 39                          |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance at end of the period**                                                       | ** ** | **$**                                           | **—** | ** **                  | **$**      | **127,367**                 | ** ** | **$**                             | **35**     | ** **       | **$**      | **1,796**        | ** ** | **$** | **—** | ** ** | **$** | **129,198** | ** ** |

 

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***21.******          LegalProceedings and Contingencies***

*LegalProceedings*

OfficeMax agreed toretain responsibility for essentially all legal proceedings related to ourbusinesses that arose before October 29, 2004. We did, however, assumeresponsibility for a small number of legal proceedings that arose before thisdate. We are also a party to routine legal proceedings that have arisen in ourbusinesses after October 29, 2004. Management does not believe any of thelegal proceedings for which we have responsibility will have a material adverseeffect on our financial position, results of operations, or cash flows.

*Environmental Matters*

We are not currentlyinvolved in any material environmental proceedings. OfficeMax retained responsibilityfor environmental claims and liabilities related to businesses, facilities, andother assets not purchased by us in the Forest Products Acquisition. Inaddition, OfficeMax indemnifies us for hazardous substance releases and otherenvironmental regulatory violations that relate to the businesses we purchasedand that occurred before the Forest Products Acquisition or arose frompre-Forest Products Acquisition operations. OfficeMax, however, may not havesufficient funds to satisfy in full its indemnification obligations, and insome cases, we may not be entitled to indemnification. Management does notbelieve that the potential exposure to the company for environmental matterswould have a material adverse effect on our financial position, results ofoperations, or cash flows even if OfficeMax failed to fulfill itsindemnification responsibilities.

***22.******          SubsequentEvent***

In July 2006, we reached an agreement to sell Minnesota, Dakota &Western Railway (MD&W) in International Falls, Minnesota, to WatcoCompanies, Inc. The sale is subject to the approval of both companies’ boardsof directors. In connection with the sale, we intend to enter into an agreementfor continued rail services with Watco Companies, Inc. 

** **
| ***ITEM 2.*** | ***MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*** |
|---------------|---------------------------------------------------------------------------------------------------|

 

This Management’s Discussion and Analysisof Financial Condition and Results of Operations includes statements regardingour expectations with respect to our performance, liquidity, and capitalresources. Such statements, along with any other nonhistorical statements inthe discussion, are forward-looking. These forward-looking statements are subjectto numerous risks and uncertainties, including, but not limited to the risksand uncertainties described in “Item 1A. Risk Factors” of our 2005 AnnualReport on Form 10-K, as well as those factors listed in other documents wefile with the Securities and Exchange Commission (SEC). There have been nomaterial changes to our risk factors for the six months ended June 30,2006, from those listed in our 2005 Annual Report. We do not assume anobligation to update any forward-looking statement. Our actual results maydiffer materially from those contained in or implied by any of theseforward-looking statements.

***Acquisition of Assets From OfficeMax***

Ouroperations began on October 29, 2004, when we acquired the forest productsand paper assets of OfficeMax (the Forest Products Acquisition). Before theForest Products Acquisition, OfficeMax was known as Boise Cascade Corporation.We acquired the names “Boise” and “Boise Cascade” as part of the ForestProducts Acquisition. We acquired OfficeMax’s forest products and paper assets,other than its timberland operations, for an aggregate purchase price of$2.2 billion, including approximately $140 million of related feesand expenses. Concurrently with the Forest Products Acquisition, BoiseLand & Timber Holdings Corp. (Timber Holdings), an entity that ismajority-owned by our majority owner, Forest Products Holdings, L.L.C.(FPH), acquired OfficeMax’s timberland operations.

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***Effects of the Forest Products Acquisition***

*PurchaseAccounting*

Weaccounted for the Forest Products Acquisition using the purchase method ofaccounting. As a result, the purchase price of $2.2 billion was allocatedto the tangible and intangible assets acquired and liabilities assumed based ontheir respective fair values as of the date of the Forest Products Acquisition.The purchase price was determined based on negotiations between OfficeMax andMadison Dearborn Partners (MDP), our equity sponsor who controls FPH. Theexcess of the purchase price over the fair value of assets acquired and liabilitiesassumed was allocated to goodwill.

*RestructuringActivities*

Inconnection with the Forest Products Acquisition, we evaluated the acquiredfacilities and organizational structure. In accordance with the provisions ofEmerging Issues Task Force (EITF) 95-3, Recognition of Liabilities inConnection With a Purchase Business Combination, exit activities related to theForest Products Acquisition increased goodwill. We had one year from theacquisition date to develop our restructuring plans and adjust goodwill.

At June 30, 2006, wehad approximately $1.8 million of restructuring reserves related toseverance costs recorded in “Accrued liabilities, Compensation and benefits”and $0.1 million recorded in “Accrued liabilities, Other.” Most of theseverance costs related to costs for 350 employees. At June 30, 2006,we had terminated approximately 320 employees. Of the $1.9 millionremaining restructuring reserve, $1.5 million is recorded in our Papersegment, and $0.4 million is in Corporate and Other. Most of the remainingcosts will be paid during 2006. Restructuring reserve liability accountactivity related to these charges is as follows:

 
|                                                  | ** ** | **Severance**  | ** ** | **Other**  | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------|------------|------------|------------|-----------|------------|
| ** **                                       | ** ** | **(millions)** | ** ** |
| ** **                                       | ** ** | ** **     | ** ** |
| 2004  restructuring reserve                      |       | $              | 13.8       |       | $          | 0.5       |       | $ | 14.3 |   |
| Charges against  reserve                         |       | (1.0           | )          | —     |       | (1.0      | )          |
| Restructuring  reserve at December 31, 2004 |       | 12.8           |       | 0.5        |       | 13.3      |       |
|                                             |       |           |       |       |       |      |       |
| Additions to  restructuring reserve              |       | 6.9            |       | 0.2        |       | 7.1       |       |
| Charges against  reserve                         |       | (16.2          | )          | (0.6       | )          | (16.8     | )          |
| Restructuring  reserve at December 31, 2005 |       | 3.5            |       | 0.1        |       | 3.6       |       |
|                                             |       |           |       |       |       |      |       |
| Charges against  reserve                         |       | (1.7           | )          | —     |       | (1.7      | )          |
| Restructuring reserve  at June 30, 2006     | ** ** | **$**          | **1.8**    | ** ** | **$**      | **0.1**   | ** ** | **$** | **1.9** | ** ** |

 

*ForestProducts Acquisition Financing*

Tofinance the Forest Products Acquisition, we incurred $2.0 billion of debt. AtJune 30, 2006, we had $1.6 billion of long-term debt, including a$278.6 million note payable to a related party. These borrowings aresubject to financial covenants and restrictions, including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At June 30, 2006, we were in compliance with our debtcovenants. Our level of debt makes us more vulnerable to a downturn in ouroperations, the forest products and paper industry, or the economy in general.See “Financing Activities” under the “Liquidity and Capital Resources”discussion in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations in this Form 10-Q for more information.

***Purchase of Central Texas Corrugated’s Assets***

On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for an aggregatepurchase price of $43.8 million, including fees and expenses, but beforeworking capital adjustments. In 2006, we paid approximately $42.5 millionof cash for the acquisition, which is net of a $2.0 million holdback thatis payable in five years. At June 30, 2006, we recorded the$1.3 million discounted holdback in “Other long-term liabilities” on ourConsolidated Balance Sheet. CTC manufactures corrugated sheets that it sellsprimarily to regional independents and full-line container

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plants in Texas, Louisiana, Arkansas, and Mexico. CTC is located close toour mill in DeRidder, Louisiana, which produces linerboard used in CTC’smanufacturing processes. Over time we expect the acquisition to increase ourPackaging & Newsprint segment’s containerboard integration from 55% in2005 to 77%.

We accounted for theacquisition using the purchase method of accounting. As a result, the purchaseprice was allocated to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date of theacquisition. For more information, see Note 3, Purchase of Central TexasCorrugated’s Assets, in “Item 1. Consolidated Financial Statements” ofthis Form 10-Q.

***Sale of Minnesota, Dakota & Western Railway***

In July 2006, we reached an agreement tosell Minnesota, Dakota & Western Railway (MD&W) in International Falls,Minnesota, to Watco Companies, Inc. The sale is subject to the approval of bothcompanies’ boards of directors. In connection with the sale, we intend to enterinto an agreement for continued rail services with Watco Companies, Inc. 

***Our Segments***

Weare a diversified North American paper and forest products companyheadquartered in Boise, Idaho. We operate our business using five reportablesegments: Building Materials Distribution, Wood Products, Paper,Packaging & Newsprint, and Corporate and Other. These segmentsrepresent distinct businesses that are managed separately because of differingproducts and services. Each of these businesses requires distinct operating andmarketing strategies. Management reviews the performance of the company basedon these segments.

*BuildingMaterials Distribution.*Our Building Materials Distributionsegment is a leading national inventory-carrying wholesale distributor ofbuilding materials. We distribute a broad line of building materials, includingengineered wood products (EWP), oriented strand board (OSB), plywood, lumber,and general line items such as framing accessories, composite decking, roofing,siding, and insulation. We purchase most of these building materials fromthird-party suppliers and market them primarily to customers that resellbuilding materials to professional builders in the residential, lightcommercial construction, and repair-and-remodeling markets.

*Wood Products.*Our Wood Products segment manufactures and sells EWP, consistingof laminated veneer lumber (LVL), a high-strength engineered lumber often usedin beams; I-joists, a structural support typically used in floors and roofs;and laminated beams. We also produce plywood, particleboard, dimension lumber,and high-quality ponderosa pine lumber, a premium lumber grade sold primarilyto manufacturers of specialty wood windows, moldings, and doors. Our woodproducts are used in new residential and light commercial construction and inresidential repair and remodeling. Most of these products are sold towholesalers, major retailers, and industrial converters or through our ownwholesale building materials distribution outlets. During 2005, approximately36% of our overall sales, including approximately 60% of our EWP sales, weresold to our Building Materials Distribution segment.

*Paper.*OurPaper segment manufactures and sells uncoated free sheet (including cut-sizeoffice papers, commercial printing paper, business forms, envelope papers, anda wide range of value-added papers), market pulp, and containerboard(corrugating medium). Many of our paper products are commodity products, whileothers have specialized features that make these products value-added. Ourvalue-added grades include bright and colored cut-size office papers andcustom-developed specialty papers for such uses as label and release. We sellto end-users both directly from our mills and through distribution centers. In2005, approximately 47% of our uncoated free sheet sales, including about 82%of our office papers sales volume was sold to OfficeMax.

*Packaging &Newsprint*. Our Packaging & Newsprint segmentmanufactures and sells containerboard (linerboard) and newsprint at our mill inDeRidder, Louisiana. We also operate five corrugated container plants in thePacific Northwest and a sheet feeder plant in Waco, Texas, which we acquired inFebruary 2006. Our corrugated containers are used in the packaging of freshfruit and 

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vegetables, processed food, beverages, and other industrial and consumerproducts. Our Waco plant, known as Central Texas Corrugated, or CTC, producescorrugated sheets that are sold to sheet plants in the region, where they areconverted into corrugated containers for a variety of customers. Ourcontainerboard and corrugated products are sold by brokers or our own salespersonnel. We market our newsprint through Abitibi-Consolidated (Abitibi)pursuant to an arrangement whereby Abitibi purchases all of the newsprint weproduce at a price equal to the price at which Abitibi sells newsprint producedat its mills located in the southern United States, less associated expensesand a sales and marketing discount. The newsprint price is verified through athird-party audit.

*Corporateand Other*. Our Corporate and Other segment includes corporatesupport staff services, related assets and liabilities, and foreign exchangegains and losses.

***Factors That Affect Our Operating Results***

Ourresults of operations and financial performance are influenced by a variety offactors, including the following:

·      Generaleconomic conditions including but not limited to housing starts,repair-and-remodel activity, nonresidential construction, white-collaremployment, and durable goods production;

·      Volatilityin raw material and energy prices;

·      Pricingvolatility in our distribution business;

·      Thecommodity nature of our products and our ability to maintain margins;

·      Industrycycles and capacity utilization rates;

·      Actions of suppliers,customers, and competitors; and

·      The other factors describedin “Item 1A. Risk Factors” in our 2005 Annual Report on Form 10-K.

*Commodityand Value-Added Products and Product Margins*

Manyof the products we manufacture and distribute are widely available and can bereadily produced by our competitors. Because commodity products have fewdistinguishing qualities from producer to producer, competition for theseproducts is primarily based on price, which is determined by supply relative todemand. Generally, market conditions beyond our control determine the price forour commodity products, and the price for any one or more of these products mayfall below our cash production costs. Therefore, our profitability with respectto these products depends on managing our cost structure, particularly rawmaterials and energy prices, which also exhibit commodity characteristics.

Notall of our products are commodities. Our EWP and specialty and premium papersare differentiated from competing products based on quality and product design,as well as related customer service. In the case of these value-added products,we are generally able to influence price based on the strength ofdifferentiation and levels of customer service and are generally able to sellthese products at higher margins than our commodity products. In order toreduce our sensitivity to the cyclicality of our industry, a fundamentalcomponent of our strategy is to increase production of EWP and specialty andpremium papers, which we believe are less susceptible to commodity dynamics.Comparing the first six months of 2006 with the same period of 2005, weincreased sales of EWP from our Wood Products segment 5% and increased sales volumesof specialty and premium papers from our Paper segment 18%. The increase in EWPproduction capacity we implemented in 2005 has allowed us to continue to growthis business, and the announced project to convert our Wallula #3 papermachine to enable it to produce pressure-sensitive grades is a key step toproviding us with the capacity to increase production of specialty and premiumpaper grades.

*Demand*

Theoverall level of demand for the products we make and distribute, andconsequently our financial results, is affected by, among other things,construction activity, manufacturing activity, employment, and consumerspending. Accordingly, we believe that our financial results depend in large 

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part on generalmacroeconomic conditions in North America, as well as on regional economicconditions in the geographic markets in which we operate. While no singleproduct line drives our overall financial performance, individual product linesare influenced by conditions in their respective industries. For example:

·      Demandfor building materials, including wood products, depends on new residential andlight commercial construction and residential repair-and-remodeling activity,which are impacted by demographic trends, interest rate levels, weather, andgeneral economic conditions. In recent years, demand for wood products has beenhigh due to strong new housing starts, the increasing size of new homes, a robustrepair-and-remodeling market, and a recovering light commercial constructionmarket. In recent months, there has been a significant increase in the numberof homes for sale relative to the monthly sales activity. Many forecasters areanticipating that this will lead to reduced demand for additional new homesand, as a result, a reduction in demand for many of the products manufacturedby our Wood Products segment or distributed by our Building MaterialsDistribution segment. For example, in second quarter 2006, relative to secondquarter 2005, our EWP sales volumes were down 3% for LVL and 1% for I-joists,and prices for plywood were down 7%. We believe that these reductions arerelated, at least in part, to slowing demand in the distribution channel, asbuilders and distributors reduce their exposure in anticipation of slowinghousing markets.

·      Historically,demand for uncoated free sheet correlated positively with general economicactivity. More recently, demand for some paper grades has decreased as the useof electronic transmission and document storage alternatives has become morewidespread.

·      A largeshare of the demand for corrugated containers, and therefore containerboard, isdriven by manufacturing, specifically that of nondurable goods. In addition,inventory stocking or liquidation of these goods has an impact, as do currencyexchange rates that affect the cost-competitiveness of foreign manufacturers.Demand continues to be negatively impacted by the offshoring of durable andnondurable goods manufacturing, as those products are then packaged abroadrather than in North America. U.S. demand has also been hurt by the largeincrease of containerboard capacity, especially in China and Europe, over thepast three to four years.

·      Demandfor newsprint depends upon prevailing levels of newspaper advertising andcirculation. Demand for newsprint in North America declined approximately 10%between 2001 and 2005, according to Resource Information Systems, Inc. (RISI),due in part to the growth of online media as well as substitution towarduncoated groundwood grades.

*Supply*

Industrysupply of commodity wood products and paper is affected by the number ofoperational or idled facilities, the building of new capacity, and the shuttingdown of existing capacity. Capacity also tends to increase gradually over timewithout significant capital expenditures, as manufacturers improve productionefficiencies. Generally, more capacity is added or employed when supply istight and margins are relatively high, and capacity is idled or eliminated whensupply significantly exceeds demand and margins are poor. Margins tend todecrease with lower capacity utilization because of downward price pressure andbecause fixed costs attributable to a product are spread across lower volumes.

Whilenew capacity additions are constrained by the high capital investment and longlead times required to plan, obtain regulatory approvals for, and build a newmill, a favorable pricing environment may prompt manufacturers to initiate expansionprojects. Currently, a number of producers of OSB, a substitute for plywood(which we produce), are starting up or building new capacity. This increase insupply is likely to have a negative impact on the price of all structural panelproducts, including plywood. In addition, a number of OSB producers haveannounced the intention to produce a strand lumber product which would beintended as a substitute for EWP in some applications.

In2005, faced with declining demand, rising costs (especially energy costs),ongoing dissatisfaction with financial performance, and in some cases, adeclining U.S. dollar, several North American paper producers announced millclosures that decreased or will decrease supply. From 2001 to 2005, NorthAmerican uncoated free sheet, containerboard, and newsprint capacities declined5%, 2%, and 15%, respectively, according to RISI.

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Industrysupply of commodity wood products and papers is also influenced by the level ofimports and overseas production capacity, which has grown in recent years.While the weakness of the U.S. dollar has mitigated the level of imports inrecent years, a strengthening in the U.S. dollar would potentially lead toincreased imports of commodity wood products and papers from overseas, therebyoffsetting domestic capacity rationalization and putting downward pressure onprices.

*RecentTrends*

Commoditywood product prices have continued to trend lower during the second quarter of2006. This has led to lower profitability for our plywood, which is manufacturedby our Wood Products segment. This has also negatively affected our BuildingMaterials Distribution segment.

Uncoatedfree sheet prices continued to rise in second quarter 2006, over first quarterprimarily due to strong demand coupled with the impact of recent capacitycurtailments across the industry. We continue to experience strong customerdemand in this business.

On thepackaging side, we continue to move linerboard price increases through themarkets as customer contracts reopen. In newsprint, we continue to experiencestrong pricing markets due to improved supply-demand balances brought about bypast capacity curtailments. In addition, we are meeting customer demand forlighter-weight newsprint, which results in higher price realizations.

*OperatingCosts*

Ourmajor costs of production are labor, wood fiber, energy, and chemicals. Therelative importance of these costs varies by segment. Given the significance ofraw material and energy costs to our total operating expenses and our limitedability to control these costs, compared with other operating costs, volatilityin these costs can materially affect our margins. In addition, the timing anddegree of price cycles of raw materials and energy differ with respect to eachtype of raw material and energy we use.

*Labor.*  Ourlabor costs tend to increase steadily due to inflation in healthcare as well aswage costs. Labor costs are not as volatile as our energy and wood fiber costs.

*Woodfiber.*  Our primary raw material is wood fiber,which represents the following percentages of materials, labor, and otheroperating expenses, including fiber costs, for our Wood Products, Paper, andPackaging & Newsprint segments:

 
|                            | ** ** | **Six Months  Ended June 30**                                     | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                 | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Wood Products              |       | 33                                                                               | %          | 33 | % |
| Paper                      |       | 16                                                                               | %          | 17 | % |
| Packaging &  Newsprint |       | 13                                                                               | %          | 12 | % |

 

Our primary sources oflogs and wood fiber are timber and byproducts of timber, such as wood chips,wood shavings, and sawdust. In February 2005, Timber Holdings sold all of itstimberlands to Forest Capital Partners, L.L.C., an unrelated party (TimberlandsSale). After the Timberlands Sale, we have acquired substantially all of ourfiber from outside sources, including pursuant to supply agreements with thebuyer of the timberland operations. In our Wood Products segment, we convertlogs into lumber and veneer, and in turn, we convert veneer into EWP andplywood. Logs are a lower percentage of the total cost of materials, labor, andother operating expenses in producing engineered wood than commodity productssuch as lumber and plywood. While log costs are still a significant componentof costs, as we continue to produce more engineered wood relative to commodityproducts, direct log costs decline as a percent of the total cost of materials,labor, and other operating expenses. We also convert residual wood fiber, fromour operations as well as from third parties, into particleboard. In our Paperand Packaging & Newsprint segments, we convert logs and wood chipsinto pulp, which we sell or use at our paper mills to produce paper. On anaggregate basis, we are able to produce all of our pulp needs, generallypurchasing and selling similar amounts on the open market.

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Logs and wood fiber arecommodities, and prices for logs and wood fiber have historically been cyclicaldue to changing levels of demand. As the amount of logs and wood fiber wepurchase pursuant to existing supply agreements declines, our wood fiber costsmay increase further, as we increase our reliance on open-market purchases. Inaddition, timber supply may be limited by public policy or governmentregulation as well as fire, insect infestation, disease, ice storms,windstorms, hurricanes, flooding, other weather conditions, and other naturaland man-made causes. Residual chip supply may be limited due to reduction inprimary manufacturing at sawmills and plywood plants. In recent years, declinesin timber supply, driven primarily by changes in public policy and governmentregulation, have been severe enough to cause the closure of numerous facilitiesin some of the regions in which we operate. During second quarter 2006, wetemporarily curtailed operations at our St. Helens pulp and paper mill dueto the inability to source wood fiber on a cost-effective basis. This resultedin approximately 4,000 tons of lost pulp production at St. Helens. Anysustained undersupply and resulting increase in wood fiber prices coulddecrease our production volumes and/or increase our operating costs. Prices forour products might not reflect increases or decreases in log and wood fiberprices, and as a result, our operating margins could fluctuate. Our sensitivityto these fluctuations increased after the Timberlands Sale. Market prices for avariety of fiber sources, including logs and chips for our Northwestoperations, logs for our Minnesota operations, and logs for our Louisianaoperations, were higher in the first half of 2006 than in the first half of2005. While log costs have stabilized in recent months, they are still high byhistorical standards. In addition, residual chip costs continue to be high, andavailability in the Pacific Northwest continues to be low.

*Otherraw materials and energy purchasing and pricing.*  Wepurchase other raw materials and energy used to manufacture our products inboth the open market and through long-term contracts. These contracts aregenerally with regional suppliers, who agree to supply all of our needs for acertain raw material or energy at one of our facilities. These contracts normallycontain minimum purchase requirements and are for terms of various lengths.They also contain price adjustment mechanisms that take into account changes inmarket prices. Therefore, although our long-term contracts provide us withsupplies of raw materials and energy that are more stable than open-marketpurchases, in many cases, they may not alleviate fluctuations in market prices.

Our costs will rise if prices for our rawmaterials or energy rise, and our margins are impacted by how much and howquickly we can pass such price increases through to our customers.Specifically, some of our key chemicals, including pulping and bleachingchemicals consumed in our Paper and Packaging & Newsprint mills andglues and resins consumed in our wood products operations, are heavilyinfluenced by energy costs. A number of our major suppliers have requestedprice increases tied to their increased energy costs. Our ability to passthrough price increases depends on several factors, which vary based on productline.

*Energy.*  Energyprices, particularly for electricity, natural gas, and fuel oil, have beenvolatile in recent years and currently exceed historical averages. When energyprices rise, as they did in the third and fourth quarters of 2005, our fuelcosts increase, leading to higher costs and lower margins. Energy costsrepresented the following percentages of materials, labor, and other operatingexpenses, including fiber costs, for our Wood Products, Paper, andPackaging & Newsprint segments:

 
|                            | ** ** | **Six Months  Ended June 30**                                     | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                 | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Wood Products              |       | 4                                                                                | %          | 3 | % |
| Paper                      |       | 15                                                                               | %          | 15 | % |
| Packaging &  Newsprint |       | 16                                                                               | %          | 12 | % |

 

In thefirst half of 2006, we reduced consumption of purchased fossil fuel in ourpaper mills by approximately 12% per unit of production as compared to thefirst half of 2005. This reduction was achieved with a variety of consumptionreduction and fuel-switching activities, including the use of more purchasedbiomass fuel to replace purchased fossil fuels. We have limited flexibility toswitch between fuel sources in the short term; accordingly, we have significantexposure to natural gas and fuel oil price increases. To reduce our exposure toprice increases, we have entered into a variety of contracts to limit oursusceptibility to increases in energy costs. As of June 30, 2006, we havemitigated our exposure to rising energy prices by hedging approximately 90% to95% of our expected natural gas usage for the 

40

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period of July2006 through February 2007. At June 30, 2006, the fair market value of ourenergy swaps was a negative $9.8 million, which we recorded in “Accruedliabilities, Other” on our Consolidated Balance Sheet.

Whileenergy prices in the first half of 2006 were generally lower than levels infourth quarter 2005, pricing remains high by historical standards. In addition,increased demand (which could be driven by weather), further supplyconstraints, or other factors could drive prices higher. In the event thecurrent fuel prices persist and we are unable to pass these increases on to ourcustomers in the form of higher prices, we will likely experience a negativefinancial impact relative to our 2005 performance. In addition, the rates weare charged by our electrical suppliers are affected by the increase in naturalgas prices, although the degree of impact depends on each utility’s mix ofenergy resources and regulatory situation.

*Chemicals.*  Importantchemicals we use in the production of our products include precipitated calciumcarbonate, sodium chlorate, sodium hydroxide, dyes, resins, and adhesives.Purchases of chemicals represented the following percentages of materials,labor, and other operating expenses, including fiber costs, for our WoodProducts, Paper, and Packaging & Newsprint segments:

 
|                            | ** ** | **Six Months  Ended June 30**                                     | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                 | ** ** | ** **                                                                       | ** ** | ** ** | ** ** |
| Wood Products              |       | 6                                                                                | %          | 6 | % |
| Paper                      |       | 13                                                                               | %          | 13 | % |
| Packaging &  Newsprint |       | 5                                                                                | %          | 3 | % |

 

We have experienced higher chemical costsduring the first half of 2006, compared with the same period in 2005, due inpart to increases in energy and transportation costs sustained by our chemicalsuppliers that they have partly passed through to us.

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*** ***

***Results ofOperations***

Thefollowing tables set forth the results of operations in dollars and as apercentage of sales for the three and six months ended June 30, 2006 and2005:

| ** **                                      | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(millions)**                                 | ** ** |
| **Sales**                                       | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                              | 1,415.8    |                                         | $          | 1,352.5 |   | $ | 2,753.3 |   | $ | 2,634.4 |   |
| Related parties                                 |       | 144.0                                          |       | 142.1                                        |       | 276.8 |   | 292.5 |   |
|                                            |       | 1,559.8                                        |       | 1,494.6                                      |       | 3,030.1 |   | 2,926.9 |   |
|                                            |       |                                           |       |                                         |       |   |   |   |   |
| **Costs and expenses**                          | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials, labor, and  other operating expenses |       | 1,360.3                                        |       | 1,299.4                                      |       | 2,673.0 |   | 2,520.1 |   |
| Fiber costs from  related parties               |       | —                                         |       | —                                       |       | — |   | 17.6 |   |
| Depreciation,  amortization, and depletion      |       | 38.5                                           |       | 31.7                                         |       | 75.1 |   | 62.3 |   |
| Selling and  distribution expenses              |       | 71.6                                           |       | 64.4                                         |       | 142.7 |   | 126.8 |   |
| General and  administrative expenses            |       | 26.1                                           |       | 18.0                                         |       | 47.7 |   | 37.2 |   |
| Other (income) expense,  net                    |       | 3.2                                            |       | 3.7                                          |       | 1.1 |   | 3.8 |   |
| * *                                        |       | 1,499.7                                        |       | 1,417.2                                      |       | 2,939.6 |   | 2,767.8 |   |
| * *                                        | * *   | * *                                       | * *   | * *                                     | * *   | * * | * * | * * | * * |
| **Income from operations**                      | ** ** | **$**                                          | **60.1**   | ** **                                   | **$**      | **77.4** | ** ** | **$** | **90.5** | ** ** | **$** | **159.1** | ** ** |

 

| ** **                                                                           | ** ** | **(percentage of sales)** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------|------------|
| **Sales**                                                                            | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                                                                |       | 90.8                      | %          | 90.5 | % | 90.9 | % | 90.0 | % |
| Related parties                                                                      |       | 9.2                       |       | 9.5 |   | 9.1 |   | 10.0 |   |
|                                                                                 |       | 100.0                     | %          | 100.0 | % | 100.0 | % | 100.0 | % |
|                                                                                 |       |                      |       |   |   |   |   |   |   |
| **Costs and expenses**                                                               | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials, labor, and  other operating expenses and fiber costs from related parties |       | 87.2                      | %          | 86.9 | % | 88.2 | % | 86.7 | % |
| Depreciation, amortization,  and depletion                                           |       | 2.4                       |       | 2.1 |   | 2.5 |   | 2.1 |   |
| Selling and  distribution expenses                                                   |       | 4.6                       |       | 4.3 |   | 4.7 |   | 4.3 |   |
| General and  administrative expenses                                                 |       | 1.7                       |       | 1.2 |   | 1.6 |   | 1.3 |   |
| Other (income) expense,  net                                                         |       | 0.2                       |       | 0.3 |   | — |   | 0.2 |   |
|                                                                                 |       | 96.1                      | %          | 94.8 | % | 97.0 | % | 94.6 | % |
|                                                                                 |       |                      |       |   |   |   |   |   |   |
| **Income from operations**                                                           | ** ** | **3.9**                   | **%**      | **5.2** | **%** | **3.0** | **%** | **5.4** | **%** |

 

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***Sales Volumes and Prices***

Setforth below are our segment sales volumes and average net selling prices forour principal products for the three and six months ended June 30, 2006and 2005.
|                                             | ** ** | **Three Months  Ended June 30** | ** ** | **Six Months  Ended June 30** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(millions)**                                 | ** ** |
| ** **                                  |       |                                           |       |                                         |       |   |   |   |   |
| **Building  Materials Distribution**        | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales dollars                               |       | $                                              | 832.7      |                                         | $          | 796.0 |   | $ | 1,594.5 |   | $ | 1,492.2 |   |
| ** **                                  | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales  Volumes**                          | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                          | ** ** | ** **                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (cubic feet) |       | 3.2                                            |       | 3.3                                          |       | 6.7 |   | 6.4 |   |
| I-joists  (equivalent lineal feet)          |       | 63                                             |       | 64                                           |       | 123 |   | 121 |   |
| Plywood (sq.  ft.) (3/8” basis)        |       | 332                                            |       | 326                                          |       | 647 |   | 653 |   |
| Lumber (board  feet)                        |       | 77                                             |       | 86                                           |       | 150 |   | 173 |   |
| Particleboard  (sq. ft.) (3/4” basis)  |       | 44                                             |       | 44                                           |       | 81 |   | 83 |   |
|                                             |            |                                                |            |                                              |            |  |  |  |  |  |  |  |  |

 
|                                          | ** ** | **(thousands of short tons,  except corrugated containers)** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Paper**                                | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Uncoated free  sheet                     |       | 386                                                          |       | 374 |   | 779 |   | 750 |   |
| Containerboard  (medium)                 |       | 34                                                           |       | 33 |   | 67 |   | 64 |   |
| Market pulp                              |       | 32                                                           |       | 27 |   | 67 |   | 57 |   |
| ** **                               | ** ** | **452**                                                      | ** ** | **434** | ** ** | **913** | ** ** | **871** | ** ** |
| ** **                               | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**      | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Containerboard  (linerboard) (a)    |       | 62                                                           |       | 114 |   | 138 |   | 228 |   |
| Newsprint                                |       | 97                                                           |       | 105 |   | 198 |   | 202 |   |
| Corrugated  containers and sheets (mmsf) |       | 1,755                                                        |       | 1,147 |   | 3,259 |   | 2,289 |   |

 
|                                                  | ** ** | **(dollars per unit)** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| **Average  Net Selling Prices**                  | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                               | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet)  |       | $                      | 1,916      |   | $ | 2,009 |   | $ | 1,909 |   | $ | 1,936 |   |
| I-joists  (1,000 equivalent lineal feet)         |       | 1,107                  |       | 1,112 |   | 1,102 |   | 1,084 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)       |       | 264                    |       | 285 |   | 271 |   | 288 |   |
| Lumber (1,000  board feet)                       |       | 498                    |       | 493 |   | 504 |   | 506 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 322                    |       | 267 |   | 299 |   | 268 |   |
|                                                  |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 
|                                           | ** ** | **(dollars per short ton,  except corrugated containers)** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------|------------|
| **Paper**                                 | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Uncoated free  sheet                      |       | $                                                          | 790        |   | $ | 759 |   | $ | 768 |   | $ | 755 |   |
| Containerboard  (medium)                  |       | 388                                                        |       | 342 |   | 365 |   | 352 |   |
| Market pulp                               |       | 420                                                        |       | 408 |   | 402 |   | 414 |   |
| ** **                                | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**       | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Containerboard  (linerboard) (a)     |       | $                                                          | 351        |   | $ | 370 |   | $ | 333 |   | $ | 377 |   |
| Newsprint                                 |       | 546                                                        |       | 483 |   | 537 |   | 470 |   |
| Corrugated  containers and sheets ($/msf) |       | 49                                                         |       | 51 |   | 48 |   | 50 |   |

 

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(a)                                  Includesthe impact of adopting EITF 04-13, Accounting for Purchases and Sales ofInventory With the Same Counterparty, effective January 1, 2006, whichrequired us to report our inventory buy/sell transactions on a net basis. Inaccordance with the provisions of EITF 04-13, prior-period financialinformation has not been reclassified to conform with the current period’spresentation. See Note 15, Recently Adopted Accounting Standards, for moreinformation.

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***Operating Results***

***Sales***

For the three monthsended June 30, 2006, total sales increased $65.2 million, or 4.4%,compared with the same period a year ago. For the six months endedJune 30, 2006, total sales increased $103.2 million, or 3.5%. In bothperiods, sales in Building Materials Distribution, Paper, and Packaging &Newsprint increased while sales in Wood Products declined, compared with thesame periods a year ago.

*Building MaterialsDistribution. *Salesincreased $36.7 million to $832.7 million for the three months endedJune 30, 2006, from $796.0 million in the same period a year ago.During the six months ended June 30, 2006, sales increased$102.3 million, or 7%, to $1,594.5 million from $1,492.2 millionin the prior year. Relative to the three and six months ended June 30, 2005,the increase in sales was driven by increased sales volume, which was partlyoffset by lower commodity sales prices. Sales of EWP and general line itemsimproved from 50% of total sales in second quarter 2005 to 55% in secondquarter 2006. Relative to six months ended June 30, 2005, this product mixincreased to 53% of total sales, compared with 47% a year ago. EWP and generalline items tend to have higher and more stable margins over time.

*Wood Products. *Sales decreased$20.3 million, or 6%, to $314.7 million for the three months endedJune 30, 2006, from $335.0 million for the three months endedJune 30, 2005. During the six months ended June 30, 2006, salesdecreased $30.1 million, or 5%, to $627.3 million from$657.4 million in the same period a year ago. During both periods, thedecrease in sales was primarily the result of lower sales prices and volumesacross most of our product lines. Competitors started up or continued to rampup OSB capacity, which impacted structural panel supplies and drove down pricesfor structural panels, including the plywood we manufacture. While most of ourproduct sales prices decreased during the three and six months endedJune 30, 2006, particleboard prices rose 21% and 12%, respectively,compared with the same periods a year ago. This increase was attributable tostrong demand coupled with reduced capacity as a result of competitor millshutdowns. While year-to-date sales volumes of EWP were higher in 2006,relative to the same period in 2005, second-quarter sales volumes of laminatedveneer lumber (LVL) and I-joists were 3% and 1% lower than volumes in the sameperiod in 2005, reflecting decreased demand in the distribution channel.

*Paper. *Sales increased$29.0** **million, or 8%, to$381.7 million for the three months ended June 30, 2006, from$352.7 million for the three months ended June 30, 2005. During thesix months ended June 30, 2006, sales increased $41.5 million, or 6%,to $752.1 million from $710.6 million in the same period a year ago.In both periods, the increase was driven by higher specialty and premium papersales volumes, offset in part by lower commodity paper sales volume. Relativeto the three and six months ended June 30, 2005, specialty and premium papersales volumes increased 15% and 18%, while commodity uncoated free sheet salesvolumes decreased 1% and 2%, as we continued to grow sales of specialty andpremium papers. During the three and six months ended June 30, 2006,prices for commodity uncoated free sheet increased 5% and 2% due to favorablesupply-demand dynamics that drove commodity prices upward. During these sameperiods, specialty and premium prices were generally flat.

*Packaging &Newsprint. *Forthe three months ended June 30, 2006, sales increased $23.0 million,or 14%, to $190.8 million from $167.8 million in the prior year.During the six months ended June 30, 2006, sales increased$8.1 million, or 2%, to $369.6 million from $361.5 million forthe same period a year ago. During both periods, the increase in sales was theresult of the addition of CTC and higher newsprint prices. Relative to thethree and six months ended June 30, 2005, the increase in newsprint priceswas driven by reduced competitor supply. In addition, we improved our productmix of higher-value, lighter-weight grades, which tend to generate higher pricerealizations. Relative to the three and six months ended June 30, 2005,our corrugated containers and sheet sales rose 53% and 42%, reflecting theimpact of the CTC plant we acquired early in the year. Excluding the impact ofEITF 04-03, linerboard sales volumes decreased 3%, compared withboth the three and six months ended June 30, 2005. The decrease is aresult of our absorbing more of our linerboard production into our ownconverting facilities. As we transfer more of our DeRidder linerboard to CTC,we expect to increase the percentage of linerboard converted at our plants from55% in 2005 to 77%.

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***Costs and Expenses***

Materials, labor, and other operatingexpenses, including fiber costs, increased $60.9 million, or 4.7%, to$1.4 billion for the three months ended June 30, 2006, compared with$1.3 billion during the same period in the prior year. Relative to the sixmonths ended June 30, 2005, these expenses increased $135.3 million,or 5.3%, to $2.7 billion during the six months ended June 30, 2006,compared with $2.5 billion in the prior year. During the three and sixmonths ended June 30, 2006, increased volumes in our Building MaterialsDistribution segment, increased specialty and premium sales in our Papersegment, and increased container volumes in our Packaging & Newsprintsegment drove these costs up. Relative to the three and six months endedJune 30, 2005, as a percent of sales, these costs increased 0.3% and 1.5%.In both periods, the increase as a percent of sales was driven by higher woodfiber and chemical costs in our manufacturing operations, coupled with lowerprices in a number of product areas, as described above. During the three andsix months ended June 30, 2006, our Paper and Packaging & Newsprintsegments also incurred higher energy costs. Relative to the three and sixmonths ended June 30, 2005, as a percentage of sales, materials, labor,and other operating expenses in the Building Materials Distribution segmentwere relatively flat.

Depreciation,amortization, and depletion expenses increased $6.8 million, or 21.3%, to$38.5 million, for the three months ended June 30, 2006, comparedwith $31.7 million for the three months ended June 30, 2005. For thesix months ended June 30, 2006, depreciation, amortization, and depletionexpenses increased $12.8 million, or 20.5%, to $75.1 million,compared with $62.3 million a year ago. As a percentage of sales, thesecosts increased to 2.4% and 2.5%, respectively, for the three and six monthsended June 30, 2006, from 2.1% in the same periods in the prior year.These increases were generally driven by higher levels of capital investment.

Selling and distributionexpenses increased $7.2 million, or 11.1%, to $71.6 million for thethree months ended June 30, 2006, compared with $64.4 million for thesame period in the prior year. For the six months ended June 30, 2006,these costs increased $15.9 million, or 12.6%, to $142.7 million,compared with the same period a year ago. During both periods, the increaseprimarily relates to increased costs in our Building Materials Distributionsegment, where we added personnel to generate additional sales volumes. We alsoincurred higher outside carrier distribution costs. Relative to the three andsix months ended June 30, 2005, we recorded higher compensation andbenefit costs. In addition, during the six months ended June 30, 2006, ourPaper segment recorded a $2.3 million write-off of bad debt related to thebankruptcy of a customer.

General andadministrative expenses increased $8.1 million, or 45.0%, to$26.1 million for the three months ended June 30, 2006, compared with$18.0 million for the same period in the prior year. General andadministrative expenses as a percentage of sales increased to 1.7% for thethree months ended June 30, 2006, from 1.2% for the three months endedJune 30, 2005. For the six months ended June 30, 2006, general andadministrative expenses increased $10.5 million, or 27.9%, to$47.7 million, compared with $37.2 million a year ago. As apercentage of sales these costs increased to 1.6% from 1.3% in the prior year.Relative to the three and six months ended June 30, 2005, general andadministrative expenses increased primarily due to higher outside professionalfees, higher compensation and benefit costs, and increased trainingexpenditures.

Other (income) expense,net, decreased to $3.2 million of expense for the three months endedJune 30, 2006, compared with $3.7 million of expense for the same periodin the prior year. Other (income) expense, net, for the six months endedJune 30, 2006 and 2005, was $1.1 million and $3.8 million ofexpense, respectively. Other (income) expense, net for the six months endedJune 30, 2006, included $3.7 million of income for changes in ourretiree healthcare programs, partially offset by $1.7 million of expensefor the loss on the sale of our headquarters building. The three and six monthsended June 30, 2005, included $3.6 million of expense for thewrite-off of costs incurred in connection with the canceled initial publicoffering.

***Income (Loss) From Operations***

For the three monthsended June 30, 2006, income from operations decreased $17.3 million,or 22%, to $60.1 million, compared with $77.4 million in the sameperiod a year ago. Income from operations decreased $68.6 million, or 43%,to $90.5 million, for the six months ended June 30, 2006, comparedwith $159.1 million during the same period in the prior year. Relative tothe three months ended June 30, 2005, segment income increased in our BuildingMaterials Distribution and Packaging &

45

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Newsprint segments and decreased in our Wood Productsand Paper segments. During the six months ended June 30, 2006, segment incomedecreased in all of our segments except Packaging & Newsprint, whichincreased 11%, compared with the same period a year ago.

* *

*Building Materials Distribution.*  Segment income increased $4.3 million, or 20%, to $25.3 millionfor the three months ended June 30, 2006, from $21.0 million for thethree months ended June 30, 2005. During the six months endedJune 30, 2006, segment income decreased $1.5 million, or 3%, to$43.9 million from $45.4 million in the same period a year ago.During both the three and six months ended June 30, 2006, higher sales volumesand improved product mix more than offset lower commodity prices and higheroperating costs.

*Wood Products. *Segment incomedecreased$14.1 million, or 45%, to $17.2 million for the three months ended June 30, 2006, compared with $31.3 million for the threemonths ended June 30, 2005.Relative to the three months ended June 30, 2005, segment income declineddue to lower plywood and EWP prices, coupled with higher delivered-logcosts. Average EWP prices decreased due to changes in product mix. During thesix months ended June 30, 2006, segment income decreased$28.4 million, or 44%, to $36.0 million, compared with$64.4 million in the same period a year ago. Segment income decreasedprimarily due to lower plywood prices and higher delivered-log costs.

*Paper.*  Segment income decreased $10.6 million,or 39%, to $16.5 million for the three months ended June 30, 2006,compared with $27.1 million for the three months ended June 30, 2005.During the six months ended June 30, 2006, segment income decreased $42.5 million,or 75%, to $13.9 million, compared with $56.4 million in the sameperiod a year ago. During both comparative periods, higher energy, chemical,and fiber costs more than offset the increase in uncoated free sheet prices andthe increase in specialty and premium papers sales volumes.

*Packaging &Newsprint. *Segment income increased $3.7 million, or 37%, to$13.8 million for the three months ended June 30, 2006, compared with $10.1 million forthe three months ended June 30, 2005. Relative to the three months ended June 30, 2005, theincrease in segment income resulted from higher newsprint prices coupled withthe positive financial impact of CTC. These improvements were offset, in part,by higher energy, chemical, and fiber costs. During the six months endedJune 30, 2006, segment income increased $1.6 million, or 11%, to$16.2 million, compared with $14.6 million in the same period a yearago. The improvement during this period was primarily due to the positivefinancial impact of CTC and improved newsprint sales prices, which werepartially offset by higher energy and chemical costs.

*Other*

*Changein fair value of interest rate swaps.*  Forthe three and six months ended June 30, 2005, we recorded$5.3 million of expense and $9.9 million of income in “Change in fairvalue of interest swaps” in our Consolidated Statements of Income (Loss) forthe change in the fair value of interest rate swaps related to our amended andrestated credit facilities. In connection with the amendment and restatementand the anticipated repayment of the Tranche B term loan, the interestrate swaps associated with this debt were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or$15.2 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statement of Income. On April 28, 2005, weredesignated the $550 million of interest rate swaps as hedges of the cashflow from the London Interbank Offered Rate (LIBOR)-based variable interestpayments on amounts borrowed under our senior secured credit facilities (theFacilities) and recognized $5.3 million of noncash expense in “Change infair value of interest rate swaps” in our Consolidated Statement of Loss duringthe three months ended June 30, 2005. The net $9.9 million of valuethat was recorded in “Other assets” on our Consolidated Balance Sheet willresult in higher interest expense over the remaining life of the interest rateswaps.

*Interestexpense.*  For the threeand six months ended June 30, 2006, interest expense was$28.6 million and $58.8 million, compared with $74.3 millionand $106.4 million in the same periods a year ago. The expenserecorded for the three and six months ended June 30, 2005, includes a$43.0 million charge for the write-off of deferred financing costsresulting from the repayment of the Tranche B term loan. Excludingthe impact of the deferred financing costs, the decrease in interest expense isprimarily attributed to a $117.1 million decrease in long-term debt. AtJune 30, 2006, our long-term debt was $1.6 billion, compared with$1.7 billion a year ago. A related-party note of $278.6 million

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payable to a subsidiary of Timber Holdingswas included in long-term debt at June 30, 2006. The related-party notewas $261.3 million at June 30, 2005.

*Income tax provision.*  For the three and six months endedJune 30, 2006, income tax expense was $0.3 million and $1.5 million,compared with $12.3 million and $13.0 million for the same periods ayear ago. On May 9, 2005, we converted to a C corporation from a limitedliability company. On December 20, 2005, acting pursuant to a RescissionAgreement among our shareholders, we rescinded our conversion toC corporation status by filing a conversion certificate with the DelawareSecretary of State that restored our status as a limited liability company. During the three and six monthsended June 30, 2006, our effective tax rates for our seperate subsidiariesthat are taxed as a corporation were 40.9% and 41.8%. Income tax expensefor the three and six months ended June 30, 2005 represent taxes incurredfrom the date of our incorporation on May 9, 2005, through the end of theperiod. For the period of May 9 through June 30, 2005, we recordedincome tax expense at an estimated annual effective tax provision rate of 41%,which is reflected in the Consolidated Statements of Income (Loss) for thethree and six months ended June 30, 2005.

***Operational Outlook***

Despite flat to decreased commodity pricing, we had arelatively strong second quarter in our Building Materials Distributionsegment. Many economists are anticipating a continued slowdown in constructionactivity due to increases in interest rates and increases in new homeinventories relative to the rate of new home sales. In addition, a number ofcompetitors have added or are adding OSB capacity, which has historicallydriven structural panel prices, including plywood prices, down. These trendsnegatively affected our Wood Products segment in the second quarter and, ifthey continue, would likely result in further negative impacts on the resultsin both our Wood Products and Building Materials Distribution segments.

During the firstsix months of 2006, we announced and implemented price increases for many ofour paper grades. Our order files remain strong, and we have placed a number ofour customers on allocation to help balance shrinking inventories with thedemand for our products. A number of large paper manufacturers have recentlyannounced capacity closures, which we anticipate will impact the supply/demandbalance in the industry and influence pricing in this segment.

Our acquisition ofCTC has had a positive influence on the results in our Packaging &Newsprint segment. We expect further operational benefits as we complete theintegration of this facility. We anticipate the addition of CTC will result inan increase in the level of integration between our containerboardmanufacturing operations and our converting facilities from 55% in 2005, to asmuch as 77%, over time.

While energy costshave declined since the high levels of fourth quarter 2005, they are stillabove historical levels, and there is a risk that energy prices may increasefurther. As of June 30, 2006, we have mitigated our exposure to rising energyprices by hedging approximately 90% to 95% of our expected natural gas usagefor the period July 2006 through February 2007.

Residual fiber forour paper mills in the Pacific Northwest has become more difficult to source ormay be priced higher in the future as primary wood products producers in theregion experience downtime because of difficult wood markets.

***Liquidity and CapitalResources***

Webelieve that funds generated from operations and available borrowing capacitywill be adequate to fund debt service requirements, capital expenditures, andworking capital requirements for the next 12 months. Our ability tocontinue to fund these items may be affected by general economic, financial,competitive, legislative, and regulatory factors.

We believe thatour current financial position and financing plans will provide flexibility infinancing activities and permit us to respond to changing conditions in creditmarkets. We cannot assure, however, that our business will generate sufficientcash flow from operations or that future borrowings will be available for useunder our revolving credit facility in an amount sufficient to enable us to payour indebtedness or to fund our other liquidity needs.

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***OperatingActivities***

We operate in acyclical industry, and our operating cash flows vary accordingly. Our principaloperating cash expenditures are for compensation, fiber, energy, and interest.For the six months ended June 30, 2006 and 2005, our operating activitiesprovided $83.1 million and $133.3 million of cash. In 2006, items included innet income provided $132.1 million of cash. Unfavorable changes in workingcapital and other items used $49.0 million of cash from operations. Workingcapital is subject to cyclical operating needs, the timing of the collection ofreceivables, the payment of payables and expenses, and to a lesser extent,seasonal fluctuations in our operations. The 2006 increase in working capitalwas primarily attributable to higher receivables in Building MaterialsDistribution and, to a lesser extent, increased company inventory levels. Theseincreases were partially offset by higher overall accounts payable and accruedliabilities. Higher receivables in Building Materials Distribution reflectedincreased sales of approximately 36%, comparing June sales with December sales.For the six months ended June 30, 2005, items included in net income provided$185.7 million of cash, and increases in working capital and other items used$52.4 million of cash from operations.

***Investment Activities***

Cash investingactivities used$84.4 million for the six months ended June 30, 2006, and provided$95.6 million during the same period in 2005. In 2006, investingactivities included approximately $42.5 million of cash paid for thepurchase of CTC’s assets in Waco, Texas, offset by $27.2 million ofproceeds from the sale of our headquarters building in Boise, Idaho. Inconnection with the sale, we leased back 65% of the building over a staggeredlease term of ten to 12 years. Purchases of property, plant, and equipmentalso used $71.3 million during the first six months of 2006. Capitalexpenditures for property and equipment consisted primarily of expansion,business improvement and quality/efficiency projects, replacement projects, andongoing environmental compliance.

For the six months endedJune 30, 2005, investing activities included $157.5 million for thecollection of a related-party note received from a subsidiary of TimberHoldings and $11.7 million of proceeds received from the sale of assets.Approximately $10.4 million of the proceeds related to the sale of aportion of our fiber farms. These proceeds were partially offset by$73.3 million used for the purchase of property and equipment. Capitalexpenditures for property and equipment consisted primarily of expansion,business improvement and quality/efficiency projects, replacement projects, andongoing environmental compliance.

We expect capitalinvestments in 2006 to total $165 million to $175 million, excludingacquisitions. This level of capital expenditures could increase or decrease asa result of a number of factors, including our financial results and futureeconomic conditions. Our capital spending in 2006 will be for expansion (suchas the project described below), business improvement and quality/efficiencyprojects, replacement projects, and ongoing environmental compliance. During2005, we spent $17 million on environmental compliance. We expect to spendapproximately $8 million in 2006 for this purpose.

In April 2006, we announced that we will expand our production ofpressure-sensitive papers by reconfiguring an existing paper machine at ourpulp and paper mill in Wallula, Washington, to produce both pressure-sensitivepaper and commodity uncoated free sheet. We estimate approximately$70 million of capital spending for the project. We expect to spendapproximately one-half of this amount in 2006 and the remainder in 2007. As ofJune 30, 2006, spending on this project totaled $9.8 million.

***Financing Activities***

Cash used for financingactivities was $6.9 million for the six months ended June 30, 2006, comparedwith $263.1 million for the same period in 2005. In 2006, the $6.9 million ofcash used for financing activities includes a $65.0 million increase in ourborrowings under our accounts receivable securitization program. Cash used forfinancing activities included $85.8 million of prepayments on our Tranche Dterm loan, which was paid with $27.2 million of proceeds from the sale of ourheadquarters building, $25.6 million of proceeds from unwinding and resettingthe fixed interest rate we pay on our interest rate swap agreements, $25.0million of lower-cost receivable securitization borrowings, and other operatingcash flows. Additionally, we used $10.7 million of cash to pay our equityinvestors amounts to fund their tax obligation related to their investment inus.

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Cash used for financing activities in the first six months of 2005 included$1,330.0 million of debt prepayments related to our Tranche B termloan, which was primarily paid down with proceeds from our $840.0 millionTranche D term loan and from a related-party loan received from a subsidiaryof Timber Holdings. Additionally, $19.6 million of cash was used to payour equity investors amounts to fund their tax obligation related to theirinvestment in us.

Thefollowing discussion describes our debt transactions in more detail. AtJune 30, 2006, and December 31, 2005, our long-term debt consisted ofthe following:
|                                                 | ** ** | **June 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                      | ** ** | **(millions)**          | ** **  |
|                                            |       |                    |        |                        |       |
| Revolving credit  facility, due 2010            |       | $                       | —      |                        | $          | — |   |
| Tranche D  term loan, due 2011             |       | 550.0                   |        | 635.8                       |       |
| Senior unsecured  floating-rate notes, due 2012 |       | 250.0                   |        | 250.0                       |       |
| 7.125% senior  subordinated notes, due 2014     |       | 400.0                   |        | 400.0                       |       |
| Borrowings  secured by receivables              |       | 145.0                   |        | 80.0                        |       |
|                                            |       | 1,345.0                 |        | 1,365.8                     |       |
| Note payable to  related party, net, due 2009   |       | 278.6                   |        | 270.9                       |       |
| ** **                                      | ** ** | **$**                   | **1,623.6** | ** **                  | **$**      | **1,636.7** | ** ** |

 

*SeniorSecured**Credit Facilities*

Boise Cascade, L.L.C. (Boise LLC) and affiliates have a $475.0million senior secured revolving credit facility (due in 2010) and an $840.0million Tranche D term loan (due in 2011). These borrowings represent oursenior secured credit facilities (the Facilities).

Our revolving credit facility agreement permits us toborrow up to $475.0 million for general corporate purposes. AtJune 30, 2006, we had no borrowings outstanding under our revolving creditfacility; however, $56.6 million of letters of credit were considered adraw on the revolver, reducing our borrowing capacity to $418.4 million.Borrowings under our revolving credit facility are based on the prime rate, thefederal funds effective rate, or the LIBOR. Pricing is subject toquarterly adjustment based on the ratio of our total indebtedness to our lastfour quarters of consolidated earnings before interest, taxes, depreciation,and amortization (EBITDA). The range of borrowing costs under the pricing gridis:  (i) the higher of prime plus0.50% to 1.25% or the federal funds effective rate plus 1.00% to 1.75% or(ii) LIBOR plus 1.50% to 2.25%. For the six months endedJune 30, 2006, and the year ended December 31, 2005, the averageinterest rate for our borrowings under the revolver was 6.0% and 5.1%. Lettersof credit are subject to a 0.25% fronting fee payable to the issuing bank and afee payable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under our revolving credit facility and thedaily average amount available for drawing under the outstanding letters ofcredit. The minimum and maximum borrowings under the revolver were zero and$30.0 million during the six months ended June 30, 2006, and zero and$126.5 million for the same period in 2005. The weighted average amountsof borrowings outstanding under the revolver during the six months endedJune 30, 2006 and 2005, were $1.5 million and $22.4 million. Therevolving credit facility provides for a commitment fee of 0.50% per annumpayable to the lenders on the average daily unused portion of the revolvingcredit facility. We also have a swingline option under the revolver, whichallows us to borrow at negotiated rates up to an aggregate of$40.0 million from individual banks that are parties to the agreement.Swingline borrowings are considered borrowings under the revolving creditfacility agreement.

At June 30,2006, and December 31, 2005, we had $550 million and$635.8 million outstanding under the Tranche D term loan, and ourborrowing rates were 6.8% and 5.8%. Borrowings under the Tranche D termloan are based on (i) the higher of the prime rate plus 0.75% or the federalfunds effective rate plus 1.25% or (ii) LIBOR plus 1.75%. As a result of a$200.0 million prepayment in October 2005, we are not required to makescheduled principal payments on the Tranche D term loan until 2011, atwhich time the principal balance is due. However, during the six months endedJune 30, 2006, we prepaid $85.8 million on our Tranche D termloan, with $27.2 million of proceeds from the sale of our headquartersbuilding in Boise, Idaho, $25.6 million of proceeds from unwinding andresetting the fixed interest rate we pay under our interest rate swapagreements, $25.0 million of lower-cost receivable securitizationborrowings, and other operating cash flows.

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Borrowings under the Facilities are subject tofinancial covenants and restrictions, including a minimum interest expensecoverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At June 30, 2006, and December 31, 2005, we were incompliance with these covenants.

*SeniorNotes*

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Forest Products Acquisition. In July 2005, we completed an exchangeoffer whereby all of our senior unsecured floating-rate notes and senior subordinatednotes were exchanged for publicly traded, registered securities with identicalterms (other than terms relating to registration rights) to the notes issued inOctober 2004. We may redeem all or part of the notes at any time at redemptionprices defined in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. Thesenior unsecured floating-rate notes bear interest at a floating rate equal toLIBOR plus 2.9%. At June 30, 2006, and December 31, 2005, ourborrowing rates for the $250.0 million senior unsecured floating-ratenotes were 8.0% and 7.0%.

*Borrowings Secured by Receivables*

In October 2005, our wholly owned subsidiary,Boise LLC, and several of its subsidiaries, including Birch Creek Investments,L.L.C. (Birch Creek), entered into an accounts receivable securitizationprogram with Bank of America National Association and Calyon New York Branch(the Investors). Under this three-year program, Boise LLC sells its interest ina defined pool of accounts receivable generated by its domestic operations on arevolving basis to Birch Creek, a fully consolidated, wholly owned,special-purpose subsidiary. In turn, Birch Creek sells the receivables to theaffiliates of the Investors. Because Boise LLC has the right to repurchase thesold receivables, sales of receivables under the program are accounted for as asecured borrowing. At June 30, 2006, and December 31, 2005, we had$145.0 million and $80.0 million outstanding under our accountsreceivable securitization program. The receivables outstanding and thecorresponding debt are included as “Receivables” and “Long-term debt,”respectively, on our Consolidated Balance Sheets. We record the financing costsassociated with the program in “Interest expense” in our ConsolidatedStatements of Income. The cost of funds under this program varies based onchanges in interest rates. At June 30, 2006, and December 31, 2005,the interest rates for borrowings secured by receivables were 5.3% and 4.3%.

Under the accounts receivable securitization program, the maximum borrowingamount is subject to change based on the level of eligible receivables andrestrictions on concentrations of receivables and cannot exceed $250 million.The accounts receivable securitization program contains the same financialcovenants as our senior secured credit facilities.

*NotePayable to Related Party, Net*

At June 30, 2006, we had a$278.6 million note payable to a subsidiary of Timber Holdings recorded as“Note payable to related party, net” on our Consolidated Balance Sheet. Theamount of this note payable was $270.9 million at December 31, 2005.The note is subject to adjustment based on transactions between the subsidiaryand us. Effective April 1, 2006, we amended and restated our note payableto Timber Holdings. Our borrowing rate under the amended and restated note is5%, and the note matures March 31, 2009. Included in “Note payable torelated party, net” was $27.8 million and $18.9 million of accruedinterest expense related to the note at June 30, 2006, andDecember 31, 2005, respectively. Timber Holdings is a guarantor of ourdebt; see Note 20, Consolidating Guarantor and Nonguarantor FinancialInformation, in “Item 1. Consolidated Financial Statements” of this Form 10-Q.

*Other*

We have enteredinto interest rate swaps to hedge the majority of the cash flow risk from thevariable interest payments on our variable-rate debt. These swaps gave us aneffective interest rate on all of our variable-rate debt of 6.6% and 5.3% atJune 30, 2006, and December 31, 2005, respectively. For additionalinformation on our interest rate swaps, see Note 14, FinancialInstruments.

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We paid approximately$85.9 million of fees and expenses associated with our senior securedcredit facilities, our senior unsecured floating-rate notes, and our seniorsubordinated notes, which we entered into in October 2004. The fees are beingamortized over the terms of the loans, which range from six to ten years. AtJune 30, 2006, and December 31, 2005, we had $34.6 million and$37.8 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan in second quarter 2005, we recorded a$43.0 million charge for the write-off of the deferred financing costs in “Interestexpense” in our Consolidated Statements of Income (Loss).

At June 30,2006, and December 31, 2005, our average effective interest rates,including the effect of our interest rate swaps, on all of our debt except forour note payable to related party, net, were 6.7% and 5.8%.

Cashpayments for interest, net of interest capitalized, were $29.8 million and$45.6 million for the three and six months ended June 30, 2006, and$30.0 million and $48.9 million for the three and six months endedJune 30, 2005.

***Contractual Obligations***

For information on contractual obligations, seeContractual Obligations in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in our 2005 Annual Report on Form 10-K. Except asdisclosed below, at June 30, 2006, there have been no material changes to ourcontractual obligations outside the normal course of business.

During the six months ended June 30, 2006, we increased the amount ofborrowings secured under our accounts receivable securitization program from$80.0 million at December 31, 2005, to $145.0 million atJune 30, 2006. Additionally, we prepaid $85.8 million on ourTranche D term loan, with $27.2 million of proceeds from the sale ofour headquarters building, $25.6 million of proceeds from unwinding andresetting the fixed interest rate we pay under our interest rate swapagreements, $25.0 million of lower-cost receivable securitizationborrowings, and other operating cash flows. For more information, see “FinancingActivities” in the Liquidity and Capital Resources section of this Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

***Off-Balance-SheetActivities***

AtJune 30, 2006, and December 31, 2005, we had no off-balance-sheetarrangements with unconsolidated entities.

***Guarantees***

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FinancialAccounting Standards Board (FASB) Interpretation No. 45, Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others. Note 17, Commitments and Guarantees,of “Item 8.  Consolidated FinancialStatements and Supplementary Data” in our 2005 Annual Report on 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. Therehave been no material changes to the guarantees disclosed in our 2005 AnnualReport on Form 10-K.

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***Inflationary and SeasonalInfluences***

Otherthan the effects of higher energy costs, which we discuss in this Form 10-Q,we believe inflation has not had a material effect on our financial conditionor results of operations. However, there can be no assurance that we will notbe affected by inflation in the future. Seasonal changes in levels of buildingactivity affect our building products businesses. We typically have highersales and working capital in the second and third quarters because of warmerweather. To a lesser degree, our paper businesses also experience someseasonality based primarily on buying patterns associated with particularproducts. For example, the demand for our corrugated containers is influencedby agricultural demand in the Pacific Northwest. In addition, seasonally coldweather increases costs, especially energy costs, at all of our manufacturingfacilities.

***Environmental***

For information onenvironmental issues, see Environmental in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2005 Annual Report onForm 10-K. At June 30, 2006, there have been no materialchanges.

***Collective BargainingAgreements***

Approximately 5,150, or 49%, of ouremployees work pursuant to collective bargaining agreements. In March 2005, theagreements covering approximately 510 workers at our paper facilities inSalem, Oregon; St. Helens, Oregon; and Vancouver, Washington, expired. InFebruary 2006, we reached a five-year agreement at the Salem facility, and inMarch 2006, we reached a five-year agreement at our St. Helens facility. InJune 2005, we announced the permanent closure of our Vancouver, Washington,facility. In May 2006, we reached a closure agreement with the union, and we donot intend to extend that agreement beyond the August 2006 expected closure.Hourly employees at our DeRidder, Louisiana, paper mill approved a newfour-year labor contract on July 10, 2006. The collective bargainingagreement covers approximately 440 employees and replaces an agreementwhich expired February 15, 2006. In June 2006, we entered into a one-yearextension for the Nampa, Idaho, container plant covering approximately 100employees. Our Jackson, Alabama, paper mill contract expired at the end ofJuly, and the parties are continuing to meet. The agreement will carry over ifno new agreement is reached. The contract at our St. Jacques, NewBrunswick, Canada, I-joist plant will expire in the fourth quarter of 2006. Weare currently in negotiations for a new contract at our veneer and plywoodfacility in Brazil. We do not currently expect material work interruptions orincreases in our costs during the course of the negotiations with ourcollective bargaining units. Nevertheless, if our expectations are notaccurate, we could experience a material labor disruption or significantlyincreased labor costs at one or more of our facilities, any of which couldprevent us from meeting customer demand or reduce our sales and profitability.

***Critical AccountingEstimates***

Criticalaccounting estimates are those that are most important to the portrayal of ourfinancial condition and results. These estimates require management’s mostdifficult, subjective, or complex judgments, often as a result of the need toestimate matters that are inherently uncertain. We review the development,selection, and disclosure of our critical accounting estimates with the AuditCommittee of our board of directors. For information about critical accountingestimates, see Critical Accounting Estimates in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2005 Annual Report onForm 10-K.

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***ITEM 3*.**                             *QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS*

We are exposed to risks such as changes in interestrates, energy prices, and foreign currency exchange rates. We employ a varietyof practices to manage these risks, including operating and financingactivities and, where deemed appropriate, the use of derivative instruments.Derivative instruments are used only for risk management purposes and not forspeculation or trading. Derivatives are such that a specific debt instrument,contract, or anticipated purchase determines the amount, maturity, and otherspecifics of the hedge. If a derivative contract is entered into, we eitherdetermine that it is an economic hedge or we designate the derivative as a cashflow or fair value hedge. We formally document all relationships betweenhedging instruments and the hedged item, as well as our risk managementobjectives and strategy for undertaking various hedged transactions. For thosederivatives designated as cash flow or fair value hedges, we formally assess,both at the hedge’s inception and on an ongoing basis, whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in the hedged items. The ineffective portion of hedging transactions isrecognized in income (loss).

In accordance with Statement ofFinancial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, asamended, we record all derivative instruments as assets or liabilities on ourConsolidated Balance Sheets at fair value. The fair value of these instrumentsis determined by third parties. Changes in the fair value of derivatives arerecorded in either “Net income (loss)” or “Other comprehensive income,” as appropriate.The gain or loss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affects income(loss), and any ineffectiveness is recognized currently in our ConsolidatedStatements of Income (Loss). The gain or loss on derivatives designated as fairvalue hedges and the offsetting gain or loss on the hedged item attributable tothe hedged risk are included in income (loss) in the period in which changes infair value occur. The gain or loss on derivatives that have not been designatedas hedging instruments is included in income (loss) in the period in whichchanges in fair value occur.

*Interest Rate Risk*

Our debt is predominantlyvariable-rate. We manage interest rate risk on our variable-rate debt byentering into interest rate swaps. At June 30, 2006, the estimated currentmarket value of our fixed-rate debt, including our note payable to relatedparty, based on then-current interest rates for similar obligations with likematurities, was approximately $72.8 million less than the amount reportedon our Consolidated Balance Sheet.

*Swaps onour Facilities. *Ourobligations under our senior secured credit facilities and senior notes exposeus to changes in short-term interest rates since interest rates on this debtare variable. In November 2004, we entered into four interest rate swapswith a total notional amount of $550 million to hedge the exposure tointerest rate fluctuations associated with our Tranche B term loan (whichwas paid in full in April 2005). The swaps on $300 million of ourTranche B term loan were fixed at an average pay rate of 3.3% and wouldhave expired in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche B termloan, these interest rate swaps were no longer considered hedges of the variableinterest payments on that loan. As a result, during first quarter 2005, werecorded the fair value of the interest rate swaps, or $15.2 million, in “Changein fair value of interest rate swaps” in our Consolidated Statement of Income.In second quarter 2005, we redesignated the $550 million of interest rateswaps as hedges of the cash flow from the LIBOR-based variable interestpayments on amounts borrowed under the Facilities, and prior to theredesignation, we recognized $5.3 million of noncash expense in “Change infair value of interest rate swaps” in our Consolidated Statement of Loss.The net $9.9 million of value that was recorded in “Other assets” on ourConsolidated Balance Sheet results in higher interest expense over theremaining life of the interest rate swaps. Changes in the fair value of theinterest rate swaps were recorded in “Other comprehensive income.” Amountsrealized during the period were reclassified to “Interest expense” as interestexpense was recognized on the LIBOR-based debt. Ineffectiveness related to theredesignated hedges was not significant. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rateof 4.9% at December 31, 2005. At December 31, 2005, the fair marketvalue of these instruments was $16.9 million, which we recorded in “Otherassets” on our Consolidated Balance Sheet.

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In April 2006, weterminated our 3.3% $300 million interest rate swap agreements that hedged ourexposure to interest rate fluctuations associated with our Facilities. Inaddition, we reset the fixed interest rate we pay on the remaining $250 millionof interest rate swap agreements under our Facilities from 3.5% to 4.75%. Thereset interest rate swaps with a total notional amount of $250 million gave usan effective interest rate of 6.4% on that debt at June 30, 2006. At June 30,2006, the fair market value of these instruments was $4.4 million, which werecorded in “Other assets” on our Consolidated Balance Sheet. There was noineffectiveness related to the hedges.

*Swaps onour senior unsecured floating-rate notes. *In November 2004, we entered into two 3.7% interestrate swaps with an aggregate notional amount of $250 million to hedge theexposure to floating-rate interest rate risks associated with our seniorunsecured floating-rate notes, which gave us an effective interest rate on thatdebt of 6.6% at December 31, 2005. In April 2006, we reset the fixedinterest rate we pay on the $250 million of interest rate swap agreementsto 4.75%, which gave us an effective interest rate on our senior unsecuredfloating-rate notes of 7.6% at June 30, 2006. These swaps expire inOctober 2009. These swaps were designated as cash flow hedges. Accordingly,changes in the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt. Therewas no ineffectiveness related to these hedges. At June 30, 2006, andDecember 31, 2005, the fair market values of these instruments were$5.8 million and $9.3 million, which we recorded in “Other assets” onour Consolidated Balance Sheets.

*Other. *In exchange for the termination of andrate resets of our interest rate swap agreements described above, we received$25.6 million which we used to make prepayments on our Tranche D term loan. Wewill reclassify the $25.6 million of “Accumulated other comprehensive income”as a reduction of interest expense over the periods which the previously hedgedinterest payments affect earnings.

For the three andsix months ended June 30, 2006, amounts reclassified to “Interest expense”for all of our cash flow hedges decreasedinterest expense $1.9 million and $4.0 million, compared with a $2.2 millionand $4.1 million increase in interest expense for the same periods in2005. At June 30, 2006, assuming no change in interest rates,$5.6 million would be reclassified as a decrease in interest expenseduring the remainder of 2006.

*Energy Risk*

We enter into natural gas swaps to hedge the variablecash flow risk of natural gas purchases to a fixed price. As of June 30,2006, we had entered into swap agreements to hedge the variable cash flow riskof natural gas purchases for the period of July 2006 through February 2007. Wedesignated all of the swaps as cash flow hedges. Accordingly, changes in thefair value of these swaps were recorded in “Other comprehensive income.”Amounts realized during the period were reclassified to “Materials, labor, andother operating expenses” in our Consolidated Statements of Income (Loss) asnatural gas was consumed. Amounts reclassified in the three months endedJune 30, 2006, decreased “Materials, labor, and other operating expenses”$0.1 million, and amounts reclassified in the six months endedJune 30, 2006, increased these expenses $0.1 million. Assumingnatural gas prices follow the futures curve in effect at June 30, 2006,$11.1 million would be reclassified as an increase in “Materials, labor, and other operating expenses” duringthe remainder of 2006. At June 30, 2006 and December 31, 2005, thefair market values of these instruments were a negative $9.8 million and$0.1 million, which we recorded in “Accrued liabilities, Other” on ourConsolidated Balance Sheets. Ineffectiveness related to these hedges was notsignificant.

*Foreign Currency Risk*

We occasionally enter into foreignexchange contracts to hedge against fluctuations in foreign currency exchangerates. These contracts allow us to hedge certain transactions, includingpurchases denominated in foreign currencies, which allows us to manage thevolatility associated with these transactions and to protect us from currencyfluctuations between the contract date and ultimate settlement of the hedgedtransaction.

In second quarter 2006, we entered into a series of forward foreignexchange contracts to hedge our commitment to purchase capital equipmentdenominated in euros. These contracts are for a total amount of12.4 million euros with settlement dates which began in April 2006 andextend through April 2007. We are accounting for these as fair value hedges andrecognize any gains or losses from

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remeasuring the forward contracts at fair value in the ConsolidatedStatements of Income (Loss). We also adjust the commitment for the capitalequipment purchase for any gains or losses attributable to fluctuations inforeign currency exchange rates. At June 30, 2006, the fair market valueof these contracts was $0.2 million, which we recorded in “Receivables,Other,” and we recorded the same amount for the increase in the purchasecommitment in “Accounts payable” on our Consolidated Balance Sheet.

***ITEM 4.******                            ******CONTROLS AND PROCEDURES***

Attached as exhibits to this Form 10-Q arecertifications of our chief executive officer and chief financial officer. ThisControls and Procedures section includes information concerning the disclosurecontrols and procedures referred to in the attached certifications. You shouldread this section in conjunction with the certifications.

*Evaluation of Disclosure Controls and Procedures*

We maintain “disclosure controls andprocedures,” as Rule 13a-15(e) under the Securities and Exchange Act of 1934,as amended, defines such term. We have designed these controls and proceduresto reasonably assure that information required to be disclosed in our reportsfiled under the Exchange Act, such as this Form 10-Q, is recorded,processed, summarized, and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. We have also designed ourdisclosure controls to provide reasonable assurance that such information isaccumulated and communicated to our senior management, including the chiefexecutive officer (CEO) and chief financial officer (CFO), as appropriate, to allowthem to make timely decisions regarding our required disclosures.

We evaluate the effectiveness of our disclosure controls andprocedures on at least a quarterly basis. A number of key components in ourinternal control system assist us in these evaluations. Since the company’sinception, we have had a disclosure committee. The committee meets regularlyand includes input from our senior management, general counsel, internal auditstaff, and independent accountants. This committee is charged with consideringand evaluating the materiality of information and reviewing the company’sdisclosure obligations on a timely basis. Our internal audit department alsoevaluates components of our internal controls on an ongoing basis. Our intentis to maintain disclosure controls and procedures as dynamic processes thatchange as our business and working environments change.

Our management, with the participation of our CEO and CFO, hasevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the fiscal quarter covered by thequarterly report on this Form 10-Q. Based on that evaluation, theCEO and CFO have concluded that, as of such date, our disclosure controls andprocedures were effective in meeting the objectives for which they weredesigned and were operating at a reasonable assurance level. Furthermore, thecompany’s management noted that as a result of their evaluation of changes ininternal control over financial reporting, they identified no changes duringthe second quarter of fiscal 2006 that materially affected, or would bereasonably likely to materially affect, the company’s internal control overfinancial reporting.

*Limitations on the Effectiveness of Controls andProcedures*

In designing and evaluating our disclosure controls andprocedures, we recognized that disclosure controls and procedures, no matterhow well-conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Wehave also designed our disclosure controls and procedures based in part uponassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

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PART II—OTHER INFORMATION

***ITEM 1.******                            ******LEGAL PROCEEDINGS***

*Legal Proceedings*

OfficeMax agreed to retain responsibility foressentially all legal proceedings related to our businesses that arose beforeOctober 29, 2004. We did, however, assume responsibility for a smallnumber of legal proceedings that arose before this date. We are also a party toroutine legal proceedings that have arisen in our businesses afterOctober 29, 2004. Management does not believe any of the legal proceedingsfor which we have responsibility will have a material adverse effect on ourfinancial position, results of operations, or cash flows.

*Environmental Matters*

We are not currently involved in any materialenvironmental proceedings. OfficeMax retained responsibility for environmentalclaims and liabilities related to businesses, facilities, and other assets notpurchased by us in the Forest Products Acquisition. In addition, OfficeMaxindemnifies us for hazardous substance releases and other environmentalregulatory violations that relate to the businesses we purchased and thatoccurred before the Forest Products Acquisition or arose from pre-ForestProducts Acquisition operations. OfficeMax, however, may not have sufficientfunds to satisfy in full its indemnification obligations, and in some cases, wemay not be entitled to indemnification. Management does not believe that thepotential exposure to the company for environmental matters would have amaterial adverse effect on our financial position, results of operations, orcash flows even if OfficeMax failed to fulfill its indemnificationresponsibilities.

***ITEM 1A.******                   ******RISK FACTORS***

 

This QuarterlyReport on Form 10-Q contains forward-looking statements. Statementsthat are not historical or current facts, including statements about our expectations,anticipated financial results, projected capital expenditures, and futurebusiness prospects, are forward-looking statements. You can identify thesestatements by our use of words such as “may,” “will,” “expect,” “believe,” “should,”“plan,” “anticipate,” and other similar expressions. You can find examples ofthese statements throughout this report, including the Operational Outlooksection of Management’s Discussion and Analysis of Financial Condition andResults of Operations. We cannot guarantee that our actual results will beconsistent with the forward-looking statements we make in this report. Youshould review carefully the risk factors listed in “Item 1A.  Risk Factors” of our 2005 Annual Report onForm 10-K, as well as those factors listed in other documents we file withthe Securities and Exchange Commission (SEC). There have been no materialchanges to our risk factors for the six months ended June 30, 2006, fromthose listed in our 2005 Annual Report on Form 10-K.

***ITEM 1B.******                   ******UNRESOLVED STAFF COMMENTS***

 

None.

 

***ITEM 2.******                            ******UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS***

 

On April 3, 2006, our parent company, Forest Products Holdings, L.L.C.(FPH), sold 335,000 of its Series B common units to two members ofmanagement for a total purchase price of $670,000. On the same day, FPH granteda total of 7,900,000 Series C common units, at no cost, to four members ofmanagement and to the four nonaffiliated members of our board of directors. Weissued 335,000 Series B common units and 7,900,000 Series C commonunits in our company to FPH to reflect management’s equity interest in thenewly issued FPH units. The proceeds from this issuance were used forgeneral corporate purposes. Because we are a limited liability company, ourequity units are neither listed nor publicly traded in any market.

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***ITEM 3.******                            ******DEFAULTS UPON SENIORSECURITIES***

 

None.

 

***ITEM 4.******                            ******SUBMISSION OF MATTERS TO AVOTE OF SECURITYHOLDERS***

 

Not applicable.

 

***ITEM 5.******                            ******OTHER INFORMATION***

 

None.

 

***ITEM 6.******                            ******EXHIBITS***

 

Required exhibitsare listed in the Index to Exhibits and are incorporated by reference.

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** **

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                            |   | BOISE CASCADE HOLDINGS, L.L.C.                                  |
|----------------------------|--------|-----------------------------------------------------------------|
|                       |   |                                                            |
|                       |   | /s/ Samuel K. Cotterell                                         |
|                       |   | Samuel K. Cotterell                                             |
|                       |   | Vice President and Controller                                   |
|                       |   | (As Duly Authorized Officer and Chief  Accounting Officer) |
|                       |   |                                                            |
| Date:  August 3, 2006 |   |                                                            |

 

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**BOISE CASCADEHOLDINGS, L.L.C.**

**INDEX TO EXHIBITS**

Filed With the QuarterlyReport on Form 10-Q for the Quarter Ended June 30, 2006

 
| **Number** | ** ** | **Description**                                                              |
|------------|------------|------------------------------------------------------------------------------|
| 12         |       | Ratio of Earnings to Fixed Charges                                           |
| 31.1       |       | CEO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 31.2       |       | CFO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 99         |       | Financial Statements of Boise Land & Timber  Holdings Corp.              |

 

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