Tableof Contents

 

** **

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

** **

| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|
|                                                   | ** ** | ** **                                                                                             |
| **For the quarterly period ended  June 30, 2008** |

 

| **o**                                                                                                                                                                                                                                                                                                           | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                      |
| **For the transition period from                         to                      ** |

 

**Commission File Number:  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 StreetSuite 300Boise, Idaho 83702-5389**(Address of principalexecutive offices) (Zip Code)

 

**(208)384-6161**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company (as defined byRule 12b-2 of the Exchange Act):

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
|--------------------------------|--------------------------|------------------------------|----------------------------------|

 

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

 

The registrant, a limitedliability company, has no voting or nonvoting equity held by nonaffiliates andno common stock outstanding. Equity units issued and outstanding on July 31,2008, were as follows:

 

| **Series**                  | ** ** | **Units  Outstanding as of July 31, 2008** |
|-----------------------------|------------|-------------------------------------------------|
|                        |       |                                            |
| Series A  Common Units |       | 66,000,000                                      |
| Series B  Common Units |       | 535,375,934                                     |
| Series C  Common Units |       | 22,662,180                                      |

 

These units areneither registered nor publicly traded.

 

 

 

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Table of Contents

 

**Table of Contents**

 
| ** **    | ** **                                                                                  | **PART I—FINANCIAL  INFORMATION**                  |                                                            |
|---------------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------|-----------------------------------------------------------------|
|          |                                                                                        |                                                         |                                                            |
| Item  1.      | Consolidated Financial  Statements                                                          | 1                                                            |
|          | Notes to Unaudited Quarterly Consolidated Financial  Statements                             | 7                                                            |
|          |                                                                                        |  1.                                                     | Nature of  Operations and Basis of Presentation                 | 7 |
|          |                                                                                        |  2.                                                     | Sale of Our  Paper and Packaging & Newsprint Assets    | 7 |
|          |                                                                                        |  3.                                                     | Assets and  Liabilities Held for Sale                           | 9 |
|          |                                                                                        |  4.                                                     | Transactions  With Related Parties                              | 10 |
|          |                                                                                        |  5.                                                     | Vendor and  Customer Rebates and Allowances                     | 11 |
|          |                                                                                        |  6.                                                     | Other (Income)  Expense, Net                                    | 12 |
|          |                                                                                        |  7.                                                     | Leases                                                          | 12 |
|          |                                                                                        |  8.                                                     | Income Taxes                                                    | 13 |
|          |                                                                                        |  9.                                                     | Inventories                                                     | 13 |
|          |                                                                                        | 10.                                                          | Property and  Equipment, Net                                    | 14 |
|          |                                                                                        | 11.                                                          | Goodwill and  Intangible Assets                                 | 14 |
|          |                                                                                        | 12.                                                          | Investment in  Equity Affiliate                                 | 15 |
|          |                                                                                        | 13.                                                          | Asset  Retirement Obligations                                   | 16 |
|          |                                                                                        | 14.                                                          | Debt                                                            | 16 |
|          |                                                                                        | 15.                                                          | Financial Instruments                                           | 18 |
|          |                                                                                        | 16.                                                          | New and  Recently Adopted Accounting Standards                  | 20 |
|          |                                                                                        | 17.                                                          | Retirement and  Benefit Plans                                   | 20 |
|          |                                                                                        | 18.                                                          | Redeemable Equity  Units                                        | 21 |
|          |                                                                                        | 19.                                                          | Segment Information                                             | 22 |
|          |                                                                                        | 20.                                                          | Commitments and  Guarantees                                     | 25 |
|          |                                                                                        | 21.                                                          | Consolidating  Guarantor and Nonguarantor Financial Information | 25 |
|          |                                                                                        | 22.                                                          | Legal  Proceedings and Contingencies                            | 36 |
|          |                                                                                        |                                                         |                                                            |   |
| Item 2.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 36                                                           |
|          |                                                                                        | Understanding Our Financial Information                      | 36                                                              |
|          |                                                                                        | Background and Executive Overview                            | 36                                                              |
|          |                                                                                        | Sale of Our Paper and Packaging & Newsprint  Assets | 37                                                              |
|          |                                                                                        | Effects  of the Sale                                         | 38                                                              |
|          |                                                                                        | Recent Trends and Operational Outlook                        | 39                                                              |
|          |                                                                                        | Factors That Affect Our Operating Results                    | 40                                                              |
|          |                                                                                        | Our  Operating Results                                       | 44                                                              |
|          |                                                                                        | Industry Mergers and Acquisitions                            | 48                                                              |
|          |                                                                                        | Acquisitions                                                 | 48                                                              |
|          |                                                                                        | Divestitures                                                 | 48                                                              |
|          |                                                                                        | Liquidity and Capital Resources                              | 49                                                              |
|          |                                                                                        | Contractual  Obligations                                     | 52                                                              |
|          |                                                                                        | Off-Balance-Sheet Activities                                 | 52                                                              |
|          |                                                                                        | Guarantees                                                   | 52                                                              |
|          |                                                                                        | Environmental                                                | 53                                                              |
|          |                                                                                        | Critical Accounting Estimates                                | 53                                                              |
|          |                                                                                        | New and Recently Adopted Accounting Standards                | 54                                                              |
|          |                                                                                        |                                                         |                                                            |
| Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                 | 55                                                           |
|          |                                                                                        |                                                         |
| Item 4T. | Controls and  Procedures                                                                    | 56                                                           |
|          |                                                                                        |                                                         |                                                            |
| ** **    | **PART II—OTHER  INFORMATION**                                                    |                                                         |
| Item 1.  | Legal Proceedings                                                                           | 58                                                           |
|          |                                                                                        |                                                         |                                                            |
| Item 1A. | Risk Factors                                                                                | 58                                                           |
|          |                                                                                        |                                                         |                                                            |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 58                                                           |
|               |                                                                                             |                                                              |                                                                 |  |  |  |

 

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| Item 3.      | Defaults  Upon Senior Securities                    | 58     |
|--------------|-----------------------------------------------------|--------|
|         |                                                |   |   |   |
| Item 4.      | Submission  of Matters to a Vote of Securityholders | 58     |
|         |                                                |   |   |   |
| Item 5.      | Other Information                                   | 58     |
|         |                                                |   |   |   |
| Item 6. | Exhibits                                            | 58     |

 

All reports we file with the Securities and ExchangeCommission (SEC) are available free of charge via Electronic Data GatheringAnalysis and Retrieval (EDGAR) through the SEC website at www.sec.gov. We alsoprovide copies of our SEC filings at no charge upon request and make electroniccopies of our reports available through our website at www.bc.com as soon asreasonably practicable after filing such material with the SEC.

 

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**PART 1—FINANCIAL INFORMATION**

 
| ***ITEM  1.*** | ***CONSOLIDATED FINANCIAL STATEMENTS*** |
|----------------|-----------------------------------------|

 

**Boise Cascade Holdings,L.L.C.Consolidated Statements of Income (Loss)**

**(unaudited)**

** **
| ** **                                                           | ** ** | **Three Months Ended  June 30** | ** **  |
|----------------------------------------------------------------------|------------|------------------------------------------------|-------------|
| ** **                                                           | ** ** | **2008**                                       | ** **  | **2007** | ** ** |
|                                                                 |       | **(thousands)**                                |        |
| **Sales**                                                            |       |                                           |        |   |   |
| Trade                                                                |       | $                                              | 743,402     |   | $ | 1,288,921 |   |
| Related parties                                                      |       | 13,786                                         |        | 159,477 |   |
|                                                                 |       | 757,188                                        |        | 1,448,398 |   |
| ** **                                                           |       |                                           |        |   |   |
| **Costs  and expenses**                                              |       |                                           |        |   |   |
| Materials, labor,  and other operating expenses                      |       | 649,886                                        |        | 1,270,294 |   |
| Materials,  labor, and other operating expenses from related parties |       | 23,009                                         |        | — |   |
| Depreciation,  amortization, and depletion                           |       | 8,684                                          |        | 40,722 |   |
| Selling and  distribution expenses                                   |       | 57,600                                         |        | 73,620 |   |
| General and  administrative expenses                                 |       | 7,859                                          |        | 20,210 |   |
| General and  administrative expenses from related party              |       | 2,526                                          |        | — |   |
| Loss on sale of  Paper and Packaging & Newsprint assets     |       | 3,328                                          |        | — |   |
| Other (income)  expense, net                                         |       | 8,635                                          |        | (5,091 | ) |
|                                                                 |       | 761,527                                        |        | 1,399,755 |   |
|                                                                 |       |                                           |        |   |   |
| **Income  (loss) from operations**                                   |       | (4,339                                         | )           | 48,643 |   |
|                                                                 |       |                                           |        |   |   |
| Equity in net  loss of affiliate                                     |       | (8,845                                         | )           | — |   |
| Foreign exchange  gain                                               |       | 890                                            |        | 2,020 |   |
| Change in fair  value of contingent value rights                     |       | 743                                            |        | — |   |
| Change in fair  value of interest rate swaps                         |       | —                                         |        | 5,395 |   |
| Interest expense                                                     |       | (6,427                                         | )           | (24,352 | ) |
| Interest income                                                      |       | 2,559                                          |        | 642 |   |
|                                                                 |       | (11,080                                        | )           | (16,295 | ) |
|                                                                 |       |                                           |        |   |   |
| **Income  (loss) before income taxes**                               |       | (15,419                                        | )           | 32,348 |   |
| Income tax  (provision) benefit                                      |       | 23                                             |        | (3,450 | ) |
| **Net  income (loss)**                                               | ** ** | **$**                                          | **(15,396** | **)** | **$** | **28,898** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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** **

**Boise Cascade Holdings,L.L.C.Consolidated Statements of Income (Loss)**

**(unaudited)**

** **
| ** **                                                           | ** ** | **Six Months Ended  June 30** | ** **  |
|----------------------------------------------------------------------|------------|----------------------------------------------|-------------|
| ** **                                                           | ** ** | **2008**                                     | ** **  | **2007** | ** ** |
| ** **                                                           | ** ** | **(thousands)**                              | ** **  |
| **Sales**                                                            |       |                                         |        |   |   |
| Trade                                                                |       | $                                            | 1,624,202   |   | $ | 2,452,094 |   |
| Related parties                                                      |       | 109,568                                      |        | 317,272 |   |
|                                                                 |       | 1,733,770                                    |        | 2,769,366 |   |
|                                                                 |       |                                         |        |   |   |
| **Costs  and expenses**                                              |       |                                         |        |   |   |
| Materials,  labor, and other operating expenses                      |       | 1,530,544                                    |        | 2,427,193 |   |
| Materials,  labor, and other operating expenses from related parties |       | 29,189                                       |        | — |   |
| Depreciation,  amortization, and depletion                           |       | 18,719                                       |        | 81,082 |   |
| Selling and distribution  expenses                                   |       | 120,965                                      |        | 142,028 |   |
| General and  administrative expenses                                 |       | 22,511                                       |        | 39,705 |   |
| General and  administrative expenses from related party              |       | 3,504                                        |        | — |   |
| Gain on sale of  Paper and Packaging & Newsprint assets     |       | (4,735                                       | )           | — |   |
| Other (income)  expense, net                                         |       | 7,693                                        |        | (2,545 | ) |
|                                                                 |       | 1,728,390                                    |        | 2,687,463 |   |
|                                                                 |       |                                         |        |   |   |
| **Income  from operations**                                          |       | 5,380                                        |        | 81,903 |   |
|                                                                 |       |                                         |        |   |   |
| Equity in net  loss of affiliate                                     |       | (17,397                                      | )           | — |   |
| Foreign exchange  gain                                               |       | 277                                          |        | 2,262 |   |
| Change in fair  value of contingent value rights                     |       | (4,030                                       | )           | — |   |
| Change in fair  value of interest rate swaps                         |       | (6,284                                       | )           | 5,395 |   |
| Interest expense                                                     |       | (21,808                                      | )           | (46,695 | ) |
| Interest income                                                      |       | 5,160                                        |        | 1,243 |   |
|                                                                 |       | (44,082                                      | )           | (37,795 | ) |
|                                                                 |       |                                         |        |   |   |
| **Income  (loss) before income taxes**                               |       | (38,702                                      | )           | 44,108 |   |
| Income tax  provision                                                |       | (1,132                                       | )           | (4,673 | ) |
| **Net  income (loss)**                                               | ** ** | **$**                                        | **(39,834** | **)** | **$** | **39,435** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Balance Sheets**

(unaudited)

 
| ** **                                        | ** ** | **June 30,**                                        | ** **    | **December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|---------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**                                                 | ** **    | **2007**              | ** ** |
| ** **                                        | ** ** | **(thousands****, except unit data****)** | ** **    |
| **ASSETS**                                        |       |                                                     |          |                  |       |
|                                              |       |                                                     |          |                  |       |
| **Current**                                       |       |                                                     |          |                  |       |
| Cash and cash  equivalents                        |       | $                                                        | 240,679       |                  | $          | 57,623 |   |
| Receivables                                       |       |                                                     |          |                  |       |
| Trade, less  allowances of $2,216 and $1,664 |       | 165,480                                                  |          | 115,209               |       |
| Related parties                                   |       | 5,905                                                    |          | 9                     |       |
| Other                                             |       | 9,364                                                    |          | 7,458                 |       |
| Inventories                                       |       | 310,179                                                  |          | 342,015               |       |
| Assets held for  sale                             |       | 40,528                                                   |          | 1,853,039             |       |
| Other                                             |       | 7,917                                                    |          | 5,426                 |       |
|                                              |       | 780,052                                                  |          | 2,380,779             |       |
|                                              |       |                                                     |          |                  |       |
| **Property**                                      |       |                                                     |          |                  |       |
| Property and  equipment, net                      |       | 292,027                                                  |          | 313,117               |       |
| Fiber farms and  deposits                         |       | 9,058                                                    |          | 24,010                |       |
|                                              |       | 301,085                                                  |          | 337,127               |       |
|                                              |       |                                                     |          |                  |       |
| **Investment  in equity affiliate**               |       | 263,476                                                  |          | —                |       |
| **Deferred  financing costs**                     |       | 8,548                                                    |          | 23,074                |       |
| **Goodwill**                                      |       | 12,170                                                   |          | 12,170                |       |
| **Intangible  assets, net**                       |       | 9,458                                                    |          | 9,668                 |       |
| **Other  assets**                                 |       | 7,287                                                    |          | 11,374                |       |
| **Total  assets**                                 | ** ** | **$**                                                    | **1,382,076** | ** **            | **$**      | **2,774,192** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Balance Sheets (continued)**

(unaudited, except unit data)

 
| ** **                                                                                                       | ** ** | **June 30,**                                        | ** **    | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|---------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2008**                                                 | ** **    | **2007**              | ** ** |
| ** **                                                                                                       | ** ** | **(thousands,**** except unit data****)** | ** **    |
| **LIABILITIES  AND CAPITAL**                                                                                     |       |                                                     |          |                  |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Current**                                                                                                      |       |                                                     |          |                  |       |
| Short-term  borrowings                                                                                           |       | $                                                        | —        |                  | $          | 10,500 |   |
| Current portion  of long-term debt                                                                               |       | —                                                   |          | 47,250                |       |
| Accounts payable                                                                                                 |       |                                                     |          |                  |       |
| Trade                                                                                                            |       | 161,036                                                  |          | 141,459               |       |
| Related parties                                                                                                  |       | 4,249                                                    |          | 43                    |       |
| Accrued  liabilities                                                                                             |       |                                                     |          |                  |       |
| Compensation and  benefits                                                                                       |       | 37,768                                                   |          | 36,909                |       |
| Interest payable                                                                                                 |       | 3,979                                                    |          | 7,140                 |       |
| Other                                                                                                            |       | 69,943                                                   |          | 29,959                |       |
| Liabilities  related to assets held for sale                                                                     |       | 766                                                      |          | 331,636               |       |
|                                                                                                             |       | 277,741                                                  |          | 604,896               | ** ** |
|                                                                                                             |       |                                                     |          |                  |       |
| **Debt**                                                                                                         |       |                                                     |          |                  |       |
| Long-term debt,  less current portion                                                                            |       | 315,000                                                  |          | 1,113,313             |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Other**                                                                                                        |       |                                                     |          |                  |       |
| Compensation and  benefits                                                                                       |       | 46,544                                                   |          | 46,981                |       |
| Other long-term  liabilities                                                                                     |       | 11,157                                                   |          | 17,097                |       |
|                                                                                                             |       | 57,701                                                   |          | 64,078                |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Redeemable  equity units**                                                                                     |       |                                                     |          |                  |       |
| Series B equity  units – 5,082,599 units and 16,622,421 units outstanding                    |       | 5,082                                                    |          | 16,992                |       |
| Series C  equity units – 22,769,364 units and 39,069,411 units outstanding                   |       | 7,500                                                    |          | 9,489                 |       |
|                                                                                                             |       | 12,582                                                   |          | 26,481                |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Commitments  and contingent liabilities**                                                                      |       |                                                     |          |                  |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Capital**                                                                                                      |       |                                                     |          |                  |       |
| Series A  equity units – no par value; 66,000,000 units authorized and outstanding                |       | 78,140                                                   |          | 78,463                |       |
| Series B  equity units – no par value; 550,000,000 units authorized and 530,356,601  units outstanding |       | 640,912                                                  |          | 876,693               |       |
| Series C  equity units – no par value; 44,000,000 units authorized                                     |       | —                                                   |          | 10,268                |       |
| **Total  capital**                                                                                               |       | 719,052                                                  |          | 965,424               |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Total  liabilities and capital**                                                                               | ** ** | **$**                                                    | **1,382,076** | ** **            | **$**      | **2,774,192** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Statements of Cash Flows**

(unaudited)

** **
| ** **                                                                       | ** ** | **Six Months Ended  June 30** | ** **  |
|----------------------------------------------------------------------------------|------------|----------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2008**                                     | ** **  | **2007** | ** ** |
| ** **                                                                       | ** ** | **(thousands)**                              | ** **  |
| **Cash  provided by (used for) operations**                                      |       |                                         |        |   |   |
| Net income  (loss)                                                               |       | $                                            | (39,834     | ) | $ | 39,435 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                         |        |   |   |
| Equity in net  loss of affiliate                                                 |       | 17,397                                       |        | — |   |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | 19,456                                       |        | 82,260 |   |
| Related-party  interest income                                                   |       | (2,760                                       | )           | — |   |
| Deferred income  taxes                                                           |       | 54                                           |        | 1,913 |   |
| Pension and  other postretirement benefit expense                                |       | 7,787                                        |        | 12,538 |   |
| Gain on changes  in retiree healthcare programs                                  |       | —                                       |        | (4,367 | ) |
| Change in fair  value of contingent value rights                                 |       | 4,030                                        |        | — |   |
| Change in fair  value of interest rate swaps                                     |       | 6,284                                        |        | (5,395 | ) |
| Management  equity units expense                                                 |       | 1,086                                        |        | 1,550 |   |
| Gain on sale of  assets, net                                                     |       | (8,399                                       | )           | (799 | ) |
| Loss on sale of  note receivable from related party                              |       | 8,313                                        |        | — |   |
| Other                                                                            |       | (311                                         | )           | (1,520 | ) |
| Decrease  (increase) in working capital, net of dispositions                     |       |                                         |        |   |   |
| Receivables                                                                      |       | (80,234                                      | )           | (73,658 | ) |
| Inventories                                                                      |       | 34,555                                       |        | (365 | ) |
| Prepaid expenses                                                                 |       | (2,324                                       | )           | (1,456 | ) |
| Accounts payable  and accrued liabilities                                        |       | 17,137                                       |        | 22,336 |   |
| Pension and  other postretirement benefit payments                               |       | (20,775                                      | )           | (524 | ) |
| Current and  deferred income taxes                                               |       | (1,129                                       | )           | 1,712 |   |
| Other                                                                            |       | 303                                          |        | 3,959 |   |
| Cash provided by  (used for) operations                                          |       | (39,364                                      | )           | 77,619 |   |
|                                                                             |       |                                         |        |   |   |
| **Cash  provided by (used for) investment**                                      |       |                                         |        |   |   |
| Proceeds from  sale of assets, net of cash contributed                           |       | 1,226,698                                    |        | 16,903 |   |
| Proceeds from  sale of note receivable from related party                        |       | 52,781                                       |        | — |   |
| Expenditures for  property and equipment                                         |       | (27,869                                      | )           | (89,913 | ) |
| Increase in  restricted cash                                                     |       | (183,290                                     | )           | — |   |
| Decrease in  restricted cash                                                     |       | 183,290                                      |        | — |   |
| Other                                                                            |       | (742                                         | )           | 1,291 |   |
| Cash provided by  (used for) investment                                          |       | 1,250,868                                    |        | (71,719 | ) |
|                                                                             |       |                                         |        |   |   |
| **Cash  provided by (used for) financing**                                       |       |                                         |        |   |   |
| Issuances of  long-term debt                                                     |       | 240,000                                      |        | 705,000 |   |
| Payments of  long-term debt                                                      |       | (1,085,563                                   | )           | (675,212 | ) |
| Short-term  borrowings                                                           |       | (10,500                                      | )           | (3,200 | ) |
| Tax  distributions to members                                                    |       | (127,884                                     | )           | (2,753 | ) |
| Repurchase of  management equity units                                           |       | (28,398                                      | )           | (249 | ) |
| Cash paid for  termination of interest rate swaps                                |       | (11,918                                      | )           | — |   |
| Proceeds from  changes to interest rate swaps                                    |       | —                                       |        | 2,848 |   |
| Other                                                                            |       | (4,185                                       | )           | (2,666 | ) |
| Cash provided by  (used for) financing                                           |       | (1,028,448                                   | )           | 23,768 |   |
|                                                                             |       |                                         |        |   |   |
| **Increase  in cash and cash equivalents**                                       |       | 183,056                                      |        | 29,668 |   |
|                                                                             |       |                                         |        |   |   |
| **Balance  at beginning of the period**                                          |       | 57,623                                       |        | 45,169 |   |
|                                                                             |       |                                         |        |   |   |
| **Balance  at end of the period**                                                | ** ** | **$**                                        | **240,679** | ** ** | **$** | **74,837** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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**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, 2006                                          |       | 66,000                                     |       | $                                    | 78,290     |                                 | 530,357     |       | $          | 724,988 |   | — |   | $ | 11,655 |   | $ | 814,933 |   |
|                                                                        |       |                                       |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Net income (a)                                                              |       | —                                     |       | —                               |       | —                               |        | 127,697    |       | — |   | — |   | 127,697 |   |
| Other  comprehensive income (loss), net of tax (a) (b)            |       |                                       |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                                            |       | —                                     |       | —                               |       | —                               |        | (3,070     | )          | — |   | — |   | (3,070 | ) |
| Unfunded  accumulated benefit obligation                                    |       | —                                     |       | —                               |       | —                               |        | 33,705     |       | — |   | — |   | 33,705 |   |
| Paid-in-kind  dividend                                                      |       | —                                     |       | 5,770                                |       | —                               |        | (5,770     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                               |       | —                                     |       | (5,597                               | )          | —                               |        | (1,803     | )          | — |   | — |   | (7,400 | ) |
| Allocation of  profit interest to Series C equity units                |       | —                                     |       | —                               |       | —                               |        | 1,387      |       | — |   | (1,387 | ) | — |   |
| Other                                                                       |       | —                                     |       | —                               |       | —                               |        | (441       | )          | — |   | — |   | (441 | ) |
| **Balance  at December 31, 2007** (c)                                  |       | 66,000                                     |       | $                                    | 78,463     |                                 | 530,357     |       | $          | 876,693 |   | — |   | $ | 10,268 |   | $ | 965,424 |   |
|                                                                        |       |                                       |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Net loss (a)                                                                |       | —                                     |       | —                               |       | —                               |        | (39,834    | )          | — |   | — |   | (39,834 | ) |
| Other  comprehensive loss, net of tax (a) (b)                     |       |                                       |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                                            |       | —                                     |       | —                               |       | —                               |        | (133       | )          | — |   | — |   | (133 | ) |
| Unfunded  accumulated benefit obligation                                    |       | —                                     |       | —                               |       | —                               |        | (36,049    | )          | — |   | — |   | (36,049 | ) |
| Equity in other  comprehensive income of    equity affiliate |       | —                                     |       | —                               |       | —                               |        | 250        |       | — |   | — |   | 250 |   |
| Paid-in-kind  dividend                                                      |       | —                                     |       | 3,068                                |       | —                               |        | (3,068     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                               |       | —                                     |       | (3,391                               | )          | —                               |        | (158,800   | )          | — |   | — |   | (162,191 | ) |
| Allocation of  profit interest from Series C equity units              |       | —                                     |       | —                               |       | —                               |        | 10,268     |       | — |   | (10,268 | ) | — |   |
| Fair market  value adjustment of redeemable equity units                    |       | —                                     |       | —                               |       | —                               |        | (11,236    | )          | — |   | — |   | (11,236 | ) |
| Other                                                                       |       | —                                     |       | —                               |       | —                               |        | 2,821      |       | — |   | — |   | 2,821 |   |
| **Balance  at June 30, 2008** (c)                                      | ** ** | **66,000**                                 | ** ** | **$**                                | **78,140** | ** **                           | **530,357** | ** ** | **$**      | **640,912** | ** ** | **—** | ** ** | **$** | **—** | ** ** | **$** | **719,052** | ** ** |

 

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(a)                                  Total comprehensive income (loss) for thethree and six months ended June 30, 2008, was $(15.2) million and$(75.8) million, compared with $23.9 million and $40.4 millionfor the three and six months ended June 30, 2007.

 

(b)                                 Total other comprehensive income (loss) forthe three and six months ended June 30, 2008, was $0.2 million and$(35.9) million, compared with $(5.0) million and $1.0 millionfor the three and six months ended June 30, 2007.

 

(c)                                  Accumulated other comprehensive income (loss)at June 30, 2008, and December 31, 2007, was $35.2 million and$71.1 million, respectively.

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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***Notesto Unaudited Quarterly Consolidated Financial Statements***

 

***1.******                                      Natureof Operations and Basis of Presentation***

 

Ouroperations began on October 29, 2004 (inception), when we acquired theforest products and paper assets of OfficeMax (the Forest ProductsAcquisition). Before the Forest Products Acquisition, OfficeMax was known asBoise Cascade Corporation. We acquired the name “Boise Cascade” as part of theForest Products Acquisition.

 

On February 22, 2008, Boise Cascade,L.L.C., our wholly owned direct subsidiary, sold the Paper and Packaging &Newsprint assets and most of our Corporate and Other assets (the Sale), toBoise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash and securitiesequal to $1.6 billion, plus working capital adjustments. With the Sale, weare now a focused wood products manufacturing and building productsdistribution company that remains headquartered in Boise, Idaho. Weproduce quality wood products and manage a nationwide building materialsdistribution network. After the Sale, we operate our business in thefollowing three reportable segments: Building Materials Distribution, WoodProducts, and Corporate and Other. See Note 19, Segment Information, foradditional information about our reportable segments.

 

As used in these consolidated financial statements,the terms “BC Holdings” and “we” refer to Boise Cascade Holdings, L.L.C., andits consolidated subsidiaries. In connection with the Sale, we received37.9 million, or 49%, of Boise Inc.’s shares. The equityinterest that we own in Boise Inc. represents a significant continuinginvolvement as defined in Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets.*As a result, the financial data in thisreport includes the results of the Paper and Packaging & Newsprintsegments through February 21, 2008, and we did not define the sold assetsas discontinued operations.

 

The quarterly consolidated financial statements havenot been audited by an independent registered public accounting firm but, inthe opinion of management, include all adjustments, consisting only of normal,recurring adjustments, necessary to present fairly the results for the periodspresented. Net income (loss) for the three and six months ended June 30,2008 and 2007, involved estimates and accruals. Some of our accountingestimates include the assessment of the recoverability of long-lived assets;the assessment of goodwill and intangible assets; the valuation and recognitionof share-based compensation; the valuation and recognition of pension expenseand liabilities; and the evaluation of our investment in Boise Inc. forother-than-temporary impairment. Actual results may vary from those estimates.Quarterly results are not necessarily indicative of results that may beexpected for the full year.

 

Certain amounts in prior periods’ consolidatedfinancial statements have been reclassified to conform with the current period’spresentation.

 

***2.******                                      Saleof Our Paper and Packaging & Newsprint Assets***

 

On February 22, 2008, Boise Cascade,L.L.C., completed the Sale for $1,277.2 million of cash consideration,$277.4 million of net stock consideration, and a $41.0 millionpaid-in-kind promissory note receivable. After the Sale, the note receivablefrom Boise Inc. increased $17.3 million for working capitaladjustments. For more information, see Note 4, Transactions With RelatedParties. In connection with the Sale, we generated a $9.3 million gain, ofwhich we recognized $4.7 million in our Consolidated Statement of Lossduring the six months ended June 30, 2008. In accordance with EmergingIssues Task Force (EITF) No. 01-02, *Interpretations ofAccounting Principles Board (APB) Opinion No. 29,*we deferred$4.6 million of the gain as a reduction of our investment in Boise Inc.

 

Immediately following the Sale, BoiseCascade, L.L.C., distributed the securities received in the transaction to us.As a result, we became a 49% owner of Boise Inc. and continue to have asignificant indirect financial interest in the results of the sold businesses.We account for our interest in Boise Inc. using the equity method ofaccounting. We valued the stock consideration received based on the February 21,2008, closing Boise Inc. stock price of $8.56. We reduced the value of thestock consideration received by a 12% discount for a lack of marketabilitysince the stock delivered as consideration was not registered for resale and bya $4.6 million gain deferred in connection with the Sale. We will realizethe deferred gain when we reduce our investment in Boise Inc. SeeNote 12, Investment in Equity Affiliate, for more information.

 

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The net proceeds of any disposition of the shares of Boise Inc., andthe net proceeds received from the sale of the note receivable fromBoise Inc. (see Note 4, Transactions With Related Parties), aregoverned by the terms of our senior subordinated notes indenture, including theasset disposition provisions, which may require us to repay seniorindebtedness, reinvest the proceeds in our business, or tender for all, or a portionof, the outstanding notes at par.

 

*Useof Transaction Proceeds*

 

With the proceeds from the Sale and aninitial borrowing under our asset-based revolving credit facility, we repaid$1,085.6 million of our debt. In addition to repaying a substantial amountof our indebtedness, in first quarter 2008, we paid $11.9 million tounwind all of our interest rate swaps.

 

We make cashdistributions to permit the members of BC Holdings and affiliates to pay theirtaxes. On February 22, 2008, we accrued $200 million for estimatedtax distributions payable to our equity holders related to the estimated nettaxable gain on the Sale. During the three and six months ended June 30,2008, we made $0.5 million and $127.9 million of tax distributions toour equity holders. We expect to make additional gain-related tax distributionsduring the remainder of the year or first quarter 2009. Our tax distributionpayable to members will include the gain on the Sale and will increase ordecrease for 2008 taxable income (loss).

 

In connection with thetransaction, approximately 75 participants in our Management Equity Planterminated employment with us. These employees collectively held6.6 million Series B and 16.1 million Series C units. Afterthe transaction, we paid $18.3 million to repurchase their equity units.In addition, we also currently expect to pay approximately $4.2 millionunder the deferred compensation agreements for employees terminated inconnection with the transaction. Of the $4.2 million, we recorded $2.6 millionin “Accrued liabilities, Compensation and benefits” and $1.6 million in “Other,Compensation and benefits” on our Consolidated Balance Sheet at June 30,2008.

 

*Pro Forma*

 

The following pro formafinancial information was derived from the unaudited quarterly financialstatements of BC Holdings. The pro forma financial information gives effect tothe Sale as if it were consummated on January 1, 2007. The pro formafinancial information is intended for informational purposes only and is notnecessarily indicative of the results of operations that may have actuallyoccurred if the Sale had been consummated on January 1, 2007, or theoperating results that may be obtained in the future.

** **
| ** **         | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **         | ** ** | **2008**                                       | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **         | ** ** | **(thousands)**                                | ** ** |
|               |       |                                           |       |                                         |       |   |   |   |   |
| Sales              |       | $                                              | 757,188    |                                         | $          | 895,729 |   | $ | 1,385,287 |   | $ | 1,667,017 |   |
|               |       |                                           |       |                                         |       |   |   |   |   |
| Net income  (loss) |       | $                                              | (12,811    | )(a)                                         | $          | 23,491 | (b) | $ | (54,676 | )(a) | $ | 27,577 | (b) |
|                    |            |                                                |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                  The pro forma net loss for the three and sixmonths ended June 30, 2008, included pro forma losses of $8.9 millionand $22.1 million related to our equity interest in Boise Inc.;included zero and $6.3 million  ofexpense related to changes in the fair value of our interest rate swaps, whichwe terminated in February 2008; included $1.8 million and$4.1 million of related-party interest income from the note receivablefrom Boise Inc., which was sold in June 2008; excluded $0.7 millionof income and $4.0 million of expense related to the fair value ofcontingent value rights that we and Terrapin Partners Venture Partnership granted to certainBoise Inc. investors; and excluded $3.3 million of expense and$4.7 million of gain on the Sale.

 

(b)                                 Pro forma net income for the three and sixmonths ended June 30, 2007, included pro forma losses of $8.9 millionand $12.1 million related to our equity interest in Boise Inc.;included $2.3 million and $4.6 million of related-party interestincome from the note receivable from Boise Inc.; both periods included a$4.4 million gain related to changes in our retiree healthcare programsand $5.4 million of income related to changes in the fair value of ourinterest rate swaps.

 

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***3.******                                     ******Assetsand Liabilities Held for Sale***

 

*BrazilOperations*

 

In April 2008, our board of directors authorizedmanagement to pursue the divestiture of our plywood and veneer mill andeucalyptus plantations we owned or controlled in Brazil. Accordingly, wereclassified the assets and liabilities of our Brazil operations, which arepart of our Wood Products segment, to “Assets held for sale” and “Liabilitiesrelated to assets held for sale” on our Consolidated Balance Sheet and stoppeddepreciating the assets. We did not record the results of its operations asdiscontinued because the business is part of a larger cash-flow generatinggroup and on its own is not a component of an entity as defined in SFAS No. 144.We tested the recoverability of the long-lived assets in accordance with SFAS No. 144and recorded no impairment.

 

On July 1, 2008, we sold our indirect whollyowned subsidiary in Brazil, Boise Cascade do Brasil, Ltda., to AracruzCelulose, S.A., for an aggregate price of $47.1 million, and we expect torecord a gain of approximately $6 million on the sale, net of estimatedselling expenses.

 

In accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, we did not recast the prior-period balance sheetfor assets and liabilities held for sale related to the Brazil operations toconform with the current-period presentation. Thecarrying amounts of the major classes of assets and liabilities classified as “Assetsheld for sale” and “Liabilities related to assets held for sale” on our June 30,2008, Consolidated Balance Sheet were as follows:

** **
| ** **                                   | ** ** | **June 30,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **2008**          | ** ** |
| ** **                                   | ** ** | **(thousands)**   | ** ** |
| Assets                                       |       |              |       |
| Cash                                         |       | $                 | 1,091      |   |
| Accounts  receivable, net                    |       | 199               |       |
| Inventories                                  |       | 2,937             |       |
| Property and  equipment, net                 |       | 14,598            |       |
| Fiber farms and  deposits                    |       | 17,935            |       |
| Other                                        |       | 3,768             |       |
| Assets held for  sale                        | ** ** | **$**             | **40,528** | ** ** |
|                                         |       |              |       |
| Liabilities                                  |       |              |       |
| Accounts payable                             |       | $                 | 513        |   |
| Accrued  compensation and benefits           |       | 189               |       |
| Other accrued  liabilities                   |       | 64                |       |
| Liabilities  related to assets held for sale | ** ** | **$**             | **766**    | ** ** |

 

*Paper andPackaging & Newsprint Assets*

 

In September 2007,in anticipation of the Sale, we reclassified the assets and liabilities of ourPaper and Packaging & Newsprint segments, as well as some of theassets and liabilities included in our Corporate and Other segment, to “Assetsheld for sale” and “Liabilities related to assets held for sale” on ourConsolidated Balance Sheet and stopped depreciating and amortizing thoseassets. As discussed in Note 2, Sale of Our Paper and Packaging &Newsprint Assets, we sold these assets to Boise Inc. on February 22,2008. The three and six months ended June 30, 2008, included approximately$30.8 million and $61.6 million of lower depreciation andamortization expense as a result of recording no depreciation and amortizationexpense for the Paper and Packaging & Newsprint assets in 2008. Ofthe $30.8 million of lower depreciation and amortization expense recordedduring the three months ended June 30, 2008, $16.1 million related toour Paper segment, $13.9 million related to our Packaging &Newsprint segment, and $0.8 million related to our Corporate and Othersegment. During the six months ended June 30, 2008, $32.7 millionrelated to our Paper segment, $27.3 million related to our Packaging &Newsprint segment, and $1.6 million related to our Corporate and Othersegment.

 

The carrying amounts of the major classes of assets and liabilitiesclassified as “Assets held for sale” and “Liabilities related to assets heldfor sale” on our December 31, 2007, Consolidated Balance Sheet were asfollows:

 

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** **
| ** **                                   | ** ** | **December 31,** | ** **    |
|----------------------------------------------|------------|-----------------------|---------------|
| ** **                                   | ** ** | **2007**              | ** **    |
| ** **                                   | ** ** | **(thousands)**       | ** **    |
| Assets                                       |       |                  |          |
| Accounts receivable,  net                    |       | $                     | 227,291       |   |
| Inventories                                  |       | 324,679               |          |
| Property and  equipment, net                 |       | 1,199,618             |          |
| Fiber farms and  deposits                    |       | 17,843                |          |
| Goodwill                                     |       | 42,218                |          |
| Intangible  assets, net                      |       | 23,967                |          |
| Other                                        |       | 17,423                |          |
| Assets held for  sale                        | ** ** | **$**                 | **1,853,039** | ** ** |
|                                         |       |                  |          |
| Liabilities                                  |       |                  |          |
| Accounts payable                             |       | $                     | 178,733       |   |
| Accrued  compensation and benefits           |       | 105,583               |          |
| Other accrued  liabilities                   |       | 47,320                |          |
| Liabilities  related to assets held for sale | ** ** | **$**                 | **331,636**   | ** ** |

 

***4.******                                      TransactionsWith Related Parties***

 

*Sales*

 

Prior to the Sale, wesold paper and paper products to OfficeMax at sales prices that were designedto approximate market prices. For the three months ended June 30, 2007,sales to OfficeMax were $159.5 million. Sales to OfficeMax were$90.1 million and $317.3 million for the six months ended June 30,2008 and 2007, respectively. These sales are included in “Sales, Relatedparties” in the Consolidated Statements of Income (Loss).

 

During the three and six months ended June 30, 2008, we sold$10.5 million and $14.7 million of fiber to Boise Inc. and$3.3 million and $4.8 million of fiber to Louisiana TimberProcurement Company, L.L.C., an unconsolidated entity that is 50% owned byBoise Cascade, L.L.C., and 50% owned by Boise Inc., at prices designed toapproximate market. Most of these sales relate to chip sales from our WoodProducts segment. These sales are included in “Sales, Related parties” in theConsolidated Statements of Loss.

 

*Costs andExpenses*

 

During the three and six months ended June 30, 2008, we purchased$21.2 million and $26.7 million of fiber from Louisiana TimberProcurement Company, L.L.C. In addition, we purchased $1.3 millionand $1.8 million of transportation services from Boise Inc. Wepurchased the fiber and transportation services at prices that approximatedmarket prices. For the three and six months ended June 30, 2008, thesecosts are recorded in “Materials, labor, and other operating expenses fromrelated parties” in our Consolidated Statements of Loss.

 

In connection with the Sale, we entered into anOutsourcing Services Agreement under which Boise Inc. provides a number ofcorporate staff services to us at cost. These services include informationtechnology, accounting, and human resource services. The initial term of theagreement is for three years. It will automatically renew for one-year termsunless either party provides notice of termination to the other party at least12 months in advance of the applicable term. The Outsourcing ServicesAgreement also gives us (but not Boise Inc.) the right to terminate all or anyportion of the services provided to us on 30 days’ notice, subject topayment of an absorption fee. The absorption fee of $5.0 million isallocated among the services provided under the contract and declines to zeroin total and on an allocable basis over the initial three-year term of theagreement. During the three and six months ended June 30, 2008, werecognized $3.8 million and $5.2 million of costs related to thisagreement, of which we recorded $0.6 million and $0.7 million in “Materials,labor, and other operating expenses from related parties,” $0.7 millionand $1.0 million in “Selling and distribution expenses,” and$2.5 million and $3.5 million in “General and administrative expensesfrom related party” in our Consolidated Statements of Loss.

 

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*NoteReceivable*

 

In connection with the Sale, we received a 15.75%, $41.0 millionpaid-in-kind promissory note receivable from Boise Inc. that compoundedquarterly and was scheduled to mature in August 2015. After thetransaction, the note receivable increased $17.3 million for workingcapital adjustments, the amount by which the working capital of our Paper andPackaging & Newsprint segments exceeded $329.0 million. Duringthe three and six months ended June 30, 2008, we recorded approximately$1.8 million and $2.8 million of interest income in our ConsolidatedStatements of Loss.

 

In June 2008,we sold the note receivable for $52.8 million, after selling expenses. Werecorded an $8.3 million loss on the sale of the note receivable in “Other(income) expense, net” in our Consolidated Statements of Loss for the three andsix months ended June 30, 2008. We are obligated under the indenture forour 7.125% senior subordinated notes due 2014 to use the net proceeds of thesale of the note receivable within one year to repay senior indebtedness,acquire additional assets, or make a tender offer at par for a portion of thesenior subordinated notes. As we evaluate potential uses for the funds, the netcash proceeds received are invested in high-quality, short-term investments,which we record in “Cash and cash equivalents.”

 

*Tax Distributions*

 

The majority of ourbusinesses and assets are held and operated by limited liability companies,which are not subject to entity-level federal or state income taxation. We makecash distributions to permit the members of BC Holdings and affiliates topay income taxes. During the six months ended June 30, 2008, we made$127.9 million of cash tax distributions, of which $120.5 million ofthe tax distributions related to the net taxable gain on the Sale. During thesix months ended June 30, 2008, we paid $104.9 million to ForestProducts Holdings (FPH), our majority owner. FPH in turn paid$94.2 million to Madison Dearborn Partners, our equity sponsor,$10.3 million to management investors, and $0.4 million tononmanagement affiliates, respectively. For the six months ended June 30,2007, we did not make any distributions to FPH. For the six months ended June 30,2008 and 2007, we paid $23.0 million and $2.8 million to OfficeMax tofund their tax obligations related to their investments in us.

 

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

 

We receive rebates and allowances from our vendorsunder a number of different programs, including vendor marketing programs. At June 30,2008, and December 31, 2007, we had $1.4 million and$2.2 million, respectively, of vendor rebates and allowances recorded in “Receivables,Other” on the Consolidated Balance Sheets. These rebates and allowances areaccounted for in accordance with EITF 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received From aVendor*. 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.

 

We also provide rebates to our customers based on thevolume of their purchases. We provide the rebates to increase the sell-throughof our products. The rebates provided to our customers are accounted for inaccordance with EITF 01-09, *Accounting forConsideration Given by a Vendor to a Customer*. The rebates are recordedas a decrease in sales. At June 30, 2008, and December 31, 2007, wehad $9.8 million and $12.7 million, respectively, of rebates payableto our customers recorded in “Accrued liabilities, Other” on our ConsolidatedBalance Sheets.

 

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

 

“Other(income) expense, net” includes miscellaneous income and expense items. Thecomponents of “Other (income) expense, net” in the Consolidated Statements ofIncome (Loss) are as follows:

 
| ** **                                                   | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                       | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(thousands)**                                |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Loss on sale of  note receivable from related party (a) |       | $                                              | 8,313      |                                         | $          | — |   | $ | 8,313 |   | $ | — |   |
| Changes in  retiree healthcare programs                      |       | —                                         |       | (4,367                                       | )          | — |   | (4,367 | ) |
| Sales of assets,  net                                        |       | 268                                            |       | (1,700                                       | )          | (730 | ) | (701 | ) |
| Other, net (b)                                               |       | 54                                             |       | 976                                          |       | 110 |   | 2,523 |   |
| ** **                                                   | ** ** | **$**                                          | **8,635**  | ** **                                   | **$**      | **(5,091** | **)** | **$** | **7,693** | ** ** | **$** | **(2,545** | **)** |

 

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| (a)    |   | In  June 2008, we sold the note receivable from Boise Inc. for  $52.8 million, after selling expenses, and recorded an $8.3 million  loss on the sale in “Other (income) expense, net.” |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                  |
| (b)    |   | The  three and six months ended June 30, 2007, included $0.7 million and  $2.0 million of expense related to the closure of our paper converting  facility in Salem, Oregon.                                |

 

***7.******                                      Leases***

 

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 $3.3 million and $6.3 million for the threemonths ended June 30, 2008 and 2007, and $8.7 million and$12.6 million for the six months ended June 30, 2008 and 2007.Sublease rental income was not material in any of the periods presented.

 

For noncancelableoperating leases with remaining terms of more than one year, the minimum leasepayment requirements are $5.8 million for the remainder of 2008, $10.8 millionin 2009, $10.1 million in 2010, $8.8 million in 2011,$8.1 million in 2012, and $6.9 million in 2013, with total paymentsthereafter of $34.8 million. These future minimum lease paymentrequirements have not been reduced by sublease rentals due in the future undernoncancelable subleases. Minimum sublease income received in the future is notexpected to be material.

 

In second quarter 2007, we sold our newly constructed building materialsdistribution center in Milton, Florida, for $10.1 million, net of relatedfees and expenses. The proceeds were used to make debt repayments. Inconnection with the sale, we leased back the facility over a 15-year leaseterm. The lease is accounted for as an operating lease. The minimum leasepayment requirements related to the transaction are included in the minimumlease payments disclosed above.

 

Substantially all lease agreements have fixed payment terms based on thepassage of time. Some lease agreements provide us with the option to purchasethe leased property. Additionally, some agreements contain renewal optionsaveraging approximately two years, with fixed payment terms similar tothose in the original lease agreements.

 

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***8.******                                      IncomeTaxes***

 

*TaxDistributions*

 

The majority of our businesses and assets are held andoperated by limited liability companies, which are not subject to entity-levelfederal or state income taxation. The income taxes in respect to theseoperations are payable by our equity holders in accordance with theirrespective ownership percentages. We make cash distributions to permit themembers of BC Holdings and affiliates to pay these taxes. For the threeand six months ended June 30, 2008, we made $0.5 million and$127.9 million of cash distributions, and zero and $2.8 million forthe three and six months ended June 30, 2007. Relative to the six monthsended June 30, 2007, the increase in 2008 distributions related to the nettaxable gain on the Sale. See Note 2, Sale of Our Paper and Packaging &Newsprint Assets, for more information. Both our senior credit facilities andthe indenture governing our notes permit these distributions.

 

*Income Tax (Provision) Benefit*

 

For the three months ended June 30, 2008, werecorded a small tax benefit, compared with $3.5 million of income taxexpense during the same period in the prior year. Income tax expense was$1.1 million and $4.7 million for the six months ended June 30,2008 and 2007. Our income tax provision consists of income taxes payable tostates that do not allow for the income tax liability to be passed through toour equity holders as well as income taxes payable by our separate subsidiariesthat are taxed as corporations. During the three months ended June 30,2008 and 2007, our effective tax rates for our separate subsidiaries that aretaxed as corporations were 34.0% and 34.4%. Our effective tax rates were 35.4%and 34.7% for the six months ended June 30, 2008 and 2007. The primaryreason for the difference in tax rates is the effect of state income taxes andthe mix of domestic and foreign sources of income. At June 30, 2008, and December 31,2007, we had zero and $0.6 million of deferred tax liabilities related toour taxable subsidiaries recorded on our Consolidated Balance Sheets. In February 2008,the deferred tax liability was reduced to zero, as the taxable subsidiariesthat held the deferred tax liabilities were part of the Sale.

 

During the three months ended June 30, 2008, wepaid $0.9 million of tax, net of income taxes refunded. We paid$1.1 million, $0.5 million, and $1.3 million of income taxes,net of refunds received, during the three months ended June 30, 2007, andthe six months ended June 30, 2008 and 2007, respectively.

 

BC Holdings or one of our subsidiaries files federalincome tax returns in the U.S. and Canada and various state and foreign incometax returns in the major state jurisdictions of Alabama, Idaho, Louisiana,Oregon, Minnesota, Texas, and Washington. We are subject to tax examinationsfrom October 29, 2004 (our inception) to present. In the second quarter2008, the United States Internal Revenue Service began an audit of the BCHoldings returns for the 2005 and 2006 tax years. Additionally, in thirdquarter 2007, the Canadian Revenue Agency began an audit of Boise AllJoist fortax years 2005 and 2006.

 

***9.******                                      Inventories***

 

Inventoriesinclude the following:

 
| ** **                          | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | **(thousands)**         |
| ** **                          | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Finished goods  and work in process |       | $                       | 266,511     |                        | $          | 266,033 |   |
| Logs                                |       | 26,516                  |        | 56,490                      |       |
| Other raw  materials and supplies   |       | 17,152                  |        | 19,492                      |       |
| ** **                          | ** ** | **$**                   | **310,179** | ** **                  | **$**      | **342,015** |   |

 

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***10.******                               Propertyand Equipment, Net***

 

                                                Propertyand equipment consisted of the following asset classes:

 
| ** **                     | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|--------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                     | ** ** | **(thousands)**         |
| ** **                     | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Land and land  improvements    |       | $                       | 36,089      |                        | $          | 37,330 |   |
| Buildings and  improvements    |       | 103,024                 |        | 105,835                     |       |
| Machinery and  equipment       |       | 245,969                 |        | 258,333                     |       |
| Construction in  progress      |       | 17,732                  |        | 15,382                      |       |
|                           |       | 402,814                 |        | 416,880                     |       |
| Less accumulated  depreciation |       | (110,787                | )           | (103,763                    | )          |
| ** **                     | ** ** | **$**                   | **292,027** | ** **                  | **$**      | **313,117** |   |

 

***11.******                               Goodwilland 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 SFAS No. 142, *Goodwill andOther Intangible Assets*, which requires us to assess our acquiredgoodwill and intangible assets with indefinite lives for impairment at leastannually in the absence of an indicator of possible impairment and immediatelyupon an indicator of possible impairment. We assess goodwill and intangibleassets with indefinite lives in the fourth quarter of each year using afair-value-based approach. We also evaluate the remaining useful lives of ourfinite-lived purchased intangible assets to determine whether any adjustmentsto the useful lives are necessary. We completed our annual assessment inaccordance with SFAS No. 142 in fourth quarter 2007 and determined thatthere was no impairment.

 

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, 2006                             |       | $                                     | 5,593      |               | $          | 6,577     |       | $                                   | 1,341      |                      | $          | 8,335      |       | $ | — |   | $ | 21,846 |   |
|                                                           |       |                                  |       |               |       |      |       |                                |       |                      |       |       |       |
| Purchase price  adjustments during 2007 (a)                    |       | —                                |       | —             |       | 32,542    |       | —                              |       | —                    |       | 32,542     |       |
| Goodwill  reclassified to “Assets held for sale” (b) |       | —                                |       | —             |       | (33,883   | )          | (8,335                              | )          | —                    |       | (42,218    | )          |
| Balance at  December 31, 2007, and June 30, 2008     | ** ** | **$**                                 | **5,593**  | ** **         | **$**      | **6,577** | ** ** | **$**                               | **—** | ** **                | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **12,170** | ** ** |

 

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(a)                                  As part of the Forest Products Acquisition, we entered into an AdditionalConsideration Agreement with OfficeMax, pursuant to which we agreed to adjustthe purchase price based on changes in paper prices over the six-year periodfollowing the Forest Products Acquisition. Based on paper prices during thethird anniversary period ended October 29, 2007, we paid OfficeMax$32.5 million. This payment increased goodwill in our Paper segment, whichwe recorded in “Assets held for sale” on our December 31, 2007,Consolidated Balance Sheet. This agreement terminated in February 2008with the sale of our Paper and Packaging & Newsprint assets.

 

(b)                                 See Note 3, Assets and Liabilities Held for Sale, for moreinformation.

 

At June 30, 2008, and December 31, 2007, intangible assetsrepresent the values assigned to trade names and trademarks and customerrelationships. The trade names and trademark assets have an indefinite life andare not amortized. Customer relationships are amortized over five years.

 

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Intangible assets consisted of the following:

 
| ** **                  | ** ** | **June 30, 2008**           | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**            | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|                        |       | **(thousands)**                       |
|                        |       |                                  |       |   |   |   |   |
| Trade names and  trademarks |       | $                                     | 8,900      |   | $ | — |   | $ | 8,900 |   |
| Customer  relationships     |       | 2,100                                 |       | (1,542 | ) | 558 |   |
| ** **                  | ** ** | **$**                                 | **11,000** | ** ** | **$** | **(1,542** | **)** | **$** | **9,458** |   |
|                        |       |                                  |       |   |   |   |   |
| ** **                  | ** ** | **December 31, 2007**       | ** ** |
| ** **                  | ** ** | **Gross Carrying   Amount** | ** ** | **Accumulated**

**Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | **(thousands)**                       | ** ** |
|                        |       |                                  |       |   |   |   |   |
| Trade names and  trademarks |       | $                                     | 8,900      |   | $ | — |   | $ | 8,900 |   |
| Customer  relationships     |       | 2,100                                 |       | (1,332 | ) | 768 |   |
|                        |       | **$**                                 | **11,000** | ** ** | **$** | **(1,332** | **)** | **$** | **9,668** |   |
|                             |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

Intangible asset amortization expense was$0.1 million and $0.2 million for the three and six months ended June 30,2008, and $1.2 million and $2.3 million for the same periods in 2007.The estimated amortization expense is $0.2 million for the remainder of2008 and $0.4 million in 2009. We estimate no amortization expense after2009.

 

***12.******                               Investmentin Equity Affiliate***

 

In connection with theSale, we received 37.9 million, or 49%, of Boise Inc.’s shares. Werecorded our investment in “Investment in equity affiliate” on ourConsolidated Balance Sheet. This ownership interest and the three seats we holdon Boise Inc.’s board provide us with the ability to exercise significantinfluence. Accordingly, we account for our investment under the equity methodof accounting.

 

We measured our ownership in Boise Inc.based on Boise Inc.’s February 21, 2008, closing stock price,adjusted for a 12% discount for lack of marketability since the stock deliveredas consideration was not registered for resale. In addition, in accordance withEITF No. 01-02, *Interpretations of APBOpinion No. 29,*the value of the stock consideration receivedwas further reduced by the $4.6 million gain on the Sale that we deferredas a reduction of our investment. We will realize the deferred gain as wereduce our investment in Boise Inc. The investment is adjusted monthly for ourproportionate share of Boise Inc.’s net income or loss and our share of othercomprehensive income or loss based on the most recently available financialstatements. For the three and six months ended June 30, 2008, we recordedan $8.8 million and $17.4 million loss related to our investment inBoise Inc. in “Equity in net loss of affiliate” in our Consolidated Statementsof Loss.

 

We closely monitor Boise Inc.’s common stockshare price and publicly reported financial performance. At June 30, 2008,Boise Inc.’s stock closed at $3.85 and the fair value of the 37.9 millionshares we hold in Boise Inc. was, based on such trading price,$145.8 million, compared with the $263.5 million value recorded onour Consolidated Balance Sheet. In accordance with APB 18, *The Equity Method of Accounting For Investments in Common Stock*,we evaluated whether the investment was other than temporarily impaired andconcluded that it was not.

 

The carrying value of ourinvestment in Boise Inc. is approximately $2.8 million less than our shareof Boise Inc.’s underlying equity in net assets. The $2.8** **milliondifference represents negative equity method goodwill. Since Boise Inc.did not record any goodwill in its purchase price allocation, we allocated theexcess carrying amount to long-lived assets and we amortize the difference on astraight-line basis over the weighted-average useful life of Boise Inc.’sassets.

 

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***13.          Asset Retirement Obligations***

 

We account for asset retirement obligations in accordance with SFAS No. 143,*Accounting for Asset Retirement Obligations*,and Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 47,*Accounting for Conditional Asset RetirementObligations — an Interpretation of FASB Statement No. 143*.We accrue for asset retirement obligations in the period in which they areincurred if sufficient information is available to reasonably estimate the fairvalue of the obligation. When we record the liability, we capitalize the costby increasing the carrying amount of the related long-lived asset. Over time,the liability is accreted to its settlement value, and the capitalized cost isdepreciated over the useful life of the related asset. Upon settlement of theliability, we will recognize a gain or loss for any difference between thesettlement amount and the liability recorded.

 

At June 30, 2008, and December 31, 2007, we had $0.6 millionand $0.8 million of asset retirement obligations recorded in “Other, Otherlong-term liabilities” on our Consolidated Balance Sheets. These liabilitiesrelated primarily to landfill closure costs. The liabilities are based on thebest estimate 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 assetretirement obligations. The table below describes changes to our assetretirement obligations for the six months ended June 30, 2008, and theyear ended December 31, 2007:

 
| ** **                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                              | ** ** | **(thousands)**   | ** ** |
|                                                                                                                    |       |              |       |                  |       |
| Asset retirement  obligation at beginning of period                                                                     |       | $                 | 782        |                  | $          | 11,544 |   |
| Accretion  expense                                                                                                      |       | 176               |       | 926                   |       |
| Payments                                                                                                                |       | —            |       | (37                   | )          |
| Revisions in  estimated cash flows                                                                                      |       | —            |       | 1,652                 |       |
| Asset retirement  obligation reclassified to “Liabilities related to assets held for sale” (See  Note 3) |       | (380              | )          | (13,303               | )          |
| Asset retirement  obligation at end of period                                                                           | ** ** | **$**             | **578**    | ** **            | **$**      | **782** | ** ** |

 

We have additional asset retirement obligations with indeterminatesettlement dates. The fair value of these asset retirement obligations cannotbe estimated due to the lack of sufficient information to estimate thesettlement dates of the obligations. These asset retirement obligationsinclude, for example, (i) removal and disposal of potentially hazardousmaterials on equipment and/or an operating facility if the equipment and/orfacility were to undergo major maintenance, renovation, or demolition; (ii) wastewatertreatment ponds that may be required to be drained and/or cleaned if therelated operating facility is closed; and (iii) storage sites or ownedfacilities for which removal and/or disposal of chemicals and other relatedmaterials are required if the operating facility is closed. We will recognize aliability in the period in which sufficient information becomes available toreasonably estimate the fair value of these obligations.

 

***14.          Debt***

 

At June 30, 2008,and December 31, 2007, our short- and long-term debt were as follows:

 
| ** **                                  | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**          | ** **  | **2007**              | ** ** |
| ** **                                  | ** ** | **(thousands)**   | ** **  |
|                                        |       |              |        |                  |       |
| Revolving credit  facility, due 2013        |       | $                 | 75,000      |                  | $          | — |   |
| Tranche E term  loan, due 2014         |       | —            |        | 521,063               |       |
| 7.125% senior  subordinated notes, due 2014 |       | 240,000           |        | 400,000               |       |
| Delayed-draw  term loan, due 2014           |       | —            |        | 199,500               |       |
| Borrowings  secured by receivables          |       | —            |        | 40,000                |       |
| Current portion  of long-term debt          |       | —            |        | (47,250               | )          |
| Long-term debt,  less current portion       |       | 315,000           |        | 1,113,313             |       |
| Short-term  borrowings                      |       | —            |        | 10,500                |       |
| Current portion  of long-term debt          |       | —            |        | 47,250                |       |
| Total debt                                  | ** ** | **$**             | **315,000** | ** **            | **$**      | **1,171,063** | ** ** |

 

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As discussed in Note 2, Sale of Our Paper and Packaging &Newsprint Assets, with the proceeds from the Sale and an initial borrowingunder our asset-based revolving credit facility, we repaid$1,085.6 million of debt, including all of the borrowings under theprevious revolving credit facility, Tranche E term loan, delayed-draw termloan, borrowings secured by our receivables, and $160.0 million of our7.125% senior subordinated notes. For more information related to theseborrowings prior to our repaying them, see Note 11, Debt, of the Notes toConsolidated Financial Statements in “Item 8. Financial Statements andSupplementary Data” of our 2007 Annual Report on Form 10-K.

 

*Asset-Based Revolving CreditFacility*

 

On February 22, 2008, Boise Cascade, L.L.C., andits principal operating subsidiaries, Boise Building Solutions Manufacturing,L.L.C., and Boise Building Solutions Distribution, L.L.C., acting as borrowers,entered into a five-year $350 million senior secured asset-based revolvingcredit facility with Bank of America (the Agreement). As part of thesyndication process, the Agreement was amended in April 2008 to revise thepricing and incorporate additional covenants. At June 30, 2008, we had$75.0 million of borrowings outstanding under the Agreement. Borrowingsunder the Agreement are based on either the prime rate or the London InterbankOffered Rate (LIBOR). Pricing is subject to quarterly adjustment based on theaverage availability under the Agreement during the prior quarter. The range ofborrowing costs under the pricing grid is: (i) prime plus 1.00% to 1.50% or (ii) LIBOR plus 2.50% to3.00%. For the period of February 22, 2008, through June 30, 2008,the average interest rate for our borrowings under the Agreement was 5.2%.Letters of credit are subject to a 0.125% fronting fee payable to the issuingbank and a fee payable to the lenders equal to the product of the interest ratespread applicable to LIBOR borrowings under the Agreement and the dailyaverage amount available for drawing under the outstanding letters of credit.The minimum and maximum borrowings under the Agreement were $64.1 millionand $75.0 million between February 22, 2008, and June 30, 2008.The weighted average amount of borrowings outstanding under the Agreementduring the period from February 22, 2008, through June 30, 2008, was$69.5 million. The Agreement provides for a commitment fee of 0.50% perannum payable to the lenders on the average daily unused portion of theAgreement.

 

The revolving credit facility is guaranteed by ourdomestic subsidiaries (other than the three borrowers noted above) and issecured by a first-priority security interest in the stock of our foreignsubsidiaries and substantially all of our domestic assets, except for property,plant, and equipment. Borrowings under the Agreement require compliance with aborrowing base formula, which sets advance rates against eligible accountsreceivable and inventory. As of June 30, 2008, we had availability of $191.1 millionabove the amount we had borrowed, including letters of credit outstanding. Ifexcess availability under the Agreement falls below the greater of$45 million or 15% of the borrowing base, we would be required to maintaina minimum fixed charge coverage ratio. TheAgreement also contains customary nonfinancial covenants, including a negativepledge covenant and restrictions on distributions to equity holders,acquisitions, and divestitures. These covenants will become more restrictive ifa minimum availability threshold is not maintained.

 

*Letters of Credit*

 

At June 30, 2008, we had $13.7 million ofletters of credit outstanding. These letters of credit reduce our borrowingcapacity under our asset-based revolving credit facility.

 

*Senior Notes*

 

In October 2004, Boise Cascade, L.L.C., issued$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 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 atredemption prices set forth in the indenture. If we sell specific assets orexperience specific kinds of changes in control, we must offer to purchase thenotes. In connection with the Sale, werepurchased $160.0 million of the notes on April 15, 2008.

 

*Other*

 

At June 30, 2008, and December 31, 2007, we had $8.5 millionand $23.1 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. With the proceeds from the 

 

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Sale, we repaid a significant portion ofour debt. In connection with repaying the debt, we expensed approximately$3.0 million and $17.6 million of deferred financing costs for thethree and six months ended June 30, 2008. We recorded the charges in “Gainon sale of Paper and Packaging & Newsprint assets” in our ConsolidatedStatements of Loss. In addition, we incurred approximately $4.1** **million of financing costs related to our newasset-based revolving credit facility, which we recorded in “Deferred financingcosts” on our June 30, 2008, Consolidated Balance Sheet.

 

For the six months ended June 30, 2008 and 2007, cash payments forinterest, net of interest capitalized, were $24.2 million and$45.6 million, respectively.

 

***15.          Financial Instruments***

 

Weare exposed to risks such as changes in interest rates, energy prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is an economichedge or we designate the derivative as a cash flow or fair value hedge. Weformally document all relationships between hedging instruments and the hedgeditems, as well as our risk management objectives and strategies for undertakingvarious hedged transactions. For those derivatives designated as cash flow orfair value hedges, we formally assess, both at the derivatives’ inception andon an ongoing basis, whether the derivatives that are used in hedgingtransactions are highly effective in offsetting changes in the hedged items.The ineffective portion of hedging transactions is recognized in income (loss).

 

Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, werecord all derivative instruments as assets or liabilities on our ConsolidatedBalance Sheets at fair value. Changes in the fair value of derivatives arerecorded in either “Net income (loss)” or “Other comprehensive income (loss),”as appropriate. The gain or loss on derivatives designated as cash flow hedgesis included in “Other comprehensive income (loss)” in the period in whichchanges in fair value occur and is reclassified to income (loss) in the periodin which the hedged item affects income (loss), and any ineffectiveness isrecognized currently in our Consolidated Statements of Income (Loss). The gainor loss on derivatives designated as fair value hedges and the offsetting gainor loss on the hedged item attributable to the hedged risk are included inincome (loss) in the period in which changes in fair value occur. The gain orloss on derivatives that have not been designated as hedging instruments isincluded in income (loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

After the Sale, our debt is predominantly fixed-rate.At June 30, 2008, the estimated current market value of our fixed-ratedebt, based on then-current interest rates for similar obligations with likematurities, was approximately $49.0 million less than the amount reportedon our Consolidated Balance Sheet.

 

With the proceeds from the Sale, we significantly decreased ourvariable-rate debt. As a result, we terminated all of our interest rate swapagreements for approximately $11.9 million. The interest rate swaps were considered economic hedges.During the six months ended June 30, 2008 and 2007, we recordedthe fair value of the interest rate swaps, or $6.3 million of expense and$5.4 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statements of Income (Loss).

 

*Energy Risk*

 

Occasionally,we enter into natural gas swaps, options, or a combination of these instrumentsto hedge the variable cash flow risk of natural gas purchases at index prices.As of June 30, 2008, we had no material derivative instruments related toour forecasted natural gas purchases.

 

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*ForeignCurrency Risk*

 

At June 30, 2008, we had no material foreigncurrency hedges.

 

*Contingent Value Rights*

 

As part of the Sale, Terrapin Partners VenturePartnership (Boise Inc.’s majority owner prior to the Sale) and Boise Cascade,L.L.C. (collectively the Grantors) issued 21.2 million contingent value rights(CVRs) to holders of Boise Inc.’s stock. The CVRs are governed by a ContingentValue Rights Agreement (the CVR Agreement). The term of the CVR Agreement isfrom February 5, 2008, through February 5, 2009, and allows investorsto receive payments in cash, shares of common stock, or a combination of cashand shares as elected by us, based upon the performance of Boise Inc.’s stock.If at any time during the year, Boise Inc.’s stock price is at least $10.50 for(1) any 20 days of any period of 30 consecutive days or (2) any10 consecutive trading days, then the CVRs have no value. If neither ofthe preceding conditions is met over the one-year period, the holder receives avalue equal to the lesser of $1.00 or the amount by which the $10.50 exceedsthe average stock price for the 30-day period ending February 5, 2009 (theAnniversary Price). If we elect to settle our obligation under the CVRAgreement using Boise Inc. shares, the CVR Agreement provides that our shareswill be valued at the greater of the Anniversary Price or $9.00 per share. As aresult, the maximum number of Boise Inc. shares we would be required to deliverto the rights holders would be 2.4 million, assuming Terrapin PartnersVenture Partnership failed to perform its obligations.

 

We recorded the fair value of the liability on the grant date based on asimulation analysis that considered the likelihood of Boise Inc. investorsreceiving payment under the Agreement. We update the simulation model eachquarter and revalue the liability based on its results. The Grantors arejointly and severally liable to the investors for the CVR payment, but betweenthe Grantors, each Grantor is individually liable for 50% of the CVR payment.Because we are jointly and severally liable to investors, at June 30,2008, we recorded a liability for 100% of the fair value of the CVRs, or$8.1 million, in “Accrued liabilities, Other” on our Consolidated BalanceSheet. We also recorded $0.7 million of income and $4.0 million ofexpense in “Change in fair value of contingent value rights” on ourConsolidated Statements of Loss for the three and six months ended June 30,2008, and a $4.0 million receivable in “Receivables, Other” on ourConsolidated Balance Sheet at June 30, 2008.

 

*FinancialInstrument Fair Value Reconciliation*

 

The following table reconciles the beginning andending balances of the instruments for which we measured the fair value usingunobservable inputs (Level 3 in the fair value hierarchy) as of June 30,2008:

 
| ** **                                                                                                                                 | ** ** | **Contingent  Value  Rights** | ** ** | **Interest  Rate  Swaps** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                                                                                                 | ** ** | **(thousands)**               | ** ** |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Beginning  balance at December 31, 2007                                                                                               |       | $                             | —     |                      | $          | 5,634      |       | $ | 5,634 |   |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Losses included  in earnings                                                                                                               |       | 4,030                         |       | 6,284                     |       | 10,314     |       |
| Receivable from  Terrapin Partners                                                                                                         |       | 4,030                         |       | —                    |       | 4,030      |       |
| Termination of  interest rate swaps                                                                                                        |       | —                        |       | (11,918                   | )          | (11,918    | )          |
| Ending balance  at June 30, 2008                                                                                                      | ** ** | **$**                         | **8,060**  | ** **                | **$**      | **—** | ** ** | **$** | **8,060** | ** ** |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Total losses  included in earnings attributable to the change in unrealized gains or losses  relating to assets held at June 30, 2008 |       | **$**                         | **4,030**  |                      | **$**      | —     |       | **$** | **4,030** |   |

 

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***16.          New and Recently Adopted AccountingStandards***

 

In May 2008, theFASB issued SFAS No. 162, *The Hierarchyof Generally Accepted Accounting Principles.* The standard isintended to improve financial reporting by identifying a consistent framework,or hierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. generallyaccepted accounting principles for nongovernmental entities. SFAS No. 162is effective 60 days following the approval by the Securities and ExchangeCommission (SEC) of the Public Company Accounting Oversight Board amendments toAU Section 411, *The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.*We do not expect the adoption to have a material impact on our financialposition or results of operations.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures About Derivative Instruments andHedging Activities*. SFAS No. 161 requires enhanced disclosuresabout derivative instruments and hedging activities to enable investors tobetter understand their effects on financial position, financial performance,and cash flows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. SFAS No. 161is effective for fiscal years beginning after November 15, 2008, whichwill require us to adopt these provisions in 2009. Early adoption of SFAS No. 161is permitted. We are currently evaluating the impact SFAS No. 161will have on our consolidated financial statements.

 

In January 2008, weadopted SFAS No. 157,*Fair ValueMeasurements*. The adoption did not have a material impact on ourfinancial position or results of operations. The statement established aframework for measuring fair value, and it enhanced the disclosures for fairvalue measurements. The statement applies when other accounting pronouncementsrequire or permit fair value measurements, but it does not require new fairvalue measurements. In accordance with the standard, in Note 15, FinancialInstruments, we expanded our disclosures about fair value measurements. Inaccordance with the provisions of FASB Staff Position (FSP) No. 157-2, *Effective Date of FASB Statement No. 157*, we elected todefer adoption of SFAS No. 157 as it relates to nonfinancial assets andnonfinancial liabilities that are recognized and disclosed at fair value in thefinancial statements on a nonrecurring basis until January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations,*and SFAS No. 160,*Accounting and Reporting of NoncontrollingInterests in Consolidated Financial Statements, an Amendment of AccountingResearch Bulletin No. 51.* These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. We are required to adopt SFAS Nos. 141(R) and 160simultaneously on January 1, 2009. Earlier adoption is prohibited. Theimpact of adopting these standards will be limited to business combinationsoccurring on or after January 1, 2009.

 

***17.          Retirement and Benefit Plans***

 

Effective January 1, 2008, we spunoff the portion of each benefit plan attributable to employees or retirees ofthe Paper and Packaging & Newsprint businesses. Effective February 22,2008, under the terms of the Purchase and Sale Agreement with Boise Inc., wetransferred sponsorship of the spunoff plans to Boise PaperHoldings, L.L.C., a subsidiary of Boise Inc., and only thoseemployees, terminated vested participants, and retirees whose employment waswith our Wood Products, Building Materials Distribution, and some corporate anddiscontinued operations continue to be covered under the plans remaining withus.

 

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The following tablepresents the pension and postretirement benefit costs as follows:

 
| ** **                                     | ** ** | **Pension Benefits**                      | ** ** | **Other Benefits**                        | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended  June 30** | ** ** | **Three Months Ended  June 30** | ** ** |
| ** **                                     | ** ** | **2008**                                       | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                | ** ** |
|                                           |       |                                           |       |                                           |       |   |   |   |   |
| Service cost                                   |       | $                                              | 2,753      |                                           | $          | 5,615 |   | $ | — |   | $ | 30 |   |
| Interest cost                                  |       | 4,615                                          |       | 9,301                                          |       | 3 |   | 122 |   |
| Expected return  on plan assets                |       | (4,542                                         | )          | (9,217                                         | )          | — |   | — |   |
| Recognized  actuarial (gain) loss              |       | (92                                            | )          | 130                                            |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 30                                             |       | 371                                            |       | — |   | — |   |
| Company-sponsored  plans                       |       | 2,764                                          |       | 6,200                                          |       | 3 |   | 152 |   |
| Multiemployer  pension plans                   |       | 13                                             |       | 120                                            |       | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                                          | **2,777**  | ** **                                     | **$**      | **6,320** | ** ** | **$** | **3** | ** ** | **$** | **152** | ** ** |

 
| ** **                                     | ** ** | **Pension Benefits**                    | ** ** | **Other Benefits**                      | ** ** |
|------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                     | ** ** | **Six Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
| ** **                                     | ** ** | **2008**                                     | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(thousands)**                              | ** ** |
|                                           |       |                                         |       |                                         |       |   |   |   |   |
| Service cost                                   |       | $                                            | 7,069      |                                         | $          | 11,362 |   | $ | 1 |   | $ | 84 |   |
| Interest cost                                  |       | 12,684                                       |       | 18,807                                       |       | 23 |   | 227 |   |
| Expected return  on plan assets                |       | (12,536                                      | )          | (18,814                                      | )          | — |   | — |   |
| Recognized  actuarial (gain) loss              |       | (204                                         | )          | 260                                          |       | (13 | ) | — |   |
| Amortization of  prior service costs and other |       | 256                                          |       | 545                                          |       | — |   | — |   |
| Curtailment  (gain) loss                       |       | 404                                          |       | (181                                         | )          | — |   | — |   |
| Company-sponsored  plans                       |       | 7,673                                        |       | 11,979                                       |       | 11 |   | 311 |   |
| Multiemployer  pension plans                   |       | 103                                          |       | 248                                          |       | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                                        | **7,776**  | ** **                                   | **$**      | **12,227** | ** ** | **$** | **11** | ** ** | **$** | **311** | ** ** |

 

In February 2008, wemade a $20 million contribution to our pension plans, which was includedin the pension assets for purposes of determining the spinoff amounts. Duringthe remainder of 2008, we are not required to make any additional minimumcontributions to our pension plans; however, we may elect to make additionalvoluntary contributions.

 

***18.          Redeemable Equity Units***

 

In connection with the Sale, approximately75 participants in our Management Equity Plan terminated employment withus. These employees collectively held 6.6 million Series B and16.1 million Series C units. In March 2008, we paid$18.3 million to repurchase their equity units.

 

In connection with the Sale, for the six months ended June 30,2008, we recorded $3.1 million of expense to adjust the value of theimmature equity units (units that have not been at risk for at least sixmonths) to redemption value and $1.9 million of expense related tononrefundable tax distributions paid to management investors in connection withtheir investments in us that will not vest. We recorded the charges in “Gain onsale of Paper and Packaging & Newsprint Assets” in our ConsolidatedStatement of Loss. In addition, during the six months ended June 30, 2008,pursuant to the Sale we recorded a $6.3 million adjustment to the value ofthe mature equity units (vested units and units that had been at risk for atleast six months) to reflect redemption value in the capital section of ourConsolidated Balance Sheet and Consolidated Statement of Capital.

 

*Repurchase and Amendment*

 

In May 2008, our parent company,Forest Products Holdings (FPH), entered into a Repurchase Agreement andAmendment No. 1 to our Management Equity Agreement (the Repurchase andAmendment Agreements) with each member of management holding Series B and Series Cequity units. 

 

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Under the redemption provisions of the Repurchase and Amendment Agreements,FPH repurchased 48.5% of each management investor’s Series B units for anamount equal to such manager’s original investment in FPH totaling$9.7 million of cash. The repurchase was at the election of the individual participantand was offered for a short period of time. Accordingly, we accounted for therepurchase as a “short-term inducement” under SFAS No. 123(R), under theequity method accounting. During the six months ended June 30, 2008, werecognized $0.4 million of compensation expense for the amount that therepurchase exceeded the fair value of the awards.

 

FPH amended the Management EquityAgreement (the Plan) such that:  (i) 62.9% of the market-condition Series Cequity units were converted to time-vesting units and vest on a daily basisfrom February 22, 2008, through December 31, 2010, (ii) 37.1% ofthe market-condition Series C equity units remain subject to the Plan’sinternal rate of return formula, but the vesting period was extended one yearto December 2010, and (iii) the vesting period for the unvestedtime-vesting Series C equity units was extended one year to December 2010.The amendments had no impact on the Series B units. In accordance withSFAS No. 123(R), we measured the value of the award before and after themodification and, as a result, will be required to recognize an incremental$2.0 million of compensation expense resulting from the modification. Ofthe $2.0 million of incremental compensation expense, we recognizedapproximately $0.2 million during the three and six months ended June 30,2008, and we will recognize the remaining $1.8 million prospectively overthe remaining vesting period.

 

***19.        SegmentInformation***

 

Prior to the Sale, weoperated our business using five reportable segments:  Building Materials Distribution, WoodProducts, Paper, Packaging & Newsprint, and Corporate and Other.Following the Sale, we now operate our business using three reportablesegments:  Building Materials Distribution,Wood Products, and Corporate and Other. There are no differences in our basisof measurement of segment profit or loss from those disclosed in Note 16,Segment Information, of the Notes to Consolidated Financial Statements andSupplementary Data in “Item 8. Consolidated Financial Statements andSupplementary Data” in our 2007 Annual Report on Form 10-K. The 49% equityinterest we own in Boise Inc. after the Sale represents a significantcontinuing involvement as defined in SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*As a result, wecontinue to show the results of the Paper and Packaging & Newsprintsegments through February 21, 2008, and we do not define the sold assetsas discontinued operations.

 

An analysis of our operationsby segment is as follows:

 
| ** **                                       | ** ** | ** **     | ** ** | **Income**  | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------|------------|-------------|------------|-------------------|------------|------------|------------|
| ** **                                       | ** ** | **Sales**      | ** ** | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **     | ** ** | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                       | ** ** | **Trade**      | ** ** | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(d)** | ** ** |
| ** **                                       | ** ** | **(millions)** | ** ** |
| **Three  Months Ended June 30, 2008**       |       |           | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                 |       | $              | 609.9      |        | $          | —            |       | $          | 0.1        |   | $ | 610.0 |   | $ | 15.3 |   | $ | 1.9 |   | $ | 17.3 |   |
| Wood Products                                    |       | 133.5          |       | 13.8        |       | 78.7              |       | 226.0      |       | (3.4 | ) | 6.7 |   | 3.3 |   |
| Corporate and  Other (a)                         |       | —         |       | —      |       | —            |       | —     |       | (15.3 | ) | 0.1 |   | (15.4 | ) |
|                                             |       | 743.4          |       | 13.8        |       | 78.8              |       | 836.0      |       | (3.4 | ) | 8.7 |   | 5.2 |   |
| Intersegment  eliminations                       |       | —         |       | —      |       | (78.8             | )          | (78.8      | )          | — |   | — |   | — |   |
| Equity in net  loss of affiliate                 |       | —         |       | —      |       | —            |       | —     |       | (8.8 | ) | — |   | (8.8 | ) |
| Change in fair  value of contingent value rights |       | —         |       | —      |       | —            |       | —     |       | 0.7 |   | — |   | — |   |
| Interest expense                                 |       | —         |       | —      |       | —            |       | —     |       | (6.4 | ) | — |   | — |   |
| Interest income                                  |       | —         |       | —      |       | —            |       | —     |       | 2.6 |   | — |   | — |   |
| ** **                                       | ** ** | **$**          | **743.4**  | ** **  | **$**      | **13.8**          | ** ** | **$**      | **—** | ** ** | **$** | **757.2** | ** ** | **$** | **(15.4** | **)** | **$** | **8.7** | ** ** | **$** | **(3.6** | **)** |

 

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| ** **                                   | ** ** | ** **     | ** **  | **Income**  | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|----------------|-------------|-------------|------------|-------------------|------------|------------|------------|
| ** **                                   | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                   | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(d)** | ** ** |
| ** **                                   | ** ** | **(millions)** | ** **  |
| **Three  Months Ended June 30, 2007**   |       |           | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution             |       | $              | 723.6       |        | $          | —            |       | $          | 0.1        |   | $ | 723.7 |   | $ | 20.4 |   | $ | 1.9 |   | $ | 22.2 |   |
| Wood Products                                |       | 161.8          |        | —      |       | 116.9             |       | 278.7      |       | 15.7 |   | 7.6 |   | 23.3 |   |
| Paper                                        |       | 226.1          |        | 159.5       |       | 15.5              |       | 401.1      |       | 13.2 |   | 16.1 |   | 29.3 |   |
| Packaging &  Newsprint              |       | 173.9          |        | —      |       | 19.0              |       | 192.9      |       | 2.3 |   | 13.9 |   | 16.2 |   |
| Corporate and  Other (b)                |       | 3.5            |        | —      |       | 10.9              |       | 14.4       |       | (0.9 | ) | 1.2 |   | 0.4 |   |
|                                         |       | 1,288.9        |        | 159.5       |       | 162.4             |       | 1,610.8    |       | 50.7 |   | 40.7 |   | 91.4 |   |
| Intersegment  eliminations                   |       | —         |        | —      |       | (162.4            | )          | (162.4     | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate swaps |       | —         |        | —      |       | —            |       | —     |       | 5.4 |   | — |   | — |   |
| Interest expense                             |       | —         |        | —      |       | —            |       | —     |       | (24.4 | ) | — |   | — |   |
| Interest income                              |       | —         |        | —      |       | —            |       | —     |       | 0.6 |   | — |   | — |   |
| ** **                                   | ** ** | **$**          | **1,288.9** | ** **  | **$**      | **159.5**         | ** ** | **$**      | **—** | ** ** | **$** | **1,448.4** | ** ** | **$** | **32.3** | ** ** | **$** | **40.7** | ** ** | **$** | **91.4** | ** ** |

 
| ** **                                       | ** ** | **Sales**      | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|----------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **Trade**      | ** **  | **Related  Party** | ** ** | **Inter-  segment**              | ** ** | **Total**  | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (d)** | ** ** |
| ** **                                       | ** ** | **(millions)** | ** **  |
| **Six  Months Ended June 30, 2008**         | ** ** | ** **     | ** **  | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                 |       | $              | 1,113.6     |               | $          | —                           |       | $          | 0.3        |   | $ | 1,113.9 |   | $ | 14.1 |   | $ | 3.9 |   | $ | 18.0 |   |
| Wood Products                                    |       | 252.2          |        | 19.5               |       | 153.1                            |       | 424.8      |       | (20.5 | ) | 14.2 |   | (6.3 | ) |
| Paper (c)                                        |       | 154.4          |        | 90.1               |       | 9.0                              |       | 253.5      |       | 20.7 |   | 0.3 |   | 21.1 |   |
| Packaging &  Newsprint (c)         |       | 102.2          |        | —             |       | 11.3                             |       | 113.5      |       | 5.7 |   | 0.1 |   | 5.7 |   |
| Corporate and Other  (a)                         |       | 1.8            |        | —             |       | 6.8                              |       | 8.6        |       | (14.3 | ) | 0.2 |   | (14.1 | ) |
|                                             |       | 1,624.2        |        | 109.6              |       | 180.5                            |       | 1,914.3    |       | 5.7 |   | 18.7 |   | 24.4 |   |
| Intersegment  eliminations                       |       | —         |        | —             |       | (180.5                           | )          | (180.5     | )          | — |   | — |   | — |   |
| Equity in net  loss of affiliate                 |       | —         |        | —             |       | —                           |       | —     |       | (17.4 | ) | — |   | (17.4 | ) |
| Change in fair  value of contingent value rights |       | —         |        | —             |       | —                           |       | —     |       | (4.0 | ) | — |   | — |   |
| Change in fair  value of interest rate swaps     |       | —         |        | —             |       | —                           |       | —     |       | (6.3 | ) | — |   | — |   |
| Interest expense                                 |       | —         |        | —             |       | —                           |       | —     |       | (21.8 | ) | — |   | — |   |
| Interest income                                  |       | —         |        | —             |       | —                           |       | —     |       | 5.2 |   | — |   | — |   |
| ** **                                       | ** ** | **$**          | **1,624.2** | ** **         | **$**      | **109.6**                        | ** ** | **$**      | **—** | ** ** | **$** | **1,733.8** | ** ** | **$** | **(38.7** | **)** | **$** | **18.7** | ** ** | **$** | **7.0** | ** ** |

 

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| ** **                                   | ** ** | **Sales**  | ** **  | **Income  (Loss)**  | ** ** | **Depreciation,  Amortization,** | ** ** | ** **     | ** ** |
|----------------------------------------------|------------|------------|-------------|---------------------|------------|----------------------------------|------------|----------------|------------|
| ** **                                   | ** ** | **Trade**  | ** **  | **Related   Party** | ** ** | **Inter-  segment**              | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (d)** | ** ** |
| ** **                                   | ** ** | ** ** | ** **  | ** **          | ** ** | ** **                       | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Six  Months Ended June 30, 2007**     |       |       | ** **  | ** **          | ** ** | ** **                       | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution             |       | $          | 1,332.3     |                | $          | —                           |       | $              | 0.1        |   | $ | 1,332.4 |   | $ | 30.8 |   | $ | 3.7 |   | $ | 34.6 |   |
| Wood Products                                |       | 313.4      |        | —              |       | 219.2                            |       | 532.6          |       | 19.4 |   | 14.9 |   | 34.3 |   |
| Paper                                        |       | 449.0      |        | 317.3               |       | 29.8                             |       | 796.1          |       | 31.2 |   | 32.7 |   | 63.9 |   |
| Packaging &  Newsprint              |       | 350.7      |        | —              |       | 36.2                             |       | 386.9          |       | 10.4 |   | 27.3 |   | 37.7 |   |
| Corporate and  Other (b)                |       | 6.7        |        | —              |       | 21.6                             |       | 28.3           |       | (7.6 | ) | 2.5 |   | (5.3 | ) |
|                                         |       | 2,452.1    |        | 317.3               |       | 306.9                            |       | 3,076.3        |       | 84.2 |   | 81.1 |   | 165.2 |   |
| Intersegment  eliminations                   |       | —     |        | —              |       | (306.9                           | )          | (306.9         | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate swaps |       | —     |        | —              |       | —                           |       | —         |       | 5.4 |   | — |   | — |   |
| Interest expense                             |       | —     |        | —              |       | —                           |       | —         |       | (46.7 | ) | — |   | — |   |
| Interest income                              |       | —     |        | —              |       | —                           |       | —         |       | 1.2 |   | — |   | — |   |
| ** **                                   | ** ** | **$**      | **2,452.1** | ** **          | **$**      | **317.3**                        | ** ** | **$**          | **—** | ** ** | **$** | **2,769.4** | ** ** | **$** | **44.1** | ** ** | **$** | **81.1** | ** ** | **$** | **165.2** | ** ** |

 

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(a)                                  Included an$8.3 million loss on the sale of the note receivable from Boise Inc. SeeNote 4, Transactions With Related Parties, for more information.

 

                                                The six monthsended June 30, 2008, included a $4.7 million gain on the Sale. Thethree months ended June 30, 2008, included $3.3 million of expensesrelated to the Sale. See Note 2, Sale of Our Paper and Packaging & NewsprintAssets, for more information.

 

(b)                                 Included a$4.4 million gain for changes in our retiree healthcare programs.

 

(c)                                  The six monthsended June 30, 2008, included the results of the Paper and Packaging &Newsprint segments through February 21, 2008.

 

(d)                                 EBITDArepresents income (loss) before interest (interest expense, interest income,and change in fair value of interest rate swaps and contingent value rights),income tax provision, and depreciation, amortization, and depletion. EBITDA isthe primary measure used by our chief operating decision makers to evaluatesegment operating performance and to decide how to allocate resources tosegments. We believe EBITDA is useful to investors because it provides a meansto evaluate the operating performance of our segments and our company on anongoing basis using criteria that are used by our internal decision makers andbecause it is frequently used by investors and other interested parties in theevaluation of a wide range of companies. We believe EBITDA is a meaningfulmeasure because it presents a transparent view of our recurring operatingperformance and allows management to readily view operating trends, performanalytical comparisons, and identify strategies to improve operatingperformance. For example, we believe that the inclusion of items such as taxes,interest expense, and interest income distorts management’s ability to assessand view the core operating trends in our segments. EBITDA, however, is not ameasure of our liquidity or financial performance under generally acceptedaccounting principles (GAAP) and should not be considered as an alternative tonet income (loss), income (loss) from operations, or any other performancemeasure derived in accordance with GAAP or as an alternative to cash flow fromoperating activities as a measure of our liquidity. The use of EBITDA insteadof net income (loss) or segment income (loss) has limitations as an analyticaltool, including the inability to determine profitability; the exclusion ofinterest expense, interest income, and change in fair value of interest rateswaps and contingent value rights, and associated significant cashrequirements; and the exclusion of depreciation, amortization, and depletion,which represent significant and unavoidable operating costs, given the level ofour indebtedness and the capital expenditures needed to maintain ourbusinesses. Management compensates for these limitations by relying on our GAAPresults. Our measures of EBITDA are not necessarily comparable to othersimilarly titled captions of other companies due to potential inconsistenciesin the methods of calculation.

 

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The following is areconciliation of net income (loss) to EBITDA:

 
| ** **                                       | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                       | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(millions)**                                 | ** ** |
|                                             |       |                                           |       |                                         |       |   |   |   |   |
| Net income                                       |       | $                                              | (15.4      | )                                            | $          | 28.9 |   | $ | (39.8 | ) | $ | 39.4 |   |
| Change in fair  value of contingent value rights |       | (0.7                                           | )          | —                                       |       | 4.0 |   | — |   |
| Change in fair  value of interest rate swaps     |       | —                                         |       | (5.4                                         | )          | 6.3 |   | (5.4 | ) |
| Interest expense                                 |       | 6.4                                            |       | 24.4                                         |       | 21.8 |   | 46.7 |   |
| Interest income                                  |       | (2.6                                           | )          | (0.6                                         | )          | (5.2 | ) | (1.2 | ) |
| Income tax  provision                            |       | —                                         |       | 3.5                                          |       | 1.1 |   | 4.7 |   |
| Depreciation,  amortization, and depletion       |       | 8.7                                            |       | 40.7                                         |       | 18.7 |   | 81.1 |   |
| EBITDA                                           | ** ** | **$**                                          | **(3.6**   | **)**                                        | **$**      | **91.4** | ** ** | **$** | **7.0** | ** ** | **$** | **165.2** | ** ** |

 

***20.          Commitments and Guarantees***

 

*Commitments*

 

We have commitments for leases and long-term debt thatare discussed further in Note 7, Leases, and Note 14, Debt. We are aparty to a number of long-term log and fiber supply agreements that arediscussed in Note 20, Commitments and Guarantees, of the Notes to Consolidated Financial Statements in “Item1. Consolidated Financial Statements” discussed in our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2008. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business. At June 30, 2008, therehave been no material changes to our commitments.

 

# *Guarantees*

# * *

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FIN No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.Note 20, Commitments and Guarantees,of the Notes to Consolidated Financial Statements in “Item 1. ConsolidatedFinancial Statements” in our Quarterly Report on Form 10-Q for the quarterended March 31, 2008, describes the nature of our guarantees, includingthe approximate terms of the guarantees, how the guarantees arose, the eventsor circumstances that would require us to perform under the guarantees, and themaximum potential undiscounted amounts of future payments we could be requiredto make. As of June 30, 2008, there have been no material changes to theguarantees disclosed in the Quarterly Report on Form 10-Q for the quarterended March 31, 2008. However, in July 2008, in connection with thesale of our Brazil operations, the buyer agreed to indemnify us against any andall claims under the Guarantee, Marketing, and Take if Required Agreement, asamended, with Global Forest Partners.

 

***21.          ConsolidatingGuarantor and Nonguarantor Financial Information***

 

The following consolidating financial informationpresents the Statements of Income (Loss), Balance Sheets, and Cash Flowsrelated to our business. The senior notes are guaranteed on a senior basisjointly and severally by Boise Cascade, L.L.C., and each of its existing andfuture subsidiaries (other than the co-issuers, Boise Cascade, L.L.C., andBoise Cascade Finance Corporation). The nonguarantors include our foreignsubsidiaries and Birch Creek Investments, L.L.C., which was dissolved on March 31,2008. Other than the consolidated financial statements and footnotes for BoiseCascade Holdings, L.L.C., financial statements and other disclosures concerningthe guarantors have not been presented because management believes that suchinformation is not material to investors.

 

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**Boise Cascade Holdings, L.L.C.,and SubsidiariesConsolidating Statements of Income (Loss)For the Three Months Ended June 30, 2008**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **  |
| **Sales**                                                                            |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —      |                        | $          | —                      |       | $                                 | 738,153    |             | $          | 5,249            |       | $ | — |   | $ | 743,402 |   |
| Intercompany                                                                         |       | —                                          |        | —                      |       | —                      |       | 5,276                             |       | (5,276           | )          | —           |       |
| Related parties                                                                      |       | —                                          |        | —                      |       | 13,786                      |       | —                            |       | —           |       | 13,786           |       |
|                                                                                 |       | —                                          |        | —                      |       | 751,939                     |       | 10,525                            |       | (5,276           | )          | 757,188          |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |        | 425                         |       | 642,372                     |       | 12,365                            |       | (5,276           | )          | 649,886          |       |
| Materials,  labor, and other operating expenses from related parties                 |       | —                                          |        | —                      |       | 23,009                      |       | —                            |       | —           |       | 23,009           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |        | 83                          |       | 7,986                       |       | 615                               |       | —           |       | 8,684            |       |
| Selling and  distribution expenses                                                   |       | —                                          |        | —                      |       | 56,632                      |       | 968                               |       | —           |       | 57,600           |       |
| General and  administrative expenses                                            |       | —                                          |        | 1,570                       |       | 6,259                       |       | 30                                |       | —           |       | 7,859            |       |
| General and  administrative expenses from related party                         |       | —                                          |        | 2,526                       |       | —                      |       | —                            |       | —           |       | 2,526            |       |
| Loss on sale of  Paper and Packaging & Newsprint assets                     |       | —                                          |        | 3,328                       |       | —                      |       | —                            |       | —           |       | 3,328            |       |
| Other (income)  expense, net                                                         |       | 8,313                                           |        | 42                          |       | (1,659                      | )          | 1,939                             |       | —           |       | 8,635            |       |
|                                                                                 |       | 8,313                                           |        | 7,974                       |       | 734,599                     |       | 15,917                            |       | (5,276           | )          | 761,527          |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | (8,313                                          | )           | (7,974                      | )          | 17,340                      |       | (5,392                            | )          | —           |       | (4,339           | )          |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  loss of Boise Inc.                                               |       | (8,845                                          | )           | —                      |       | —                      |       | —                            |       | —           |       | (8,845           | )          |
| Foreign exchange  gain (loss)                                                        |       | —                                          |        | 246                         |       | (139                        | )          | 783                               |       | —           |       | 890              |       |
| Change in fair  value of contingent value rights                                     |       | —                                          |        | 743                         |       | —                      |       | —                            |       | —           |       | 743              |       |
| Interest expense                                                                     |       | —                                          |        | (6,427                      | )          | —                      |       | —                            |       | —           |       | (6,427           | )          |
| Interest  expense—intercompany                                                  |       | —                                          |        | —                      |       | —                      |       | (20                               | )          | 20               |       | —           |       |
| Interest income                                                                      |       | 1,774                                           |        | 719                         |       | 59                          |       | 7                                 |       | —           |       | 2,559            |       |
| Interest  income—intercompany                                                   |       | —                                          |        | 20                          |       | —                      |       | —                            |       | (20              | )          | —           |       |
|                                                                                 |       | (7,071                                          | )           | (4,699                      | )          | (80                         | )          | 770                               |       | —           |       | (11,080          | )          |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | (15,384                                         | )           | (12,673                     | )          | 17,260                      |       | (4,622                            | )          | —           |       | (15,419          | )          |
| Income tax  (provision) benefit                                                      |       | —                                          |        | 20                          |       | (2                          | )          | 5                                 |       | —           |       | 23               |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (15,384                                         | )           | (12,653                     | )          | 17,258                      |       | (4,617                            | )          | —           |       | (15,396          | )          |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | (12                                             | )           | 12,641                      |       | —                      |       | —                            |       | (12,629          | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **(15,396** | **)**                       | **$**      | **(12**                     | **)**      | **$**                             | **17,258** | ** **       | **$**      | **(4,617**       | **)**      | **$** | **(12,629** | **)** | **$** | **(15,396** | **)** |

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries**

**ConsolidatingStatements of Income (Loss)**

**F****or the Three MonthsEnded June 30, 2007**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —     |                        | $          | —                      |       | $                                 | 1,280,960  |             | $          | 7,961            |       | $ | — |   | $ | 1,288,921 |   |
| Intercompany                                                                         |       | —                                          |       | 883                         |       | 1                           |       | 22,589                            |       | (23,473          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                      |       | 159,477                     |       | —                            |       | —           |       | 159,477          |       |
|                                                                                 |       | —                                          |       | 883                         |       | 1,440,438                   |       | 30,550                            |       | (23,473          | )          | 1,448,398        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |       | 397                         |       | 1,264,231                   |       | 22,785                            |       | (17,119          | )          | 1,270,294        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 992                         |       | 38,697                      |       | 1,033                             |       | —           |       | 40,722           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                      |       | 72,946                      |       | 674                               |       | —           |       | 73,620           |       |
| General and  administrative expenses                                            |       | —                                          |       | 7,190                       |       | 18,632                      |       | 742                               |       | (6,354           | )          | 20,210           |       |
| Other (income)  expense, net                                                         |       | —                                          |       | (4,027                      | )          | (1,904                      | )          | 840                               |       | —           |       | (5,091           | )          |
|                                                                                 |       | —                                          |       | 4,552                       |       | 1,392,602                   |       | 26,074                            |       | (23,473          | )          | 1,399,755        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |       | (3,669                      | )          | 47,836                      |       | 4,476                             |       | —           |       | 48,643           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |       | 13,789                      |       | 911                         |       | (12,680                           | )          | —           |       | 2,020            |       |
| Change in fair  value of interest rate swaps                                         |       | —                                          |       | 5,395                       |       | —                      |       | —                            |       | —           |       | 5,395            |       |
| Interest expense                                                                     |       | —                                          |       | (22,094                     | )          | —                      |       | (2,258                            | )          | —           |       | (24,352          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (155                        | )          | —                      |       | (4,490                            | )          | 4,645            |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 592                         |       | 36                          |       | 14                                |       | —           |       | 642              |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 17                          |       | 4,628                       |       | —                            |       | (4,645           | )          | —           |       |
|                                                                                 |       | —                                          |       | (2,456                      | )          | 5,575                       |       | (19,414                           | )          | —           |       | (16,295          | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (6,125                      | )          | 53,411                      |       | (14,938                           | )          | —           |       | 32,348           |       |
| Income tax  provision                                                                |       | —                                          |       | (2,815                      | )          | (635                        | )          | —                            |       | —           |       | (3,450           | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                          |       | (8,940                      | )          | 52,776                      |       | (14,938                           | )          | —           |       | 28,898           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 28,898                                          |       | 37,838                      |       | —                      |       | —                            |       | (66,736          | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **28,898** | ** **                  | **$**      | **28,898**                  | ** ** | **$**                             | **52,776** | ** **       | **$**      | **(14,938**      | **)**      | **$** | **(66,736** | **)** | **$** | **28,898** | ** ** |

 

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**Boise Cascade Holdings, L.L.C.,and Subsidiaries**

**ConsolidatingStatements of Income (Loss)**

**F****or the Six Months Ended June 30,2008**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **  |
| ** **                                                                           |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Sales**                                                                            |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —      |                        | $          | —                      |       | $                                 | 1,613,705  |             | $          | 10,497           |       | $ | — |   | $ | 1,624,202 |   |
| Intercompany                                                                         |       | —                                          |        | —                      |       | 2                           |       | 16,144                            |       | (16,146          | )          | —           |       |
| Related parties                                                                      |       | —                                          |        | —                      |       | 109,568                     |       | —                            |       | —           |       | 109,568          |       |
|                                                                                 |       | —                                          |        | —                      |       | 1,723,275                   |       | 26,641                            |       | (16,146          | )          | 1,733,770        |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |        | 1,811                       |       | 1,512,920                   |       | 27,033                            |       | (11,220          | )          | 1,530,544        |       |
| Materials,  labor, and other operating expenses from related parties                 |       | —                                          |        | —                      |       | 29,189                      |       | —                            |       | —           |       | 29,189           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |        | 260                         |       | 17,081                      |       | 1,378                             |       | —           |       | 18,719           |       |
| Selling and  distribution expenses                                                   |       | —                                          |        | —                      |       | 119,383                     |       | 1,582                             |       | —           |       | 120,965          |       |
| General and  administrative expenses                                            |       | 1                                               |        | 5,762                       |       | 21,438                      |       | 236                               |       | (4,926           | )          | 22,511           |       |
| General and  administrative expenses from related party                         |       | —                                          |        | 3,504                       |       | —                      |       | —                            |       | —           |       | 3,504            |       |
| Gain on sale of  Paper and Packaging & Newsprint assets                     |       | —                                          |        | (4,735                      | )          | —                      |       | —                            |       | —           |       | (4,735           | )          |
| Other (income)  expense, net                                                         |       | 8,313                                           |        | 262                         |       | (3,218                      | )          | 2,336                             |       | —           |       | 7,693            |       |
|                                                                                 |       | 8,314                                           |        | 6,864                       |       | 1,696,793                   |       | 32,565                            |       | (16,146          | )          | 1,728,390        |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | (8,314                                          | )           | (6,864                      | )          | 26,482                      |       | (5,924                            | )          | —           |       | 5,380            |       |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  loss of Boise Inc.                                               |       | (17,397                                         | )           | —                      |       | —                      |       | —                            |       | —           |       | (17,397          | )          |
| Foreign exchange  gain (loss)                                                        |       | —                                          |        | (197                        | )          | (142                        | )          | 616                               |       | —           |       | 277              |       |
| Change in fair  value of contingent value rights                                     |       | —                                          |        | (4,030                      | )          | —                      |       | —                            |       | —           |       | (4,030           | )          |
| Change in fair  value of interest rate swaps                                         |       | —                                          |        | (6,284                      | )          | —                      |       | —                            |       | —           |       | (6,284           | )          |
| Interest expense                                                                     |       | —                                          |        | (20,963                     | )          | —                      |       | (845                              | )          | —           |       | (21,808          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |        | (158                        | )          | (2                          | )          | (1,419                            | )          | 1,579            |       | —           |       |
| Interest income                                                                      |       | 2,760                                           |        | 2,265                       |       | 121                         |       | 14                                |       | —           |       | 5,160            |       |
| Interest  income—intercompany                                                   |       | —                                          |        | 52                          |       | 1,527                       |       | —                            |       | (1,579           | )          | —           |       |
|                                                                                 |       | (14,637                                         | )           | (29,315                     | )          | 1,504                       |       | (1,634                            | )          | —           |       | (44,082          | )     |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | (22,951                                         | )           | (36,179                     | )          | 27,986                      |       | (7,558                            | )          | —           |       | (38,702          | )          |
| Income tax  provision                                                                |       | —                                          |        | (895                        | )          | (237                        | )          | —                            |       | —           |       | (1,132           | )          |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (22,951                                         | )           | (37,074                     | )          | 27,749                      |       | (7,558                            | )          | —           |       | (39,834          | )          |
|                                                                                 |       |                                            |        |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | (16,883                                         | )           | 20,191                      |       | —                      |       | —                            |       | (3,308           | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **(39,834** | **)**                       | **$**      | **(16,883**                 | **)**      | **$**                             | **27,749** | ** **       | **$**      | **(7,558**       | **)**      | **$** | **(3,308** | **)** | **$** | **(39,834** | **)** |

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries**

**ConsolidatingStatements of Income (Loss)**

**F****or the Six Months Ended June 30,2007**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —     |                        | $          | —                      |       | $                                 | 2,437,317  |             | $          | 14,777           |       | $ | — |   | $ | 2,452,094 |   |
| Intercompany                                                                         |       | —                                          |       | 1,738                       |       | 1                           |       | 45,229                            |       | (46,968          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                      |       | 317,272                     |       | —                            |       | —           |       | 317,272          |       |
|                                                                                 |       | —                                          |       | 1,738                       |       | 2,754,590                   |       | 60,006                            |       | (46,968          | )          | 2,769,366        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |       | 815                         |       | 2,415,889                   |       | 42,211                            |       | (31,722          | )          | 2,427,193        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 1,898                       |       | 77,091                      |       | 2,093                             |       | —           |       | 81,082           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                      |       | 140,671                     |       | 1,357                             |       | —           |       | 142,028          |       |
| General and  administrative expenses                                            |       | —                                          |       | 14,048                      |       | 39,544                      |       | 1,359                             |       | (15,246          | )          | 39,705           |       |
| Other (income)  expense, net                                                         |       | —                                          |       | (3,622                      | )          | (571                        | )          | 1,648                             |       | —           |       | (2,545           | )          |
|                                                                                 |       | —                                          |       | 13,139                      |       | 2,672,624                   |       | 48,668                            |       | (46,968          | )          | 2,687,463        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |       | (11,401                     | )          | 81,966                      |       | 11,338                            |       | —           |       | 81,903           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |       | 15,359                      |       | 994                         |       | (14,091                           | )          | —           |       | 2,262            |       |
| Change in fair  value of interest rate swaps                                         |       | —                                          |       | 5,395                       |       | —                      |       | —                            |       | —           |       | 5,395            |       |
| Interest expense                                                                     |       | —                                          |       | (42,771                     | )          | —                      |       | (3,924                            | )          | —           |       | (46,695          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (282                        | )          | —                      |       | (9,382                            | )          | 9,664            |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 1,132                       |       | 78                          |       | 33                                |       | —           |       | 1,243            |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 32                          |       | 9,632                       |       | —                            |       | (9,664           | )          | —           |       |
|                                                                                 |       | —                                          |       | (21,135                     | )          | 10,704                      |       | (27,364                           | )          | —           |       | (37,795          | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (32,536                     | )          | 92,670                      |       | (16,026                           | )          | —           |       | 44,108           |       |
| Income tax  provision                                                                |       | —                                          |       | (3,311                      | )          | (1,362                      | )          | —                            |       | —           |       | (4,673           | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                          |       | (35,847                     | )          | 91,308                      |       | (16,026                           | )          | —           |       | 39,435           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 39,435                                          |       | 75,282                      |       | —                      |       | —                            |       | (114,717         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **39,435** | ** **                  | **$**      | **39,435**                  | ** ** | **$**                             | **91,308** | ** **       | **$**      | **(16,026**      | **)**      | **$** | **(114,717** | **)** | **$** | **39,435** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries**

**ConsolidatingBalance Sheets at June 30, 2008**

 
| ** **                                       | ** ** | **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                       |       | $                                               | 1           |                        | $          | 240,514                     |       | $                                 | 21          |             | $          | 143              |       | $ | — |   | $ | 240,679 |   |
| Receivables                                      |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Trade, less  allowances                          |       | —                                          |        | —                      |       | 163,349                     |       | 2,131                             |        | —           |       | 165,480          |       |
| Intercompany                                     |       | —                                          |        | —                      |       | 56                          |       | —                            |        | (56              | )          | —           |       |
| Related parties                                  |       | —                                          |        | 234                         |       | 5,671                       |       | —                            |        | —           |       | 5,905            |       |
| Other                                            |       | —                                          |        | 6,880                       |       | 964                         |       | 1,520                             |        | —           |       | 9,364            |       |
| Inventories                                      |       | —                                          |        | —                      |       | 299,348                     |       | 10,831                            |        | —           |       | 310,179          |       |
| Assets held for  sale                            |       | —                                          |        | —                      |       | —                      |       | 40,528                            |        | —           |       | 40,528           |       |
| Other                                            |       | —                                          |        | 2,742                       |       | 4,714                       |       | 461                               |        | —           |       | 7,917            |       |
|                                             |       | 1                                               |        | 250,370                     |       | 474,123                     |       | 55,614                            |        | (56              | )          | 780,052          |       |
|                                             |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Property**                                     |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Property and  equipment, net                     |       | —                                          |        | 2,383                       |       | 275,389                     |       | 14,255                            |        | —           |       | 292,027          |       |
| Fiber farms and  deposits                        |       | —                                          |        | —                      |       | 9,058                       |       | —                            |        | —           |       | 9,058            |       |
|                                             |       | —                                          |        | 2,383                       |       | 284,447                     |       | 14,255                            |        | —           |       | 301,085          |       |
|                                             |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Investment  in equity affiliate (Boise Inc.)** |       | 263,476                                         |        | —                      |       | —                      |       | —                            |        | —           |       | 263,476          |       |
| **Deferred  financing costs**                    |       | —                                          |        | 8,548                       |       | —                      |       | —                            |        | —           |       | 8,548            |       |
| **Goodwill**                                     |       | —                                          |        | —                      |       | 12,170                      |       | —                            |        | —           |       | 12,170           |       |
| **Intangible  assets, net**                      |       | —                                          |        | —                      |       | 9,458                       |       | —                            |        | —           |       | 9,458            |       |
| **Other  assets**                                |       | —                                          |        | 40                          |       | 7,142                       |       | 105                               |        | —           |       | 7,287            |       |
| **Investments  in affiliates**                   |       | 468,238                                         |        | 947,861                     |       | —                      |       | —                            |        | (1,416,099       | )          | —           |       |
| **Total  assets**                                | ** ** | **$**                                           | **731,715** | ** **                  | **$**      | **1,209,202**               | ** ** | **$**                             | **787,340** | ** **       | **$**      | **69,974**       | ** ** | **$** | **(1,416,155** | **)** | **$** | **1,382,076** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries**

**ConsolidatingBalance Sheets at June 30, 2008 (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                                             |       | $                                               | 81          |                        | $          | 12,711                      |       | $                                 | 146,751     |             | $          | 1,493            |       | $ | — |   | $ | 161,036 |   |
| Intercompany                                      |       | —                                          |        | —                      |       | —                      |       | 56                                |        | (56              | )          | —           |       |
| Related parties                                   |       | —                                          |        | 1,713                       |       | 2,536                       |       | —                            |        | —           |       | 4,249            |       |
| Accrued  liabilities                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Compensation and  benefits                        |       | —                                          |        | 16,091                      |       | 21,135                      |       | 542                               |        | —           |       | 37,768           |       |
| Interest payable                                  |       | —                                          |        | 3,979                       |       | —                      |       | —                            |        | —           |       | 3,979            |       |
| Other                                             |       | —                                          |        | 52,916                      |       | 16,428                      |       | 599                               |        | —           |       | 69,943           |       |
| Liabilities  related to assets held for sale |       | —                                          |        | —                      |       | —                      |       | 766                               |        | —           |       | 766              |       |
|                                              |       | 81                                              |        | 87,410                      |       | 186,850                     |       | 3,456                             |        | (56              | )          | 277,741          |       |
|                                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Debt**                                          |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Long-term debt                                    |       | —                                          |        | 315,000                     |       | —                      |       | —                            |        | —           |       | 315,000          |       |
|                                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Other**                                         | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                        |       | —                                          |        | 46,544                      |       | —                      |       | —                            |        | —           |       | 46,544           |       |
| Other long-term  liabilities                      |       | —                                          |        | 6,947                       |       | 4,210                       |       | —                            |        | —           |       | 11,157           |       |
|                                              |       | —                                          |        | 53,491                      |       | 4,210                       |       | —                            |        | —           |       | 57,701           |       |
|                                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Due to  (from) affiliates**                     |       | —                                          |        | 285,063                     |       | (274,443                    | )          | (10,620                           | )           | —           |       | —           |       |
|                                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Redeemable  equity units**                      |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Series B  equity units                       |       | 5,082                                           |        | —                      |       | —                      |       | —                            |        | —           |       | 5,082            |       |
| Series C  equity units                       |       | 7,500                                           |        | —                      |       | —                      |       | —                            |        | —           |       | 7,500            |       |
| Redeemable  equity units                          |       | —                                          |        | 12,582                      |       | —                      |       | —                            |        | (12,582          | )          | —           |       |
|                                              |       | 12,582                                          |        | 12,582                      |       | —                      |       | —                            |        | (12,582          | )          | 12,582           |       |
|                                              |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Commitments  and contingent liabilities**       | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                        | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                       | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Series A  equity units                       |       | 78,140                                          |        | —                      |       | —                      |       | —                            |        | —           |       | 78,140           |       |
| Series B  equity units                       |       | 640,912                                         |        | —                      |       | —                      |       | —                            |        | —           |       | 640,912          |       |
| Series C  equity units                       |       | —                                          |        | —                      |       | —                      |       | —                            |        | —           |       | —           |       |
| Subsidiary  equity                                |       | —                                          |        | 455,656                     |       | 870,723                     |       | 77,138                            |        | (1,403,517       | )          | —           |       |
| **Total  capital**                                |       | 719,052                                         |        | 455,656                     |       | 870,723                     |       | 77,138                            |        | (1,403,517       | )          | 719,052          |       |
| **Total  liabilities and capital**                | ** ** | **$**                                           | **731,715** | ** **                  | **$**      | **1,209,202**               | ** ** | **$**                             | **787,340** | ** **       | **$**      | **69,974**       | ** ** | **$** | **(1,416,155** | **)** | **$** | **1,382,076** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2007**

 
| ** **                     | ** ** | **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     |       | $                                               | 1           |                        | $          | 56,588                      |       | $                                 | 21            |             | $          | 1,013            |       | $ | — |   | $ | 57,623 |   |
| Receivables                    |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade, less  allowances        |       | —                                          |        | —                      |       | (1,939                      | )          | 117,148                           |          | —           |       | 115,209          |       |
| Intercompany                   |       | —                                          |        | —                      |       | 56                          |       | —                            |          | (56              | )          | —           |       |
| Related parties                |       | —                                          |        | 9                           |       | —                      |       | —                            |          | —           |       | 9                |       |
| Other                          |       | —                                          |        | 995                         |       | 3,721                       |       | 2,742                             |          | —           |       | 7,458            |       |
| Inventories                    |       | —                                          |        | 10                          |       | 325,804                     |       | 16,201                            |          | —           |       | 342,015          |       |
| Assets held for  sale          |       | —                                          |        | 13,118                      |       | 1,638,706                   |       | 201,215                           |          | —           |       | 1,853,039        |       |
| Other                          |       | —                                          |        | 3,072                       |       | 1,632                       |       | 722                               |          | —           |       | 5,426            |       |
|                           |       | 1                                               |        | 73,792                      |       | 1,968,001                   |       | 339,041                           |          | (56              | )          | 2,380,779        |       |
|                           |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Property**                   |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Property and  equipment, net   |       | —                                          |        | 3,280                       |       | 279,928                     |       | 29,909                            |          | —           |       | 313,117          |       |
| Fiber farms and  deposits      |       | —                                          |        | —                      |       | 7,976                       |       | 16,034                            |          | —           |       | 24,010           |       |
|                           |       | —                                          |        | 3,280                       |       | 287,904                     |       | 45,943                            |          | —           |       | 337,127          |       |
|                           |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Deferred  financing costs**  |       | —                                          |        | 22,927                      |       | —                      |       | 147                               |          | —           |       | 23,074           |       |
| **Goodwill**                   |       | —                                          |        | —                      |       | 12,170                      |       | —                            |          | —           |       | 12,170           |       |
| **Intangible  assets, net**    |       | —                                          |        | —                      |       | 9,668                       |       | —                            |          | —           |       | 9,668            |       |
| **Investments  in affiliates** |       | 991,904                                         |        | 927,670                     |       | —                      |       | —                            |          | (1,919,574       | )          | —           |       |
| **Other  assets**              |       | —                                          |        | 5,014                       |       | 3,261                       |       | 3,099                             |          | —           |       | 11,374           |       |
| **Total  assets**              | ** ** | **$**                                           | **991,905** | ** **                  | **$**      | **1,032,683**               | ** ** | **$**                             | **2,281,004** | ** **       | **$**      | **388,230**      | ** ** | **$** | **(1,919,630** | **)** | **$** | **2,774,192** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2007 (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**                                  |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Short-term  borrowings                       |       | $                                               | —      |                        | $          | 10,500                      |       | $                                 | —        |             | $          | —           |       | $ | — |   | $ | 10,500 |   |
| Current portion  of long-term debt           |       | —                                          |        | 7,250                       |       | —                      |       | 40,000                            |          | —           |       | 47,250           |       |
| Accounts payable                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                                        |       | —                                          |        | 30,120                      |       | 105,550                     |       | 5,789                             |          | —           |       | 141,459          |       |
| Related parties                              |       | —                                          |        | 43                          |       | —                      |       | —                            |          | —           |       | 43               |       |
| Intercompany                                 |       | —                                          |        | —                      |       | —                      |       | 56                                |          | (56              | )          | —           |       |
| Accrued  liabilities                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and  benefits                   |       | —                                          |        | 9,811                       |       | 26,084                      |       | 1,014                             |          | —           |       | 36,909           |       |
| Interest payable                             |       | —                                          |        | 6,604                       |       | —                      |       | 536                               |          | —           |       | 7,140            |       |
| Other                                        |       | —                                          |        | 10,106                      |       | 17,057                      |       | 2,796                             |          | —           |       | 29,959           |       |
| Liabilities  related to assets held for sale |       | —                                          |        | 87,678                      |       | 243,958                     |       | —                            |          | —           |       | 331,636          |       |
|                                         |       | —                                          |        | 162,112                     |       | 392,649                     |       | 50,191                            |          | (56              | )          | 604,896          |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                     |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Long-term debt,  less current portion        |       | —                                          |        | 1,113,313                   |       | —                      |       | —                            |          | —           |       | 1,113,313        |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                                    | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                   |       | —                                          |        | 46,981                      |       | —                      |       | —                            |          | —           |       | 46,981           |       |
| Other long-term  liabilities                 |       | —                                          |        | 12,704                      |       | 4,393                       |       | —                            |          | —           |       | 17,097           |       |
|                                         |       | —                                          |        | 59,685                      |       | 4,393                       |       | —                            |          | —           |       | 64,078           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**                |       | —                                          |        | (1,294,331                  | )          | 1,040,988                   |       | 253,343                           |          | —           |       | —           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**                 |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Series B  equity units                  |       | 16,992                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 16,992           |       |
| Series C  equity units                  |       | 9,489                                           |        | —                      |       | —                      |       | —                            |          | —           |       | 9,489            |       |
| Redeemable  equity units                     |       | —                                          |        | 26,481                      |       | —                      |       | —                            |          | (26,481          | )          | —           |       |
|                                         |       | 26,481                                          |        | 26,481                      |       | —                      |       | —                            |          | (26,481          | )          | 26,481           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Commitment  and contingent liabilities**   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                  | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A  equity units                  |       | 78,463                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 78,463           |       |
| Series B  equity units                  |       | 876,693                                         |        | —                      |       | —                      |       | —                            |          | —           |       | 876,693          |       |
| Series C  equity units                  |       | 10,268                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 10,268           |       |
| Subsidiary  equity                           |       | —                                          |        | 965,423                     |       | 842,974                     |       | 84,696                            |          | (1,893,093       | )          | —           |       |
| **Total  capital**                           |       | 965,424                                         |        | 965,423                     |       | 842,974                     |       | 84,696                            |          | (1,893,093       | )          | 965,424          |       |
| **Total  liabilities and capital**           | ** ** | **$**                                           | **991,905** | ** **                  | **$**      | **1,032,683**               | ** ** | **$**                             | **2,281,004** | ** **       | **$**      | **388,230**      | ** ** | **$** | **(1,919,630** | **)** | **$** | **2,774,192** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Six Months Ended June 30, 2008**

** **
| ** **                                                                       | ** ** | **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)                                                                |       | $                                               | (39,834    | )                           | $          | (16,883                     | )          | $                                 | 27,749     |             | $          | (7,558           | )          | $ | (3,308 | ) | $ | (39,834 | ) |
| Items in net  income (loss) not using (providing) cash                           |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  loss of Boise Inc.                                                |       | 17,397                                          |       | —                      |       | —                      |       | —                            |       | —           |       | 17,397           |       |
| Equity in net  (income) loss of affiliates                                       |       | 16,883                                          |       | (20,191                     | )          | —                      |       | —                            |       | 3,308            |       | —           |       |
| Depreciation, depletion,  and amortization of deferred financing costs and other |       | —                                          |       | 982                         |       | 17,081                      |       | 1,393                             |       | —           |       | 19,456           |       |
| Related-party  interest expense                                                  |       | —                                          |       | 158                         |       | 2                           |       | 1,419                             |       | (1,579           | )          | —           |       |
| Related-party  interest income                                                   |       | (2,760                                          | )          | (52                         | )          | (1,527                      | )          | —                            |       | 1,579            |       | (2,760           | )          |
| Deferred income  taxes                                                           |       | —                                          |       | 43                          |       | 11                          |       | —                            |       | —           |       | 54               |       |
| Pension and other  postretirement benefit expense                                |       | —                                          |       | 7,787                       |       | —                      |       | —                            |       | —           |       | 7,787            |       |
| Change in fair  value of contingent rights                                       |       | —                                          |       | 4,030                       |       | —                      |       | —                            |       | —           |       | 4,030            |       |
| Change in fair  value of interest rate swaps                                     |       | —                                          |       | 6,284                       |       | —                      |       | —                            |       | —           |       | 6,284            |       |
| Management equity  units expense                                            |       | —                                          |       | 1,086                       |       | —                      |       | —                            |       | —           |       | 1,086            |       |
| (Gain) loss on  sale of assets, net                                              |       | —                                          |       | (4,734                      | )          | (3,666                      | )          | 1                                 |       | —           |       | (8,399           | )          |
| Loss on sale of  note receivable from related party                              |       | 8,313                                           |       | —                      |       | —                      |       | —                            |       | —           |       | 8,313            |       |
| Other                                                                            |       | —                                          |       | 197                         |       | 108                         |       | (616                              | )          | —           |       | (311             | )          |
| Decrease  (increase) in working capital, net of dispositions                     |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                      |       | —                                          |       | (11,495                     | )          | (385,936                    | )          | 317,197                           |       | —           |       | (80,234          | )          |
| Inventories                                                                      |       | —                                          |       | 5,611                       |       | 26,511                      |       | 2,433                             |       | —           |       | 34,555           |       |
| Prepaid expenses                                                                 |       | —                                          |       | (866                        | )          | (1,661                      | )          | 203                               |       | —           |       | (2,324           | )          |
| Accounts payable  and accrued liabilities                                   |       | 81                                              |       | (7,543                      | )          | 31,415                      |       | (6,735                            | )          | (81              | )          | 17,137           |       |
| Pension and other  postretirement benefit payments                               |       | —                                          |       | (20,775                     | )          | —                      |       | —                            |       | —           |       | (20,775          | )          |
| Current and  deferred income taxes                                               |       | —                                          |       | (644                        | )          | 173                         |       | (658                              | )          | —           |       | (1,129           | )          |
| Other                                                                            |       | —                                          |       | 4,712                       |       | (4,409                      | )          | —                            |       | —           |       | 303              |       |
| Cash provided by  (used for) operations                                          |       | 80                                              |       | (52,293                     | )          | (294,149                    | )          | 307,079                           |       | (81              | )          | (39,364          | )          |
| **Cash  provided by (used for) investment**                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Proceeds from  sale of assets, net of cash contributed                           |       | —                                          |       | 1,204,078                   |       | 22,620                      |       | —                            |       | —           |       | 1,226,698        |       |
| Proceeds from  sale of note receivable from related party                        |       | 52,781                                          |       | 52,781                      |       | —                      |       | —                            |       | (52,781          | )          | 52,781           |       |
| Expenditures for  property and equipment                                    |       | —                                          |       | (693                        | )          | (24,713                     | )          | (2,463                            | )          | —           |       | (27,869          | )          |
| Increase in  restricted cash                                                     |       | —                                          |       | (183,290                    | )          | —                      |       | —                            |       | —           |       | (183,290         | )          |
| Decrease in  restricted cash                                                     |       | —                                          |       | 183,290                     |       | —                      |       | —                            |       | —           |       | 183,290          |       |
| Investments in  affiliates                                                       |       | 103,554                                         |       | 20,191                      |       | —                      |       | —                            |       | (123,745         | )          | —           |       |
| Other                                                                            |       | —                                          |       | 527                         |       | (483                        | )          | (786                              | )          | —           |       | (742             | )          |
| Cash provided by  (used for) investment                                     |       | 156,335                                         |       | 1,276,884                   |       | (2,576                      | )          | (3,249                            | )          | (176,526         | )          | 1,250,868        |       |
| **Cash  provided by (used for) financing**                                       | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                     |       | —                                          |       | 115,000                     |       | —                      |       | 125,000                           |       | —           |       | 240,000          |       |
| Payments of  long-term debt                                                      |       | —                                          |       | (920,563                    | )          | —                      |       | (165,000                          | )          | —           |       | (1,085,563       | )          |
| Short-term  borrowings                                                           |       | —                                          |       | (10,500                     | )          | —                      |       | —                            |       | —           |       | (10,500          | )          |
| Tax distributions  to members                                                    |       | (127,884                                        | )          | —                      |       | —                      |       | —                            |       | —           |       | (127,884         | )          |
| Tax distributions  to Boise Cascade Holdings, L.L.C.                        |       | —                                          |       | (127,884                    | )          | —                      |       | —                            |       | 127,884          |       | —           |       |
| Repurchase of  management equity units                                           |       | (28,398                                         | )          | (28,398                     | )          | —                      |       | —                            |       | 28,398           |       | (28,398          | )          |
| Cash paid for  termination of interest rate swaps                           |       | —                                          |       | (11,918                     | )          | —                      |       | —                            |       | —           |       | (11,918          | )          |
| Other                                                                            |       | (133                                            | )          | (4,185                      | )          | —                      |       | —                            |       | 133              |       | (4,185           | )          |
| Cash provided by  (used for) financing                                      |       | (156,415                                        | )          | (988,448                    | )          | —                      |       | (40,000                           | )          | 156,415          |       | (1,028,448       | )          |
| Due to (from)  affiliates                                                        |       | —                                          |       | (52,216                     | )          | 296,725                     |       | (264,700                          | )          | 20,191           |       | —           |       |
| **Increase  (decrease) in cash and cash equivalents**                            |       | —                                          |       | 183,927                     |       | —                      |       | (870                              | )          | (1               | )          | 183,056          |       |
| **Balance  at beginning of the period**                                          |       | 1                                               |       | 56,588                      |       | 21                          |       | 1,013                             |       | —           |       | 57,623           |       |
| **Balance  at end of the period**                                                | ** ** | **$**                                           | **1**      | ** **                  | **$**      | **240,515**                 | ** ** | **$**                             | **21**     | ** **       | **$**      | **143**          | ** ** | **$** | **(1** | **)** | **$** | **240,679** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Six Months Ended June 30, 2007**

** **
| ** **                                                                       | ** ** | **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)                                                                |       | $                                               | 39,435     |                        | $          | 39,435                      |       | $                                 | 91,308     |             | $          | (16,026          | )          | $ | (114,717 | ) | $ | 39,435 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  income of affiliates                                              |       | (39,435                                         | )          | (75,282                     | )          | —                      |       | —                            |       | 114,717          |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | —                                          |       | 2,989                       |       | 77,091                      |       | 2,180                             |       | —           |       | 82,260           |       |
| Related-party  interest expense                                                  |       | —                                          |       | 282                         |       | —                      |       | 9,382                             |       | (9,664           | )          | —           |       |
| Related-party  interest income                                                   |       | —                                          |       | (32                         | )          | (9,632                      | )          | —                            |       | 9,664            |       | —           |       |
| Deferred income  taxes                                                           |       | —                                          |       | 1,854                       |       | 59                          |       | —                            |       | —           |       | 1,913            |       |
| Pension and other  postretirement benefit expense                                |       | —                                          |       | 12,538                      |       | —                      |       | —                            |       | —           |       | 12,538           |       |
| Gain on changes  in retiree healthcare programs                                  |       | —                                          |       | (4,367                      | )          | —                      |       | —                            |       | —           |       | (4,367           | )          |
| Change in fair  value of interest rate swaps                                     |       | —                                          |       | (5,395                      | )          | —                      |       | —                            |       | —           |       | (5,395           | )          |
| Management equity  units expense                                            |       | —                                          |       | 1,550                       |       | —                      |       | —                            |       | —           |       | 1,550            |       |
| (Gain) loss on  sale of assets, net                                              |       | —                                          |       | (5                          | )          | (853                        | )          | 59                                |       | —           |       | (799             | )          |
| Other                                                                            |       | —                                          |       | (15,210                     | )          | (401                        | )          | 14,091                            |       | —           |       | (1,520           | )          |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                      |       | —                                          |       | 595                         |       | (1,789                      | )          | (68,088                           | )          | (4,376           | )          | (73,658          | )          |
| Inventories                                                                      |       | —                                          |       | 1                           |       | (767                        | )          | 401                               |       | —           |       | (365             | )          |
| Prepaid expenses                                                                 |       | —                                          |       | 4,159                       |       | (5,432                      | )          | (183                              | )          | —           |       | (1,456           | )          |
| Accounts payable  and accrued liabilities                                   |       | —                                          |       | (13,109                     | )          | 28,133                      |       | 2,936                             |       | 4,376            |       | 22,336           |       |
| Pension and other  postretirement benefit payments                               |       | —                                          |       | (524                        | )          | —                      |       | —                            |       | —           |       | (524             | )          |
| Current and  deferred income taxes                                               |       | —                                          |       | 1,491                       |       | 305                         |       | (84                               | )          | —           |       | 1,712            |       |
| Other                                                                            |       | —                                          |       | 2,741                       |       | 1,217                       |       | 1                                 |       | —           |       | 3,959            |       |
| Cash provided by  (used for) operations                                          |       | —                                          |       | (46,289                     | )          | 179,239                     |       | (55,331                           | )          | —           |       | 77,619           |       |
|                                                                             |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Expenditures for  property and equipment                                    |       | —                                          |       | (2,424                      | )          | (85,991                     | )          | (1,498                            | )          | —           |       | (89,913          | )          |
| Sales of assets                                                                  |       | —                                          |       | 6                           |       | 16,897                      |       | —                            |       | —           |       | 16,903           |       |
| Investments in  affiliates                                                       |       | 3,002                                           |       | 75,282                      |       | —                      |       | —                            |       | (78,284          | )          | —           |       |
| Other                                                                            |       | —                                          |       | 15,365                      |       | (50                         | )          | (14,024                           | )          | —           |       | 1,291            |       |
| Cash provided by  (used for) investment                                     |       | 3,002                                           |       | 88,229                      |       | (69,144                     | )          | (15,522                           | )          | (78,284          | )          | (71,719          | )          |
| **Cash  provided by (used for) financing**                                       |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Issuances of  long-term debt                                                     |       | —                                          |       | 525,000                     |       | —                      |       | 180,000                           |       | —           |       | 705,000          |       |
| Payments of  long-term debt                                                      |       | —                                          |       | (540,212                    | )          | —                      |       | (135,000                          | )          | —           |       | (675,212         | )          |
| Short-term  borrowings                                                           |       | —                                          |       | (3,200                      | )          | —                      |       | —                            |       | —           |       | (3,200           | )          |
| Proceeds from  changes to interest rate swaps                                    |       | —                                          |       | 2,848                       |       | —                      |       | —                            |       | —           |       | 2,848            |       |
| Tax distributions  to members                                                    |       | (2,753                                          | )          | —                      |       | —                      |       | —                            |       | —           |       | (2,753           | )          |
| Tax distribution  to Boise Cascade Holdings, L.L.C.                              |       | —                                          |       | (2,753                      | )          | —                      |       | —                            |       | 2,753            |       | —           |       |
| Repurchase of  management equity units                                           |       | (249                                            | )          | (249                        | )          | —                      |       | —                            |       | 249              |       | (249             | )          |
| Other                                                                            |       | 1                                               |       | (2,667                      | )          | —                      |       | —                            |       | —           |       | (2,666           | )          |
| Cash provided by  (used for) financing                                      |       | (3,001                                          | )          | (21,233                     | )          | —                      |       | 45,000                            |       | 3,002            |       | 23,768           |       |
| Due to (from)  affiliates                                                        |       | —                                          |       | 10,340                      |       | (110,097                    | )          | 24,475                            |       | 75,282           |       | —           |       |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 1                                               |       | 31,047                      |       | (2                          | )          | (1,378                            | )          | —           |       | 29,668           |       |
| **Balance  at beginning of the period**                                          |       | —                                          |       | 42,962                      |       | 32                          |       | 2,175                             |       | —           |       | 45,169           |       |
| **Balance  at end of the period**                                                | ** ** | **$**                                           | **1**      | ** **                  | **$**      | **74,009**                  | ** ** | **$**                             | **30**     | ** **       | **$**      | **797**          | ** ** | **$** | **—** | ** ** | **$** | **74,837** | ** ** |

 

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***22.******                         LegalProceedings and Contingencies***

 

We are a party to routine legal proceedings that arisein the ordinary course of our business. We are not currently a party to anylegal proceedings or environmental claims that we believe would have a materialadverse effect on our financial position, results of operations, or cash flows.

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

 

***Understanding Our FinancialInformation***

 

The following discussion and analysisprovides information management believes to be relevant to understanding ourfinancial condition and results of operations. We begin this discussionand analysis with a general background related to our company and an overviewof the effects of the “Sale of Our Paper and Packaging & NewsprintAssets.” “Recent Trends and Operational Outlook” and “Factors That Affect OurOperating Results” are intended to give the reader context that may be helpfulin understanding the opportunities and challenges our businesses face as wecompete in the marketplace. The analysis then reviews “Our Operating Results”for the three and six months ended June 30, 2008, compared with the sameperiods in 2007. Following the analysis of our results, relevant mergeractivity in our industry is discussed in “Industry Mergers and Acquisitions,”as well as in “Acquisitions” and “Divestitures.”

 

We discuss ourbalance sheet, cash flows, and financial commitments in the section entitled “Liquidityand Capital Resources.” The analysis then refers you to “ContractualObligations” and “Critical Accounting Estimates” that are discussed in detailin “Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in our Quarterly Report on Form 10-Q for thequarter ended March 31, 2008. Critical accounting estimates are thoseestimates that our management believes are important to understanding theassumptions and judgments incorporated in our reported financial results.

 

This discussion and analysis includes statements regarding our expectationswith respect to our future performance, liquidity, and capital resources. Suchstatements, along with any other nonhistorical statements in the discussion,are forward-looking. These forward-looking statements are subject to numerousrisks and uncertainties, including, but not limited to, the risks anduncertainties described in “Part II, Item 1A. Risk Factors” of ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2008,as well as the factors listed in other documents we file with the Securitiesand Exchange Commission (SEC). There have been no material changes to our riskfactors during the three months ended June 30, 2008, from those listed inour Quarterly Report on Form 10-Q for the quarter ended March 31,2008. We do not assume an obligation to update any forward-looking statement.Our future actual results may differ materially from those contained in orimplied by any of the forward-looking statements in this Form 10-Q.

 

***Background and Executive Overview***

 

Ouroperations began on October 29, 2004 (inception), when we acquired theforest products and paper assets of OfficeMax (the Forest ProductsAcquisition). Before the Forest Products Acquisition, OfficeMax was known asBoise Cascade Corporation. We acquired the name “Boise Cascade” as part of theForest Products Acquisition.

 

On February 22, 2008, Boise Cascade,L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging &Newsprint assets and most of its Corporate and Other assets (the Sale) toBoise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash andsecurities equal to $1.6 billion, plus working capital adjustments.Immediately following the Sale, Boise Cascade, L.L.C., distributed thesecurities received in the transaction to us. As a result, we became a 49%owner of Boise Inc. and continue to have a significant indirect financialinterest in the results of the sold businesses. We account for ourinterest in Boise Inc. using the equity method of accounting. BoiseCascade, L.L.C., is now solely focused on wood products manufacturing andbuilding products distribution and remains headquartered in Boise, Idaho.After the Sale, we operate our business in the following three reportablesegments: Building Materials Distribution, Wood Products, and Corporate andOther. See Note 19, Segment Information, of the Notes to UnauditedQuarterly Consolidated Financial Statements in “Item 1. ConsolidatedFinancial Statements” of this Form 10-Q for additional information aboutour reportable segments.

 

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Recent results for ourbusiness segments remain weak, compared with those we achieved in the periodsof 2004 through the first half of 2007, when single-family housing starts weremore robust. We do not expect housing starts to meaningfully improve over thenext several quarters. At this point, our outlook is for relatively weakend-product demand in the near term. See additional comments below in “RecentTrends and Operational Outlook.”

 

***Sale of Our Paper and Packaging &Newsprint Assets***

 

On February 22, 2008, Boise Cascade,L.L.C., completed the Sale for $1,277.2 million of cash consideration,$277.4 million of net stock consideration, and a $41.0 millionpaid-in-kind promissory note receivable. After the Sale, the note receivablefrom Boise Inc. increased $17.3 million for working capitaladjustments. For more information, see Note 4, Transactions With RelatedParties in “Item . Consolidated Financial Statements” of this Form 10-Q.In connection with the Sale, we generated a $9.3 million gain, of which werecognized $4.7 million in our Consolidated Statement of Loss during thesix months ended June 30, 2008. In accordance with Emerging Issues TaskForce (EITF) No. 01-02, *Interpretations ofAccounting Principles Board (APB) Opinion No. 29,*we deferred$4.6 million of the gain as a reduction of our investment in Boise Inc.

 

Immediately following the Sale, BoiseCascade, L.L.C., distributed the securities received in the transaction to us.As a result, we became a 49% owner of Boise Inc. and continue to have asignificant indirect financial interest in the results of the sold businesses.We account for our interest in Boise Inc. using the equity method ofaccounting. We valued the stock consideration received based on the February 21,2008, closing Boise Inc. stock price of $8.56. We reduced the value of thestock consideration received by a 12% discount for a lack of marketabilitysince the stock delivered as consideration was not registered for resale and bya $4.6 million gain deferred in connection with the Sale. We will realizethe deferred gain when we reduce our investment in Boise Inc. SeeNote 12, Investment in Equity Affiliate, in “Item 1. ConsolidatedFinancial Statements” of this Form 10-Q for more information.

 

The net proceeds of any disposition of the shares of Boise Inc., andthe net proceeds received from the sale of the note receivable fromBoise Inc. (see Note 4, Transactions With Related Parties in “Item 1.Consolidated Financial Statements” of this Form 10-Q for moreinformation), are governed by the terms of our senior subordinated notesindenture, including the asset disposition provisions, which may require us torepay senior indebtedness, reinvest the proceeds in our business, or tender forall, or a portion of, the outstanding notes at par.

 

*Useof Transaction Proceeds*

 

With the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million of ourdebt. In addition to repaying a substantial amount of our indebtedness, infirst quarter 2008, we paid $11.9 million to unwind all of our interestrate swaps.

 

We make cash distributions to permit the members ofBoise Cascade Holdings, L.L.C., (BC Holdings) and affiliates to paytheir taxes. On February 22, 2008, we accrued $200 million forestimated tax distributions payable to our equity holders related to theestimated net taxable gain on the Sale. During the three and six months ended June 30,2008, we made $0.5 million and $127.9 million of tax distributions toour equity holders. We expect to make additional gain-related tax distributionsduring the remainder of the year or first quarter 2009. Our tax distributionpayable to members will include the gain on the Sale and will increase ordecrease for 2008 taxable income (loss).

 

In connection with the transaction, approximately75 participants in our Management Equity Plan terminated employment withus. These employees collectively held 6.6 million Series B and16.1 million Series C units. After the transaction, we paid$18.3 million to repurchase their equity units. In addition, we alsocurrently expect to pay approximately $4.2 million under the deferredcompensation agreements for employees terminated in connection with thetransaction. Of the $4.2 million, we recorded $2.6 million in “Accruedliabilities, Compensation and benefits” and $1.6 million in “Other,Compensation and benefits” on our Consolidated Balance Sheet at June 30,2008.

 

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*Pro Forma*

 

The following pro formafinancial information was derived from the unaudited quarterly financialstatements of BC Holdings. The pro forma financial information gives effect tothe Sale as if it were consummated on January 1, 2007. The pro formafinancial information is intended for informational purposes only and is notnecessarily indicative of the results of operations that may have actuallyoccurred if the Sale had been consummated on January 1, 2007, or theoperating results that may be obtained in the future.

** **
| ** **         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **         | ** ** | **June 30**                 | ** ** | **June 30**               | ** ** |
| ** **         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|               |       | **(millions)**                   |       |
| Sales              |       | $                                | 757.2      |                           | $          | 895.7 |   | $ | 1,385.3 |   | $ | 1,667.0 |   |
|               |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) |       | $                                | (12.8      | )(a)                           | $          | 23.5 | (b) | $ | (54.7 | )(a) | $ | 27.6 | (b) |

 

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(a)                                  The pro forma net loss for the three and sixmonths ended June 30, 2008, included pro forma losses of $8.9 millionand $22.1 million related to our equity interest in Boise Inc.;included zero and $6.3 million  ofexpense related to changes in the fair value of our interest rate swaps, whichwe terminated in February 2008; included $1.8 million and$4.1 million of related-party interest income from the note receivablefrom Boise Inc., which was sold in June 2008; excluded $0.7 millionof income and $4.0 million of expense related to the fair value ofcontingent value rights that we and Terrapin Partners Venture Partnership granted to certainBoise Inc. investors; and excluded $3.3 million of expense and$4.7 million of gain on the Sale.

 

(b)                                 Pro forma net income for the three and sixmonths ended June 30, 2007, included pro forma losses of $8.9 millionand $12.1 million related to our equity interest in Boise Inc.;included $2.3 million and $4.6 million of related-party interestincome from the note receivable from Boise Inc.; both periods included a$4.4 million gain related to changes in our retiree healthcare programsand $5.4 million of income related to changes in the fair value of ourinterest rate swaps.

 

***Effects of the Sale***

 

*OutsourcingAgreement*

 

In connection with the Sale, weentered into an Outsourcing Services Agreement under which Boise Inc. providesa number of corporate staff services to us at cost. These services includeinformation technology, accounting, and human resource services. The initialterm of the agreement is for three years. It will automatically renew forone-year terms unless either party provides notice of termination to the otherparty at least 12 months in advance of the applicable term. The OutsourcingServices Agreement also gives us (but not Boise Inc.) the right to terminateall or any portion of the services provided to us on 30 days’ notice,subject to payment of an absorption fee. The absorption fee of$5.0 million is allocated among the services provided under the contractand declines to zero in total and on an allocable basis over the initialthree-year term of the agreement. During the three and six months ended June 30,2008, we recognized $3.8 million and $5.2 million of costs related tothis agreement, of which we recorded $0.6 million and $0.7 million in“Materials, labor, and other operating expenses from related parties,”$0.7 million and $1.0 million in “Selling and distribution expenses,”and $2.5 million and $3.5 million in “General and administrativeexpenses from related party” in our Consolidated Statements of Loss.

 

*DecreasedLeverage*

 

With the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million oflong-term debt, including all of the borrowings under the previous revolvingcredit facility, Tranche E term loan, delayed-draw term loan, borrowingssecured by our receivables, and $160.0 million of our 7.125% seniorsubordinated notes. We repaid the amounts primarily with the proceeds from theSale and, to a lesser extent, with borrowings under our $350 millionsenior secured asset-based revolving credit facility. At June 30, 2008, wehad $315.0 million of debt outstanding. For more information, see “FinancingActivities” under Liquidity and Capital Resources in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

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*Segments*

 

Prior to the Sale, weoperated our business using five reportable segments:  Building Materials Distribution, WoodProducts, Paper, Packaging & Newsprint, and Corporate and Other.Following the Sale, we now operate our business using three reportablesegments:  Building MaterialsDistribution, Wood Products, and Corporate and Other. There are no differencesin our basis of measurement of segment profit or loss from those disclosed inNote 16, Segment Information, of the Notes to Consolidated FinancialStatements in “Item 8. Consolidated Financial Statements and SupplementaryData” in our 2007 Annual Report on Form 10-K. The equity interest we ownin Boise Inc. after the Sale represents a significant continuing involvement asdefined in Statement of Financial Accounting Standards (SFAS) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*Asa result, we continue to show the results of the Paper and Packaging &Newsprint segments through February 21, 2008, and we do not define thesold assets as discontinued operations.

 

*Pensionand Benefit Plans*

 

Effective January 1, 2008, we spunoff the portion of each benefit plan attributable to employees or retirees ofthe Paper and Packaging & Newsprint businesses. Effective February 22,2008, under the terms of the Purchase and Sale Agreement with Boise Inc., wetransferred sponsorship of the spunoff plans to Boise Paper Holdings, L.L.C., asubsidiary of Boise Inc., and only those employees, terminated vestedparticipants, and retirees whose employment was with our Wood Products,Building Materials Distribution, and some corporate and discontinued operationscontinue to be covered under the plans remaining with us. As a result of theSale, our annual pension expense and contributions to the plans going forwardwill be less than the amounts included in prior periods.

 

***Recent Trends and Operational Outlook***

 

As of July 2008, the Blue Chip Economic consensusforecast for 2008 housing starts in the U.S. was approximately0.96 million units, which is significantly below historical trends ofapproximately 1.7 million units per year over the prior ten years. Housingstarts in 2004 and 2005 were approximately 2.0 million per year, with 2006coming in around 1.8 million per year. This above-trend period was fueledby low mortgage rates, a strong economy with low unemployment, and the growthof the subprime mortgage market and the various mortgage securitizationmechanisms developed by financial institutions. In the second half of 2007,turbulence in the mortgage market and a significant oversupply of homes forsale led to a sharp drop-off in housing construction and demand for ourproducts. Housing starts in 2007 were approximately 1.3 million units peryear. The inventory of unsold homes is elevated relative to historical levels,and foreclosure rates have increased as home prices have declined in many partsof the United States. Housing markets across the country have been affectednegatively by recent events. As a general rule, those markets that experiencedthe highest growth and price appreciation are now experiencing the biggestdeclines in price and resulting declines in housing starts.

 

While our products areused in repair-and-remodel activities, as well as light commercialconstruction, our results are principally driven by new single-family homeconstruction. In many parts of the country — the Southeast, Midwest, andCalifornia — demand for building products continues to be weak, and there isongoing pricing pressure as suppliers compete for the limited businessavailable. In other markets, such as Texas and the Pacific Northwest, businesshas slowed, but not as dramatically as in the areas mentioned above.

 

Input costs are anotherkey factor of our recent results. Energy costs, including electricity, naturalgas, and diesel fuel, continue to be higher than historical norms. This raisesour freight and manufacturing costs both directly and indirectly by raising keyvariable-cost inputs, such as glues and resins. Global supply and demandfactors, as well as the weak U.S. dollar, appear to be contributing to thepersistence of the recent higher energy and other commodity price trends. Ourlog costs have started to decline, but have not fallen as sharply as we haveexperienced in prior periods of weak industry manufacturing output. Some ofthis is a result of higher cutting and hauling costs due to the energy issuesmentioned above.

 

We expect 2008 to continue to be a difficult year.During the first and second quarters of 2008, we took rolling curtailments at anumber of our Wood Products operations to maintain appropriate inventorylevels, while trying to minimize the negative impact of the curtailments on ouremployees and our operating results. Earlier in the year, we permanently closedour White City, Oregon, lumber operation, and in July 2008, we sold ourplywood and veneer mill in Brazil. It is likely that we will need to

 

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continue our practice ofrolling curtailments at a number of our facilities, doing so in a manner thatallows us to retain our skilled workforce and keep our inventories in balancewith demand. We will continue to focus on supporting our customers, vendors,and employees during these difficult times. This has allowed us to modestlygrow market share in this downturn and will prepare us to take full advantageof a recovery in demand when it arrives.

 

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

 

Our results of operations and financial performanceare influenced by a variety of factors, including the following:

 

·                  General economicconditions, including but not limited to housing starts, repair-and-remodelactivity and nonresidential construction, and relative currency values;

 

·                  Mortgage pricingand availability, as well as other consumer financing mechanisms, thatultimately impact demand for our products;

 

·                  Volatility inraw material costs, including energy prices and log costs;

 

·                  The commoditynature of our products and their price movements, which are driven largely bysupply and demand;

 

·                  Pricingvolatility in our distribution business;

 

·                  Industry cyclesand capacity utilization rates;

 

·                  The cost andability to obtain necessary financing;

 

·                  Continuedcompliance with government regulations;

 

·                  Legislative orregulatory environments, requirements, or changes affecting the businesses inwhich we are engaged;

 

·                  Labor andpersonnel relations and shortages of skilled and technical labor;

 

·                  Credit orcurrency risks affecting our revenue and profitability;

 

·                  Major equipmentfailure;

 

·                  Severe weatherphenomena such as drought, hurricanes, tornadoes, and fire;

 

·                  Our ability toimplement our strategies;

 

·                  Actions ofsuppliers, customers, and competitors, including merger and acquisitionactivities;

 

·                  Financialresults of Boise Inc., which we account for under the equity method ofaccounting;

 

·                  Boise Inc.’sperformance under the administrative services outsourcing agreement; and

 

·                  The otherfactors described in “Part II, Item 1A. Risk Factors” of ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2008.

 

*Commodity and DifferentiatedProducts and Services*

 

Many of the products wemanufacture and distribute are widely available and can be readily produced ordistributed by our competitors. Because commodity products have fewdistinguishing qualities from producer to producer, competition for theseproducts is based primarily 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 or our cost of procurement. Therefore, ourprofitability with respect to these 

 

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products depends on managing our cost structure, particularly rawmaterial and energy costs, which also exhibit commodity characteristics.

 

Not all of our productsare viewed as commodities in the marketplace. Our engineered wood products(EWP) are differentiated from competing products based on quality and productdesign, as well as related customer service. In the case of EWP products, weare generally able to influence price based on the strength of differentiationand levels of customer service and are generally able to sell these products athigher margins than our commodity products. A fundamental component of ourstrategy is to grow EWP as a share of our total Wood Products segment sales. Webelieve this product is less susceptible to commodity pricing dynamics.

 

Comparing second quarter2008 with the same period in 2007, sales of EWP from our Wood Products segmentdecreased from approximately 49% of segment sales in 2007 to 37% of sales in2008. The ongoing weakness in new residential construction has impeded ourability to grow our EWP sales. Comparing the three months ended June 30,2008, with the same period in 2007, our laminated veneer lumber (LVL) andI-joist sales volumes decreased 27% and 36%, respectively.

 

Our Building MaterialsDistribution segment distributes a significant number of commodity and brandedbuilding materials. While we must be competitive on price, our associates andmanagement team understand the positive impact excellent customer service,process innovation, and local market adaptation can have on differentiating ourfunction in the marketplace and generating superior returns on investedcapital.

 

*Demand*

 

Historically, demand forthe products we manufacture, as well as the products we purchase anddistribute, has been closely correlated with new residential construction inthe United States. Demand for new residential construction is influenced byseasonal weather factors, mortgage availability and rates, unemployment levels,immigration rates, demand for second homes, existing home prices, consumerconfidence, and other general economic factors. Industry supply is influencedprimarily by operating rates of existing facilities but is also influenced overtime by the introduction of new product technologies and capacity additions.The balance of supply and demand in the U.S. is also heavily influenced byimported products, principally from Canada.

 

U.S. housing starts havefallen dramatically since early 2006, resulting in much lower building productsshipments and pricing for us and many others in the industry. The length andmagnitude of industry cycles have varied over time, and we are uncertain as tohow long the current supply-demand imbalances will persist. Many of the woodproducts we produce or distribute, including oriented strand board (OSB),plywood, lumber, and particleboard, are commodities that are widely availablefrom other producers or distributors. Even our noncommodity products, such asEWP, are impacted by commodity prices since the cost of producing EWP isimpacted by veneer and OSB prices. Commodity products have few distinguishingqualities from producer to producer, and as a result, competition for theseproducts is based primarily on price, which is determined by supply relative todemand.

 

Demand for buildingproducts also depends on light commercial construction and residentialrepair-and-remodeling activity, which are affected by demographic trends,interest rate levels, weather, and general economic conditions.

 

*Supply*

 

Industry supply ofcommodity wood products is affected by the number of operational or idledfacilities, the building of new capacity, and the shutting down of existingcapacity. Capacity also tends to increase gradually over time withoutsignificant 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 whencapacity significantly exceeds demand and margins are poor.

 

While new capacityadditions are constrained by the high capital investment and long lead timesrequired to plan, obtain regulatory approvals for, and build a new mill, afavorable pricing environment may prompt manufacturers to initiate expansionprojects.

 

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Some major OSB producershave announced indefinite shutdowns or permanent closures of existingfacilities, and others have announced delays in previously announced capacityadditions. A number of OSB producers have announced the intention to produce astrand lumber product that is intended to be a substitute for EWP in someapplications. Some of the strand lumber mills have announced that productionwill commence in 2008. Their ability to produce such a product and its impacton the EWP market are uncertain.

 

Industry supply ofcommodity wood products is also influenced by the level of imports and overseasproduction capacity, which has grown in recent years. The weakening of the U.S.dollar has mitigated the level of imports in recent years.

 

*Operating Costs*

 

Our major costs in ourWood Products segment are labor, wood fiber, energy, and chemicals. Given thesignificance of raw material and energy costs to our total operating expensesand our limited ability to control these costs, volatility in these costs canmaterially affect our margins. In addition, the timing and degree of pricecycles of raw materials and energy differ with respect to each type of rawmaterial and energy we use.

 

In our Building MaterialsDistribution segment, the primary cost is for products procured for resale,which typically represents over 90% of our total costs.  Occupancy, labor, and delivery costs are alsoimportant factors that impact our earnings in this segment.

 

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

 

As of June 30, 2008, we had approximately 5,100employees. Approximately 1,900, or 37%, of these employees work pursuant tocollective bargaining agreements. Our Northwest wood products facilities openednegotiations on May 9, 2008, to bargain eight contracts coveringapproximately 950 employees at the following locations:  St. Helens, Oregon, veneer; LaGrande,Oregon, sawmill and particleboard; Elgin, Oregon, plywood plant and stud mill;Emmett, Idaho, laminated beam; Kettle Falls, Washington, plywood and small logmill; and Woodinville, Washington, building materials distribution center. Thelabor agreement at our St. Jacques, New Brunswick, Canada, I-joist plantthat covers approximately 120 workers was ratified on July 10, 2008,following a ten-day strike. This contract runs through December 2011. Wealso ratified a three-year contract, expiring in 2011, at our Billings,Montana, building materials distribution center that covers 27 drivers andmaterial handlers. We do not expect material work interruptions or increases inour costs during the course of the negotiations with our collective bargainingunits. Nevertheless, if our expectations are not accurate, we could experiencea material labor disruption or significantly increased labor costs at one ormore of our facilities, any of which could prevent us from meeting customerdemand or reduce our sales and profitability.

 

*Woodfiber.*  Our primary raw material is wood fiber. Forthe six months ended June 30, 2008 and 2007, wood fiber accounted for 40%and 42% of materials, labor, and other operating expenses, including relatedparties, in our Wood Products segment.

 

Our primary sources oflogs and wood fiber are timber and byproducts of timber, such as wood shavingsand sawdust. Our wood fiber costs also include purchases of semifinishedmaterials, such as OSB and lumber, for use in EWP production. We acquiresubstantially all of our fiber from outside sources. In our Wood Productssegment, we convert logs into lumber and veneer, and in turn, we convert veneerinto EWP and plywood. Logs are a lower percentage of the total cost ofmaterials, labor, and other operating expenses in producing EWP than commodityproducts, such as lumber and plywood. While log costs are still a significantcomponent of costs, as we continue to produce more EWP relative to commodityproducts, direct-log costs decline as a percentage of the total cost ofmaterials, labor, and other operating expenses. We also convert residual woodfiber from our operations, as well as from third parties, into particleboard.

 

Logs and wood fiber arecommodities, and prices for logs and wood fiber have historically been cyclicaldue to changing levels of demand. Log and fiber supply may be limited by publicpolicy or government regulation as well as fire, insect infestation, disease,ice storms, windstorms, hurricanes, flooding, other weather conditions, andother natural and man-made causes. Residual fiber supply may be limited due toreduction in primary manufacturing at sawmills and plywood plants. Declines inlog and 

 

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fiber supply, driven primarily by changes in public policy andgovernment regulation, have been severe enough to cause the closure of numerousfacilities in some of the regions in which we operate. Any sustainedundersupply and resulting increase in wood fiber prices could decrease ourproduction volumes and/or increase our operating costs. Prices for our productsmight not reflect increases or decreases in log and wood fiber prices, and as aresult, our operating margins could fluctuate. Further curtailments of solidwood manufacturing in the Northwest have led to limited availability and higherprices for residual fiber in 2008, which raises input costs to ourparticleboard operations, but also results in higher realizations on ourbyproducts sales of wood chips from our lumber, veneer, and plywood operations.

 

*Other rawmaterials and energy purchasing and pricing. *We purchase other raw materials and energy used tomanufacture our products in both the open market and through long-termcontracts. These contracts are generally with regional suppliers who agree tosupply all of our needs for a certain raw material or energy at one of ourfacilities. These contracts normally contain minimum purchase requirements andare for terms of various lengths. They also contain price adjustment mechanismsthat take into account changes in market prices. Therefore, although ourlong-term contracts provide us with supplies of raw materials and energy thatare more stable than open-market purchases, in many cases, they may notalleviate fluctuations in market prices.

 

Our costs for raw materials are influenced by increases in energycosts. Specifically, some of our key chemicals, including glues and resinsconsumed in our Wood Products segment, are heavily influenced by energy costs.A number of our major suppliers have obtained price increases tied to theirincreased energy costs. For our commodity products, the relationship betweenindustry supply and demand, rather than changes in the cost of raw materials,determines our ability to increase prices. Consequently, we may be unable topass increases in our operating costs to our customers in the short term.

 

*Energy. *Prices for energy,particularly electricity, natural gas, and diesel, have been volatile in recentyears and currently exceed historical averages. For the six months ended June 30,2008 and 2007, energy costs represented approximately 5% and 4% of materials, labor,and other operating expenses, including related parties, in our Wood Productssegment. Relative to the prior year, fuel costs increased in our BuildingMaterials Distribution segment.

 

*Chemicals.*Important chemicals weuse in the production of our wood products are resins and glues. For the sixmonths ended June 30, 2008 and 2007, purchases of chemicals represented 7%and 6% of materials, labor, and other operating expenses, including relatedparties, in our Wood Products segment. We experienced higher chemical costs during the first half of2008, compared with the same period a year ago, due primarily to chemicalmarket supply-demand dynamics and the impact that higher energy prices arehaving on the cost structure of chemical producers.

 

*Inflationary and seasonal influences. *Our major costs of production are labor, wood fiber, energy, andchemicals. Fiber markets in the Pacific Northwest are still relatively high byhistorical standards. Energy costs, particularly for electricity, natural gas,and fuel oil, have been volatile in recent years and currently exceedhistorical standards. We have also seen higher chemical costs in the currentyear, compared with historical standards, due primarily to chemical marketsupply and demand dynamics. 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. In addition, seasonally cold weather increases costs, especially energyconsumption, at our manufacturing facilities.

 

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***OurOperating Results***

 

The following tables setforth our operating results in dollars and as a percentage of sales for thethree and six months ended June 30, 2008 and 2007:

 
| ** **                                                                 | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                       | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **(millions)**                                 | ** ** |
| **Sales**                                                                  |       |                                           |       |                                         |       |   |   |   |   |
| Trade                                                                      |       | $                                              | 743.4      |                                         | $          | 1,288.9 |   | $ | 1,624.2 |   | $ | 2,452.1 |   |
| Related parties                                                            |       | 13.8                                           |       | 159.5                                        |       | 109.6 |   | 317.3 |   |
|                                                                       |       | 757.2                                          |       | 1,448.4                                      |       | 1,733.8 |   | 2,769.4 |   |
|                                                                       |       |                                           |       |                                         |       |   |   |   |   |
| **Costs  and expenses**                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Materials,  labor, and other operating expenses                            |       | 649.9                                          |       | 1,270.3                                      |       | 1,530.5 |   | 2,427.2 |   |
| Materials,  labor, and other operating expenses from related parties       |       | 23.0                                           |       | —                                       |       | 29.2 |   | — |   |
| Depreciation,  amortization, and depletion                                 |       | 8.7                                            |       | 40.7                                         |       | 18.7 |   | 81.1 |   |
| Selling and  distribution expenses                                         |       | 57.6                                           |       | 73.7                                         |       | 121.0 |   | 142.0 |   |
| General and  administrative expenses                                       |       | 7.9                                            |       | 20.2                                         |       | 22.5 |   | 39.7 |   |
| General and  administrative expenses from related party                    |       | 2.5                                            |       | —                                       |       | 3.5 |   | — |   |
| Gain on sale of  Paper and Packaging & Newsprint assets           |       | 3.3                                            |       | —                                       |       | (4.7 | ) | — |   |
| Other (income)  expense, net                                               |       | 8.6                                            |       | (5.1                                         | )          | 7.7 |   | (2.5 | ) |
| * *                                                                   |       | 761.5                                          |       | 1,399.8                                      |       | 1,728.4 |   | 2,687.5 |   |
| * *                                                                   |       |                                           |       |                                         |       |   |   |   |   |
| **Income  (loss) from operations**                                         | ** ** | **$**                                          | **(4.3**   | **)**                                        | **$**      | **48.6** | ** ** | **$** | **5.4** | ** ** | **$** | **81.9** | ** ** |
| * *                                                                   |       |                                           |       |                                         |       |   |   |   |   |
| ** **                                                                 | ** ** | **(percentage of sales )**                     | ** ** |
| **Sales**                                                                  |       |                                           |       |                                         |       |   |   |   |   |
| Trade                                                                      |       | 98.2                                           | %          | 89.0                                         | %          | 93.7 | % | 88.5 | % |
| Related parties                                                            |       | 1.8                                            |       | 11.0                                         |       | 6.3 |   | 11.5 |   |
|                                                                       |       | 100.0                                          | %          | 100.0                                        | %          | 100.0 | % | 100.0 | % |
|                                                                       |       |                                           |       |                                         |       |   |   |   |   |
| **Costs  and expenses**                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Materials,  labor, and other operating expenses, including related parties |       | 88.9                                           | %          | 87.7                                         | %          | 90.0 | % | 87.7 | % |
| Depreciation,  amortization, and depletion                                 |       | 1.2                                            |       | 2.8                                          |       | 1.1 |   | 2.9 |   |
| Selling and  distribution expenses                                         |       | 7.6                                            |       | 5.1                                          |       | 7.0 |   | 5.1 |   |
| General and  administrative expenses, including related party              |       | 1.4                                            |       | 1.4                                          |       | 1.5 |   | 1.4 |   |
| Gain on sale of  Paper and Packaging & Newsprint assets           |       | 0.4                                            |       | —                                       |       | (0.3 | ) | — |   |
| Other (income)  expense, net                                               |       | 1.1                                            |       | (0.4                                         | )          | 0.4 |   | (0.1 | ) |
|                                                                       |       | 100.6                                          | %          | 96.6                                         | %          | 99.7 | % | 97.0 | % |
|                                                                       |       |                                           |       |                                         |       |   |   |   |   |
| **Income  from operations**                                                | ** ** | **(0.6**                                       | **)%**     | **3.4**                                      | **%**      | **0.3** | **%** | **3.0** | **%** |

 

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***Sales Volumes and Prices***

 

Set forth below are our segment sales volumes and averagenet selling prices for our principal products for the three and six monthsended June 30, 2008 and 2007.

 
| ** **                                       | ** ** | **Three Months Ended  June 30**             | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                                   | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(millions)**                                             | ** ** |
| **Building  Materials Distribution**             |       |                                                       |       |                                         |       |   |   |   |   |
| Sales dollars                                    |       | $                                                          | 610.0      |                                         | $          | 723.7 |   | $ | 1,113.9 |   | $ | 1,332.4 |   |
|                                             |       |                                                       |       |                                         |       |   |   |   |   |
| ** **                                       | ** ** | **(percentage of Building Materials  Distribution sales)** | ** ** |
|                                             |       |                                                       |       |                                         |       |   |   |   |   |
| **Product  Line Sales**                          |       |                                                       |       |                                         |       |   |   |   |   |
| Commodity                                        |       | 45                                                         | %          | 43                                           | %          | 45 | % | 43 | % |
| Engineered wood                                  |       | 12                                                         |       | 15                                           |       | 12 |   | 15 |   |
| General line                                     |       | 43                                                         |       | 42                                           |       | 43 |   | 42 |   |
|                                             |       |                                                       |       |                                         |       |   |   |   |   |
| ** **                                       | ** ** | **(millions)**                                             | ** ** |
| **Sales  Volumes**                               |       |                                                       |       |                                         |       |   |   |   |   |
| **Wood  Products**                               |       |                                                       |       |                                         |       |   |   |   |   |
| Laminated veneer  lumber (LVL) (cubic feet)      |       | 2.3                                                        |       | 3.2                                          |       | 4.3 |   | 5.9 |   |
| I-joists  (equivalent lineal feet)               |       | 38                                                         |       | 60                                           |       | 67 |   | 107 |   |
| Plywood (sq.  ft.) (3/8” basis)             |       | 317                                                        |       | 300                                          |       | 630 |   | 610 |   |
| Lumber (board  feet)                             |       | 57                                                         |       | 63                                           |       | 106 |   | 119 |   |
| Particleboard  (sq. ft.) (3/4” basis)       |       | 28                                                         |       | 37                                           |       | 54 |   | 74 |   |
|                                             |       |                                                       |       |                                         |       |   |   |   |   |
| ** **                                       | ** ** | **(dollars per unit)**                                     | ** ** |
| **Average  Net Selling Prices**                  | ** ** | ** **                                                 | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                               | ** ** | ** **                                                 | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet)  |       | $                                                          | 1,597      |                                         | $          | 1,723 |   | $ | 1,607 |   | $ | 1,735 |   |
| I-joists (1,000  equivalent lineal feet)         |       | 952                                                        |       | 1,035                                        |       | 960 |   | 1,039 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)       |       | 259                                                        |       | 262                                          |       | 250 |   | 253 |   |
| Lumber (1,000  board feet)                       |       | 369                                                        |       | 436                                          |       | 377 |   | 442 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 365                                                        |       | 334                                          |       | 354 |   | 327 |   |

 

***Operating Results***

 

# ***Sales***

# * *

For the three months ended June 30, 2008, totalsales decreased $691.2 million, or 48%, to $757.2 million from$1,448.4 million during the three months ended June 30, 2007. For thesix months ended June 30, 2008, total sales decreased$1,035.6 million, or 37%, to $1,733.8 million from$2,769.4 million in the prior year. Relative to the three and six monthsended June 30, 2008, the decrease was driven primarily by the sale of ourPaper and Packaging & Newsprint assets in first quarter 2008. The soldbusinesses had sales of $582.6 million and $1,161.3 million duringthe three and six months ended June 30, 2007. For the period of January 1through February 21, 2008, the sold businesses had sales of$359.9 million. The decrease in sales was also attributable to lower salesin our Building Materials Distribution and Wood Products segments due to weakerproduct demand and prices as U.S. new residential housing demand declined.

 

*Building Materials Distribution.*  Sales decreased $113.7 million, or 16%,to $610.0 million for thethree months ended June 30, 2008, from $723.7 million for the threemonths ended June 30, 2007. During the six months ended June 30,2008, sales decreased $218.5 million, or 16%, to $1,113.9 millionfrom $1,332.4 million in the prior year. Relative to the three and sixmonths ended June 30, 2007, the decrease was driven primarily by a 14% and17% decline, respectively, in the volume of product sold. In addition, salesprices decreased about 2% during the three months ended June 30, 2008. Thereduced volumes and prices were the result of decreased demand in newresidential construction markets.

 

*WoodProducts.* Sales decreased $52.7 million, or 19%, to$226.0 million for thethree months ended June 30, 2008, from $278.7 million for the threemonths ended June 30, 2007. During the six months ended June 30,2008, sales decreased $107.8 million, or 20%, to $424.8 million from$532.6 million in the same period a year ago. Relative to the three andsix months ended June 30, 2007,

 

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the decrease in sales wasdriven primarily by lower sales volumes for our EWP, lumber, and particleboardproducts, with lower prices for EWP and lumber also contributing to the decline.

 

##### ***Costs and Expenses***

##### *** ***

Materials, labor, and other operating expenses,including related parties, decreased $597.4 million, or 47%, to$672.9 million for thethree months ended June 30, 2008, compared with $1.3 billion duringthe same period in the prior year. For the six months ended June 30, 2008,these expenses decreased $867.5 million, or 36%, to $1.6 billion,compared with $2.4 billion in the same period in the prior year. Relativeto the three and six months ended June 30, 2007, the decrease was drivenprimarily by the sale of our Paper and Packaging & Newsprint assets infirst quarter 2008. The sold businesses had materials, labor, and otheroperating expenses of $503.5 million during the three months ended June 30,2007. During the six months ended June 30, 2008, the sold businessesincurred $313.9 million of materials, labor, and other operating expenses,compared with $991.4 million for the same period in the prior year. In ourbuilding products businesses, materials, labor, and other operating expensesdecreased during both the three and six months ended June 30, 2008, due tolower purchased materials costs in our Building Materials Distribution segmentdue to lower sales volumes and lower log costs in our Wood Products segment.Fiber costs for our Wood Products segment declined primarily due to lower logprices and lower log consumption.

 

Depreciation, amortization, and depletion expenses decreased$32.0 million, or 79%, to $8.7 million for the three months ended June 30,2008, compared with $40.7 million for the same period in the prior year.Relative to the six months ended June 30, 2007, these expenses decreased$62.4 million, or 77%, to $18.7 million, compared with$81.1 million in the prior year. The three and six months ended June 30,2007, included $30.8 million and $61.6 million of depreciationexpense related to the sold Paper, Packaging & Newsprint, andCorporate and Other segments that was not included in the three and six monthsended June 30, 2008, because the assets were sold on February 22,2008, and because, prior to the Sale, we had discontinued depreciation on theassets as a result of classifying them as held for sale.

 

Selling and distributionexpenses decreased $16.1 million,or 22%, to $57.6 million forthe three months ended June 30, 2008, compared with $73.7 million forthe same period in the prior year. During the six months ended June 30,2008, these costs decreased $21.0 million,or 15%, to $121.0 million, compared with $142.0 million during thesame period a year ago. Relative to the three and six months ended June 30,2007, selling and distribution expenses decreased $14.5 million and$19.8 million as a result of the sale of our Paper and Packaging &Newsprint assets in first quarter 2008. Relative to the three and six monthsended June 30, 2007, selling and distribution expenses decreased in ourBuilding Materials Distribution and Wood Products segments primarily due tolower sales activity; however, selling and distribution expenses were higher asa percentage of sales, due to higher distribution costs, primarily fuel.

 

General and administrative expenses, including relatedparty, decreased $9.8 million,or 49%, to $10.4 million forthe three months ended June 30, 2008, compared with $20.2 million forthe same period in the prior year. For the six months ended June 30, 2008,general and administrative expenses decreased$13.7 million, or 34%, to $26.0 million, compared with$39.7 million a year ago. In both periods, the decrease was drivenprimarily by lower compensation costs associated with operating as a smallercompany.

 

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Other(income) expense, net, includes miscellaneous income and expense items. Thecomponents of “Other (income) expense, net” in the Consolidated Statements ofIncome (Loss) are as follows:

 
| ** **                                                   | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                       | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(millions)**                                 | ** ** |
|                                                         |       |                                           |       |                                         |       |   |   |   |   |
| Loss on sale of  note receivable from related party (a) |       | $                                              | 8.3        |                                         | $          | — |   | $ | 8.3 |   | $ | — |   |
| Changes in  retiree healthcare programs                      |       | —                                         |       | (4.4                                         | )          | — |   | (4.4 | ) |
| Sales of assets,  net                                        |       | 0.3                                            |       | (1.7                                         | )          | (0.7 | ) | (0.7 | ) |
| Other, net (b)                                               |       | 0.1                                            |       | 1.0                                          |       | 0.1 |   | 2.6 |   |
| ** **                                                   | ** ** | **$**                                          | **8.6**    | ** **                                   | **$**      | **(5.1** | **)** | **$** | **7.7** | ** ** | **$** | **(2.5** | **)** |

 

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(a)                                  In June 2008, we sold the note receivablefrom Boise Inc. for $52.8 million, after selling expenses, andrecorded an $8.3 million loss on the sale in “Other (income) expense, net.”

 

(b)                                 The three and six months ended June 30,2007, included $0.7 million and $2.0 million of expense related to theclosure of our paper converting facility in Salem, Oregon.

 

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

 

Income from operations decreased $52.9 million, or 109%, to a loss of$4.3 million for the threemonths ended June 30, 2008, from income of $48.6 million in the sameperiod a year ago. Income from operations decreased $76.5 million, or 93%, to $5.4 million for thesix months ended June 30, 2008, compared with $81.9 million duringthe same period in the prior year. Relative to the three and six months ended June 30,2008, the decrease was driven primarily by the sale of our Paper and Packaging &Newsprint assets in first quarter 2008. We also reported lower operating incomein the Building Materials Distribution and Wood Products segments as discussedin more detail below.

 

*BuildingMaterials Distribution.* Segment income decreased $5.1 million,or 25%, to $15.3 million forthe three months ended June 30, 2008, from $20.4 million for thethree months ended June 30, 2007. During the six months ended June 30,2008, segment income decreased $16.7 million,or 54%, to $14.1 million from $30.8 million in the same period a yearago. The decreases in both periods were driven primarily by lower gross margindollars available to cover relatively fixed expenses such as occupancy,payroll, and delivery costs, as sales volumes declined from the same periods ayear ago.

 

*WoodProducts. *Segment income decreased $19.1 million, or 121%,to a loss of $3.4 million forthe three months ended June 30, 2008,compared with income of $15.7 million for the three months ended June 30,2007. During the six monthsended June 30, 2008, segment income decreased $39.9 million, or 205%,to a loss of $20.5 million, compared with income of $19.4 million inthe same period a year ago. In both periods, the decreases were drivenprimarily by a combination of lower sales volumes and/or prices for most of ourproducts, coupled with higher conversion costs. These negatives were slightlyoffset by lower log costs and higher log byproduct income. In addition, duringthe three and six months ended June 30, 2008, the Wood Products segmentrecorded $0.7 million and $1.3 million of expenses, respectively, related tothe curtailment and subsequent closure of our Brazil plywood and veneer mill.We sold the Brazil mill and related eucalyptus plantations in July 2008.

 

*Other*

 

*Equity in net income (loss) of affiliate.*Inconnection with the Sale, we received 37.9 million, or 49%, ofBoise Inc.’s shares. We recorded the investment in “Investment in equityaffiliate” on our Consolidated Balance Sheet. This ownership interest and thethree seats we hold on Boise Inc.’s. board provide us with the ability toexercise significant influence. Accordingly, we account for our investmentunder the equity method of accounting.

 

We measured our ownership inBoise Inc. based on Boise Inc.’s February 21, 2008, closingstock price, adjusted for a 12% discount for lack of marketability since thestock delivered as consideration was not registered for resale. In addition, inaccordance with EITF No. 01-2, *Interpretations of APBOpinion No. 29,*the value of the stock consideration receivedwas further reduced by the $4.6 million gain on the Sale that we deferredas a reduction of our investment. We will realize the deferred gain as wereduce our investment in Boise Inc. The investment is adjusted monthly forour

 

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proportionate share of Boise Inc.’s netincome or loss and our share of other comprehensive income or loss based on themost recently available financial statements. For the three and six monthsended June 30, 2008, we recorded an $8.8 million and$17.4 million loss related to our investment in Boise Inc. in “Equityin net loss of affiliate” in our Consolidated Statements of Loss.

 

*Change in fair value of contingent valuerights. *The threeand six months ended June 30, 2008, included $0.7 million of incomeand $4.0 million of expense related to the fair value of the contingentvalue rights (CVRs) that we and Terrapin Partners Venture Partnership grantedto certain Boise Inc. investors. For more information related to the CVRs,see “Item 3. Quantitative and Qualitative Disclosures About Market Risk”of this Form 10-Q.

 

*Changein fair value of interest rate swaps.*The six months ended June 30, 2008and 2007, included $6.3 million of expense and $5.4 million of incomerelated to changes in the fair value of our interest rate swaps. We terminatedall of the swaps in February 2008.

 

*Interest expense. *For thethree months ended June 30, 2008, interest expense was $6.4 million,compared with $24.4 million for the same period a year ago. For the sixmonths ended June 30, 2008, interest expense was $21.8 million,compared with $46.7 million for the same period in 2007. The decrease ininterest expense is primarily attributable to the significant reduction in ourlong-term debt. At June 30, 2008, our long-term debt was$315.0 million, compared with $1.2 billion a year ago. Thedecrease in long-term debt is primarily attributable to the use of the majorityof the proceeds from the sale of the Paper and Packaging & Newsprintassets to reduce debt. For more information, see “Financing Activities” under “Liquidityand Capital Resources” in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

*Income tax (provision) benefit.* For the three months ended June 30, 2008,we recorded a small tax benefit, compared with $3.5 million of income taxexpense during the same period in the prior year. Income tax expense was$1.1 million and $4.7 million for the six months ended June 30,2008 and 2007. Our income tax provision consists of income taxes payable tostates that do not allow for the income tax liability to be passed through toour equity holders as well as income taxes payable by our separate subsidiariesthat are taxed as corporations. During the three months ended June 30,2008 and 2007, our effective tax rates for our separate subsidiaries that aretaxed as corporations were 34.0% and 34.4%. Our effective tax rates were 35.4%and 34.7% for the six months ended June 30, 2008 and 2007. The primaryreason for the difference in tax rates is the effect of state income taxes andthe mix of domestic and foreign sources of income.

 

***Industry Mergers and Acquisitions***

 

Wehave not seen significant merger and acquisition activity in the buildingproducts area other than the acquisition of International Paper’s wood productsfacilities by Georgia-Pacific in 2007.

 

***Acquisitions***

 

Weaccount for acquisitions using the purchase method of accounting. Accordingly,the purchase price is allocated to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date of theacquisition.

 

***Divestitures***

 

We may engage in divestiture discussions, includingthose entered into during the year, as discussed in “Sale of Our Paper andPackaging & Newsprint Assets” in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations, with other companiesand make divestitures from time to time. We review our operations and disposeof assets that fail to meet our criteria for return on investment or cease towarrant retention for other reasons. We decided to permanently close our WhiteCity, Oregon, lumber operation in January 2008, and in July 2008, wesold our plywood and veneer mill in Brazil. For additional information related tothe sale of our Brazil operations, see Note 3, Assets and Liabilities Held forSale, in “Item 1. Consolidated Financial Statements” of this Form 10-Q.

 

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***Liquidity and Capital Resources***

 

During the three months ended June 30, 2008, ourliquidity position continued to strengthen with the sale of the note receivablefrom Boise Inc. for $52.8 million, after selling expenses. At June 30,2008, we had $240.7 million of cash, compared with $57.6 million at December 31,2007. On July 1, 2008, we sold our indirect wholly owned subsidiary inBrazil for an aggregate price of $47.1 million. We are obligated under our7.125% senior subordinated notes to use the net proceeds from the sale of thenote receivable and the sale of the Brazil operations within one year to repaysenior indebtedness, acquire additional assets, or make a tender offer at parfor a portion of the senior subordinated notes. As we evaluate potential usesfor the funds, the net cash proceeds received are invested in high-quality,short-term investments, which we record in “Cash and cash equivalents.”

 

We believe that funds generated from operations andavailable borrowing capacity will be adequate to fund debt servicerequirements, capital expenditures, and working capital requirements for thenext 12 months. However, our ability to continue to fund these items maybe affected by general economic, financial, competitive, legislative, andregulatory factors, and as a result, we cannot assure that our business willgenerate sufficient cash flow from operations or that future borrowings will beavailable for use under our revolving credit facility in an amount sufficientto enable us to pay our indebtedness or to fund our other liquidity needs.

 

***OperatingActivities***

 

We operate in a cyclical industry, and our operating cash flows varyaccordingly. Our principal operating cash expenditures are for purchasedinventories, compensation, fiber, energy, and interest. For the six monthsended June 30, 2008 and 2007, our operating activities used$39.4 million and provided $77.6 million of cash, respectively. Relativeto the six months ended June 30, 2007, the decrease in cash provided byoperations relates primarily to the following:

 

·                  *Incurring a $39.8 million net loss during the six months ended June 30,2008, compared with $39.4 million of income during the same period in 2007*.Asdiscussed under “Our Operating Results” above, the loss reported for the sixmonths ended June 30, 2008, was due to the sale of our Paper and Packaging &Newsprint assets in first quarter 2008. We also reported lower income in ourBuilding Materials Distribution and Wood Products segments. This lower incomewas driven primarily by lower sales activity, resulting in fewer gross margindollars being generated to cover cash operating costs, in our BuildingMaterials Distribution segment and by pricing and sales volume declines in ourWood Products segment.

 

·                  *Changes in working capital*. Unfavorable changes in working capital used $30.9 million of cash fromoperations. Working capital is subject to cyclical operating needs, the timingof the collection of receivables, the payment of payables and expenses, and toa lesser extent, seasonal fluctuations in our operations. In the first sixmonths of 2008, the increase in working capital was attributable to higherreceivables in Building Materials Distribution, partially offset by higheroverall accounts payable and accrued liabilities and a decrease in overallinventory levels. Higher receivables in Building Materials Distribution reflectincreased sales of approximately 47%, comparing sales for the month of June 2008with sales for the month of December 2007. The increase in accountspayable and the decrease in inventories primarily reflect seasonal inventorychanges.

 

·                  *More cash contributions to our pension and postretirement benefitplans.*  During thesix months ended June 30, 2008, we used $20.8 million of cash to makepension contributions and other postretirement benefit payments, compared with$0.5 million during the six months ended June 30, 2007. The 2008contribution was included in the pension assets prior to the Sale.

 

For the six months ended June 30, 2007, our operating activitiesprovided $77.6 million of cash. In 2007, items included in net incomeprovided $125.6 million of cash. Unfavorable changes in working capitaland other items used $48.0 million of cash from operations. In the firstsix months of 2007, the increase in working capital was primarily attributableto higher receivables in Building Materials Distribution. Higher receivables inBuilding Materials Distribution reflect increased sales of approximately 46%,comparing sales for the month of June 2007 with sales for the month of December 2006.The increase in receivables was partially offset by higher overall accountspayable and accrued liabilities.

 

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***InvestmentActivities***

 

During the six months ended June 30, 2008, wereceived approximately $1,226.7 million of net cash from the sale ofassets as follows:

 
| ** **                                                             | ** ** | **(millions)** | ** **  |
|------------------------------------------------------------------------|------------|----------------|-------------|
| Proceeds from  sale of Paper and Packaging & Newsprint assets |       | $              | 1,277.2     |   |
| Selling expenses                                                       |       | (35.1          | )           |
| Cash contributed  to Boise Inc.                                        |       | (38.0          | )           |
| Sales proceeds,  net of selling expenses and cash contributed          |       | 1,204.1        |        |
| Net proceeds  from other asset sales                                   |       | 22.6           |        |
| ** **                                                             |       | **$**          | **1,226.7** |   |

 

In connection with the sale of our Paper andPackaging & Newsprint assets, we received approximately$1,204.1 million, which is net of $38.0 million of cash contributedto Boise Inc. and $35.1 million of selling expenses, which included$24.9 million of financing costs that we agreed to pay for Boise Inc. Wealso received approximately $22.6 million of cash for the sale of ourVancouver, Washington, and Independence, Oregon, mill sites and othermiscellaneous assets.

 

During the six months ended June 30, 2008, cashinvesting activities included $52.8 million of net proceeds from the saleof the note receivable from Boise Inc. In addition, we used $27.9 millionof cash for purchases of property, plant, and equipment ($10.2 million ofwhich was invested in the Paper and Packaging & Newsprint businesseswe sold on February 22, 2008).

 

In 2007, investing activities used $89.9 million of cash, primarilyfor purchases of property, plant, and equipment. Approximately$68.7 million of these expenditures related to the Paper andPackaging & Newsprint businesses we sold on February 22, 2008.Investing activities also included $16.9 million of proceeds from the saleof assets, which included $10.1 million of net proceeds from the sale ofour building materials distribution center in Milton, Florida. In connectionwith the sale of the Milton facility, we leased it back over a 15-year leaseterm.

 

We expect capitalinvestments in 2008 to total approximately $45 million to$50 million, excluding acquisitions ($10.2 million of which wasinvested in the Paper and Packaging & Newsprint businesses we sold onFebruary 22, 2008). This level of capital expenditures could increase ordecrease as a result of a number of factors, including our financial resultsand future economic conditions. Our capital spending in 2008 will be forexpansion, business improvement and quality/efficiency projects, replacementprojects, and ongoing environmental compliance. During 2007, we spent$9 million on environmental compliance and expect to spend approximatelythe same amount in 2008.

 

***FinancingActivities***

 

Cash used for financing activities was$1,028.4 million for the six months ended June 30, 2008, comparedwith $23.8 million of cash provided by financing activities during thesame period in 2007. In 2008, cash used for financing activities relatedprimarily to the repayment of long-term debt.

 

During the period of January 1 toFebruary 21, 2008, we borrowed $125.0 million under our receivablessecuritization facility and $40.0 million under our revolving creditfacility to make $7.4 million of tax distributions to our equity holders,contribute $20.0 million to our pension plans, and fund working capitaland other operating requirements. On February 22, 2008, we repaid all ofthe borrowings under the revolving credit facility, Tranche E term loan,delayed-draw term loan, and the borrowings secured by our receivables, and inApril 2008, we repaid $160.0 million of our 7.125% senior subordinatednotes. With proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we have repaid $1,085.6 million ofoutstanding debt and terminated all of our credit facilities with the exceptionof our 7.125% senior subordinated notes and our asset-based revolving creditfacility.

 

As a result of the significant decrease in ourvariable-rate debt, we terminated all of our interest rate swap agreements forapproximately $11.9 million. We also made $127.9 million of taxdistributions to our equity holders and paid $28.4 million to repurchaseequity units from management investors.

 

During the six months ended June 30, 2007, financing activitiesincluded $538.9 million of debt prepayments related to our Tranche Dterm loan, which was paid down primarily with the proceeds from

 

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our new$525.0 million Tranche E term loan. Cash provided by financingactivities also included a $45.0 million net increase in borrowings underour accounts receivable securitization program, $2.8 million of proceedsfrom unwinding two of our interest rate swap agreements that were scheduled tobegin in 2009, $3.2 million of cash for the repayment of short-termborrowings, and $2.8 million of cash used to pay our equity investorsamounts to fund their tax obligations related to their investment in us.

 

The following discussion describes our debt transactions inmore detail.

 

*Debt Transactions*

 

At June 30, 2008,and December 31, 2007, our short- and long-term debt were as follows:

 
| ** **                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                  | ** ** | **(millions)**    | ** ** |
|                                        |       |              |       |                  |       |
| Revolving credit  facility, due 2013        |       | $                 | 75.0       |                  | $          | — |   |
| Tranche E  term loan, due 2014         |       | —            |       | 521.1                 |       |
| 7.125% senior  subordinated notes, due 2014 |       | 240.0             |       | 400.0                 |       |
| Delayed-draw  term loan, due 2014           |       | —            |       | 199.5                 |       |
| Borrowings  secured by receivables          |       | —            |       | 40.0                  |       |
| Current portion  of long-term debt          |       | —            |       | (47.3                 | )          |
| Long-term debt,  less current portion       |       | 315.0             |       | 1,113.3               |       |
| Short-term  borrowings                      |       | —            |       | 10.5                  |       |
| Current portion  of long-term debt          |       | —            |       | 47.3                  |       |
| Total debt                                  | ** ** | **$**             | **315.0**  | ** **            | **$**      | **1,171.1** | ** ** |

 

As discussed in “Sale of Our Paper and Packaging & Newsprint Assets”above, with the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million of debt,including all of the borrowings under the previous revolving credit facility,Tranche E term loan, delayed-draw term loan, borrowings secured by ourreceivables, and $160.0 million of our 7.125% senior subordinated notes.For more information related to these borrowings prior to our repaying them,see Note 11, Debt, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of our 2007 Annual Report onForm 10-K.

 

*Asset-BasedRevolving Credit Facility*

 

On February 22, 2008, Boise Cascade, L.L.C., andits principal operating subsidiaries, Boise Building Solutions Manufacturing,L.L.C., and Boise Building Solutions Distribution, L.L.C., acting as borrowers,entered into a five-year $350 million senior secured asset-based revolvingcredit facility with Bank of America (the Agreement). As part of thesyndication process, the Agreement was amended in April 2008 to revise the pricingand incorporate additional covenants. At June 30, 2008, we had$75.0 million of borrowings outstanding under the Agreement. Borrowingsunder the Agreement are based on either the prime rate or the London InterbankOffered Rate (LIBOR). Pricing is subject to quarterly adjustment based on theaverage availability under the Agreement during the prior quarter. The range ofborrowing costs under the pricing grid is: (i) prime plus 1.00% to 1.50% or (ii) LIBOR plus 2.50% to3.00%. For the period of February 22, 2008, through June 30, 2008, theaverage interest rate for our borrowings under the Agreement was 5.2%. Lettersof credit are subject to a 0.125% fronting fee payable to the issuing bank anda fee payable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under the Agreement and the daily averageamount available for drawing under the outstanding letters of credit. Theminimum and maximum borrowings under the Agreement were $64.1 million and$75.0 million between February 22, 2008, and June 30, 2008. Theweighted average amount of borrowings outstanding under the Agreement duringthe period from February 22, 2008, through June 30, 2008, was$69.5 million. The Agreement provides for a commitment fee of 0.50% perannum payable to the lenders on the average daily unused portion of theAgreement.

 

The revolving credit facility is guaranteed by ourdomestic subsidiaries (other than the three borrowers noted above) and issecured by a first-priority security interest in the stock of our foreignsubsidiaries and substantially all of our domestic assets, except for property,plant, and equipment. Borrowings under the Agreement require compliance with aborrowing base formula, which sets advance rates against eligible accountsreceivable and inventory. As ofJune 30, 2008, we had availability of $191.1 million above the amountwe had borrowed, including letters of credit outstanding. If excess

 

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availability under the Agreement falls below thegreater of $45 million or 15% of the borrowing base, we would be requiredto maintain a minimum fixed charge coverage ratio. The Agreementalso contains customary nonfinancial covenants, including a negative pledgecovenant and restrictions on distributions to equity holders, acquisitions, anddivestitures. These covenants will become more restrictive if a minimumavailability threshold is not maintained.

 

*Letters of Credit*

 

At June 30, 2008, wehad $13.7 million of letters of credit outstanding. These letters ofcredit reduce our borrowing capacity under our asset-based revolving creditfacility.

 

*Senior Notes*

 

In October 2004, Boise Cascade, L.L.C., issued$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 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 set forth in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. Inconnection with the Sale, we repurchased $160.0 million of the notes onApril 15, 2008.

 

*Other*

 

At June 30, 2008, and December 31, 2007, we had $8.5 millionand $23.1 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. With the proceeds from the Sale, we repaid asignificant portion of our debt. In connection with repaying the debt, weexpensed approximately $3.0 million and $17.6 million of deferredfinancing costs for the three and six months ended June 30, 2008. Werecorded the charges in “Gain on sale of Paper and Packaging &Newsprint assets” in our Consolidated Statements of Loss. In addition, weincurred approximately $4.1** **millionof financing costs related to our new asset-based revolving credit facility,which we recorded in “Deferred financing costs” on our June 30, 2008,Consolidated Balance Sheet.

 

For the six months ended June 30, 2008 and 2007, cash payments forinterest, net of interest capitalized, were $24.2 million and$45.6 million, respectively.

 

***Contractual Obligations***

 

For information oncontractual obligations, see Contractual Obligations in “Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2008. For the period ended June 30, 2008, there have beenno material changes to our contractual obligations outside the normal course ofbusiness, except as disclosed in “Financing Activities” in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations related to the payment of $160.0 million of our 7.125% seniorsubordinated notes in April 2008 and those amounts disclosed in “Item 3.Quantitative and Qualitative Disclosures About Market Risks” related to thefair value of the liability for the contingent value rights.

 

***Off-Balance-Sheet Activities***

 

At June 30, 2008,and December 31, 2007, we had no material off-balance-sheet arrangementswith unconsolidated entities.

 

***Guarantees***

 

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under Financial Accounting Standards Board (FASB) Interpretation (FIN)No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*. Note 20, Commitments and Guarantees, of the Notesto Consolidated Financial Statements in “Item 1. Consolidated FinancialStatements” in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2008, describes the nature of our guarantees, including theapproximate terms of the guarantees, how the guarantees arose, the events orcircumstances that would require us to perform

 

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under theguarantees, and the maximum potential undiscounted amounts of future paymentswe could be required to make. As of June 30, 2008, there have been nomaterial changes to the guarantees disclosed in the Quarterly Report on Form10-Q for the quarter ended March 31, 2008. However, in July 2008, inconnection with the sale of our Brazil operations, the buyer agreed toindemnify us against any and all claims under the Guarantee, Marketing, andTake if Required Agreement, as amended, with Global Forest Partners.

 

***Environmental***

 

For information on environmentalissues, see Environmental in “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations” in our 2007 Annual Report onForm 10-K.

 

***Critical Accounting Estimates***

 

Critical accounting estimates are those that are most important to theportrayal of our financial condition and results. These estimates requiremanagement’s most difficult, subjective, or complex judgments, often as aresult of the need to estimate matters that are inherently uncertain. We reviewthe development, selection, and disclosure of our critical accounting estimateswith the Audit Committee of our board of directors. For information aboutcritical accounting estimates, see Critical Accounting Estimates in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our 2007 Annual Report on Form 10-K.

 

As of June 30, 2008, there have been no changes to our criticalaccounting estimates, except as follows.

 

***Other-Than-Temporary Impairment ofEquity Method Investment***

 

We account for the impairment of our equity method investment in accordancewith APB Opinion No. 18, *The EquityMethod of Accounting**forInvestments in Common Stock*. An equity method investment is impairedif the fair value of the investment is less than its carrying value. Once aninvestment is determined to be impaired, the investor is required to evaluatewhether the impairment is other than temporary.

 

This is a critical accounting estimate because judgment is required forpurposes of determining whether an impairment of an equity method investment isother than temporary. Factors to consider in making the determination include:

 

(i)                                     The lengthof time and extent to which the fair value of the investment is less than itscarrying amount;

 

(ii)                                  Thefinancial condition and near-term prospects of the equity method investee,including recent operating losses or specific events that may negativelyinfluence the future earnings potential of the investee; and

 

(iii)                               Whether weintend to sell the impaired equity method investment before it recovers to itscarrying amount.

 

In connection with the Sale, we received 37.9 million, or 49%, of Boise Inc.’sshares.  We account for the equityinterest that we own in Boise Inc. using the equity method of accounting. Theinvestment is recorded on our balance sheet based on an $8.56 closingprice at the time of the Sale, less a 12% discount for lack of marketabilityand a $4.6 million deferred gain, and is adjusted monthly based on ourproportionate share of Boise Inc.’s net income or loss and our share of othercomprehensive income or loss. At June 30, 2008, Boise Inc.’s stockclosed at $3.85, and the fair value of the 37.9 million shares we hold inBoise Inc. was, based on such trading price, $145.8 million, comparedwith the $263.5 million value recorded on our Consolidated Balance Sheet.

 

In accordance with APB Opinion No. 18, we evaluated items (i) through(iii) above and concluded that our investment in Boise Inc. was not other thantemporarily impaired at June 30, 2008. However, should the length of timeand the extent to which the fair value of our investment is less than thecarrying amount increase, should market conditions and/or Boise Inc.’sfinancial performance deteriorate, or should we decide to sell our equitymethod investment before it recovers to its carrying amount, it is

 

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possiblethat we will be required to record a noncash impairment charge that could havea material impact on our Consolidated Statements of Income (Loss).  As additional information becomes known, wemay change our estimates.

 

***Pension Expense***

 

As of June 30, 2008, there have been no changes to the discussion ofour pension critical accounting estimate included in our 2007 Annual Report onForm 10-K, except for the amounts disclosed for 2008 expected pensionexpense and related sensitivities.

 

As a result of the Sale, our expectedannual pension expense decreased, and a 0.25% change in either direction to thediscount rate, the expected rate of return on plan assets, or the rate ofcompensation increases would have the following effect on 2008 pension expense:

 
| ** **                              | ** ** | ** **        | ** ** | **Increase (Decrease)  in Pension Expense** | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **Base  Expense** | ** ** | **0.25 %  Increase**                                  | ** ** | **0.25%  Decrease** | ** ** |
| ** **                              | ** ** | **(millions)**    | ** ** |
|                                    |       |              |       |                                                       |       |   |   |
| **2008  Expense**                       |       |              |       |                                                       |       |   |   |
| Discount rate                           |       | $                 | 12.8       |                                                       | $          | (1.9 | ) | $ | 1.0 |   |
| Expected rate of  return on plan assets |       | 12.8              |       | (0.7                                                       | )          | 0.7 |   |
| Rate of  compensation increases         |       | 12.8              |       | 0.2                                                        |       | (0.4 | ) |
|                                         |            |                   |            |                                                            |            |  |  |  |  |  |

 

***New and Recently Adopted AccountingStandards***

 

In May 2008, the FASBissued SFAS No. 162, *The Hierarchy ofGenerally Accepted Accounting Principles.* The standard is intendedto improve financial reporting by identifying a consistent framework, orhierarchy, for selecting accounting principles to be used in preparingfinancial statements that are presented in conformity with U.S. generallyaccepted accounting principles for nongovernmental entities. SFAS No. 162is effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.* We do not expect theadoption to have a material impact on our financial position or results ofoperations.

 

In March 2008, the FASB issued SFASNo. 161, *Disclosures About DerivativeInstruments and Hedging Activities*. SFAS No. 161 requiresenhanced disclosures about derivative instruments and hedging activities toenable investors to better understand their effects on financial position,financial performance, and cash flows. These requirements include thedisclosure of the fair values of derivative instruments and their gains andlosses in a tabular format. SFAS No. 161 is effective for fiscal yearsbeginning after November 15, 2008, which will require us to adopt theseprovisions in 2009. Early adoption of SFAS No. 161 is permitted. Weare currently evaluating the impact SFAS No. 161 will have on ourconsolidated financial statements.

 

In January 2008, weadopted SFAS No. 157,*Fair ValueMeasurements*. The adoption did not have a material impact on ourfinancial position or results of operations. The statement established aframework for measuring fair value, and it enhanced the disclosures for fairvalue measurements. The statement applies when other accounting pronouncementsrequire or permit fair value measurements, but it does not require new fairvalue measurements. In accordance with the standard, in Note 15, FinancialInstruments, of the Notes to Unaudited Quarterly Consolidated FinancialStatements in “Item 1. Financial Statements” of this Form 10-Q, weexpanded our disclosures about fair value measurements. In accordance with theprovisions of FASB Staff Position (FSP) No. 157-2, *EffectiveDate of FASB Statement No. 157*, we elected to defer adoption ofSFAS No. 157 as it relates to nonfinancial assets and nonfinancialliabilities that are recognized and disclosed at fair value in the financialstatements on a nonrecurring basis until January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations,*and SFASNo. 160, *Accounting and Reporting ofNoncontrolling Interests in Consolidated Financial Statements, an Amendment ofAccounting Research Bulletin No. 51.* These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. We are required to adopt SFAS Nos. 141(R) and 160simultaneously

 

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onJanuary 1, 2009. Earlier adoption is prohibited. The impact of adoptingthese standards will be limited to business combinations occurring on or afterJanuary 1, 2009.

 

***ITEM 3.******                                                ******QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK***

 

We are exposed to risks suchas changes in interest rates, energy prices, and foreign currency exchange rates.We employ a variety of practices to manage these risks, including operating andfinancing activities and, where deemed appropriate, the use of derivativeinstruments. Derivative instruments are used only for risk management purposesand not for speculation or trading. Derivatives are such that a specific debtinstrument, contract, or anticipated purchase determines the amount, maturity,and other specifics of the hedge. If a derivative contract is entered into, weeither determine that it is an economic hedge or we designate the derivative asa cash flow or fair value hedge. We formally document all relationships betweenhedging instruments and the hedged items, as well as our risk managementobjectives and strategies for undertaking various hedged transactions. Forthose derivatives designated as cash flow or fair value hedges, we formallyassess, both at the derivatives’ inception and on an ongoing basis, whether thederivatives that are used in hedging transactions are highly effective inoffsetting changes in the hedged items. The ineffective portion of hedgingtransactions is recognized in income (loss).

 

In accordance with SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, we record allderivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. Changes in the fair value of derivatives are recorded ineither “Net income (loss)” or “Other comprehensive income (loss),” asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in “Other comprehensive income (loss)” 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*

 

After the Sale, our debtis predominantly fixed-rate. At June 30, 2008, the estimated currentmarket value of our fixed-rate debt, based on then-current interest rates forsimilar obligations with like maturities, was approximately $49.0 millionless than the amount reported on our Consolidated Balance Sheet.

 

With the proceeds from the Sale, wesignificantly decreased our variable-rate debt. As a result, we terminated allof our interest rate swap agreements for approximately $11.9 million inFebruary 2008. The interest rate swaps were considered economic hedges. Duringthe six months ended June 30, 2008 and 2007, we recorded the fair value ofthe interest rate swaps, or $6.3 million of expense and $5.4 millionof income, in “Change in fair value of interest rate swaps” in our ConsolidatedStatements of Income (Loss).

 

*Energy Risk*

 

Occasionally,we enter into natural gas swaps, options, or a combination of these instrumentsto hedge the variable cash flow risk of natural gas purchases at index prices.As of June 30, 2008, we had no material derivative instruments related toour forecasted natural gas purchases.

 

*Foreign Currency Risk*

 

At June 30, 2008, we had no material foreigncurrency hedges.

 

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*Contingent Value Rights*

 

As part of the Sale, Terrapin Partners VenturePartnership (Boise Inc.’s majority owner prior to the Sale) and Boise Cascade,L.L.C. (collectively the Grantors) issued 21.2 million contingent valuerights (CVRs) to holders of Boise Inc.’s stock. The CVRs are governed by aContingent Value Rights Agreement (the CVR Agreement). The term of the CVRAgreement is from February 5, 2008, through February 5, 2009, andallows investors to receive payments in cash, shares of common stock, or acombination of cash and shares as elected by us, based upon the performance ofBoise Inc.’s stock. If at any time during the year, Boise Inc.’s stock price isat least $10.50 for (1) any 20 days of any period of 30 consecutive daysor (2) any 10 consecutive trading days, then the CVRs have no value. Ifneither of the preceding conditions is met over the one-year period, the holderreceives a value equal to the lesser of $1.00 or the amount by which the $10.50exceeds the average stock price for the 30-day period ending February 5,2009 (the Anniversary Price). If we elect to settle our obligation under theCVR Agreement using Boise Inc. shares, the CVR Agreement provides that ourshares will be valued at the greater of the Anniversary Price or $9.00 pershare. As a result, the maximum number of Boise Inc. shares we would berequired to deliver to the rights holders would be 2.4 million, assumingTerrapin Partners Venture Partnership failed to perform its obligations.

 

We recorded the fair value of the liability on the grant date based on asimulation analysis that considered the likelihood of Boise Inc. investorsreceiving payment under the Agreement. We update the simulation model eachquarter and revalue the liability based on its results. The Grantors arejointly and severally liable to the investors for the CVR payment, but betweenthe Grantors, each Grantor is individually liable for 50% of the CVR payment.Because we are jointly and severally liable to investors, at June 30,2008, we recorded a liability for 100% of the fair value of the CVRs, or$8.1 million, in “Accrued liabilities, Other” on our Consolidated BalanceSheet. We also recorded $0.7 million of income and $4.0 million ofexpense in “Change in fair value of contingent value rights” on ourConsolidated Statements of Loss for the three and six months endedJune 30, 2008, and a $4.0 million receivable in “Receivables, Other”on our Consolidated Balance Sheet at June 30, 2008.

 

*Financial Instrument Fair Value Reconciliation*

 

The following table reconciles the beginning andending balances of the instruments for which we measured the fair value usingunobservable inputs (Level 3 in the fair value hierarchy) as of June 30,2008:

 
| ** **                                                                                                                                 | ** ** | **Contingent  Value  Rights** | ** ** | **Interest  Rate  Swaps** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                                                                                                 | ** ** | **(millions)**                | ** ** |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Beginning  balance at December 31, 2007                                                                                               |       | $                             | —     |                      | $          | 5.6        |       | $ | 5.6 |   |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Losses included  in earnings                                                                                                               |       | 4.0                           |       | 6.3                       |       | 10.3       |       |
| Receivable from  Terrapin Partners                                                                                                         |       | 4.0                           |       | —                    |       | 4.0        |       |
| Termination of  interest rate swaps                                                                                                        |       | —                        |       | (11.9                     | )          | (11.9      | )          |
| Ending balance  at June 30, 2008                                                                                                      | ** ** | **$**                         | **8.1**    | ** **                | **$**      | **—** | ** ** | **$** | **8.1** | ** ** |
|                                                                                                                                       |       |                          |       |                      |       |       |       |
| Total losses  included in earnings attributable to the change in unrealized gains or losses  relating to assets held at June 30, 2008 |       | **$**                         | **4.0**    |                      | **$**      | **—** |       | **$** | **4.0** |   |

 

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

 

Attached as exhibits to this Form 10-Q are certifications of ourchief executive officer and chief financial officer. Rule 13a-14 of theSecurities Exchange Act of 1934, as amended, requires that we include thesecertifications with this report. This Controls and Procedures section includesinformation concerning the disclosure controls and procedures referred to inthe certifications. You should read this section in conjunction with thecertifications.

 

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*Evaluationof Disclosure Controls and Procedures*

 

We maintain “disclosure controls and procedures,” as Rule13a-15(e) under the Securities Exchange Act of 1934, as amended, defines suchterm. We have designed these controls and procedures to reasonably assure thatinformation required to be disclosed in our reports filed under the ExchangeAct, such as this Form 10-Q, is recorded, processed, summarized, andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms. We have also designed our disclosure controls toprovide reasonable assurance that such information is accumulated andcommunicated to our senior management, including the chief executive officer(CEO) and chief financial officer (CFO), as appropriate, to allow them to maketimely 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. To assist inits evaluations, the internal audit staff identifies, documents, and tests ourcontrols and procedures. Our intent is to maintain disclosure controls andprocedures as dynamic processes that change as our business and workingenvironments change.

 

During the three months ended June 30, 2008, there were nomaterial changes in our internal controls over financial reporting. Inconjunction with the February 22, 2008, sale of our Paper andPackaging & Newsprint assets, we entered into an Outsourcing ServicesAgreement under which Boise Inc. provides a number of corporate staff servicesto us at cost. These services include information technology, accounting, andhuman resource services. Ourmanagement, with the participation of our CEO and CFO, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures, including the effectiveness of the services provided to us underthe Outsourcing Services Agreement, as of the end of the quarter covered by thequarterly report on this Form 10-Q. Based on that evaluation, the CEO andCFO have concluded that, as of such date, our disclosure controls and procedureswere effective in meeting the objectives for which they were designed and wereoperating at a reasonable assurance level.

 

*Limitationson the Effectiveness of Controls and Procedures*

 

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***

 

We are a party to routine legal proceedings that arisein the ordinary course of our business. We are not currently a party to any legalproceedings or environmental claims that we believe would have a materialadverse effect on our financial position, results of operations, or cash flows.

 

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

 

This Quarterly Report onForm 10-Q contains forward-looking statements. Statements that are nothistorical 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 “Recent Trends andOperational Outlook” section of “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” We cannot guarantee that ouractual results will be consistent with the forward-looking statements we makein this report. You should review carefully the risk factors listed in “Item 1A.Risk Factors” of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2008, as well as those factors listed in other documents we filewith the Securities and Exchange Commission (SEC). There have been no materialchanges to our risk factors during the three months ended June 30, 2008,from those listed in our Quarterly Report on Form 10-Q for the quarterended March 31, 2008. We do not assume an obligation to update anyforward-looking statements. Certain specific events have occurred which arewithin the scope of the risk factors discussed in our Quarterly Report onForm 10-Q for the quarter ended March 31, 2008. These events aredisclosed in “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” of this Quarterly Report onForm 10-Q.

 

***ITEM 2.******                                                ******UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS***

 

None.

 

***ITEM 3.******                                                ******DEFAULTS UPON SENIOR SECURITIES***

 

None.

 

***ITEM 4.******                                                ******SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS***

 

Not applicable.

 

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

 

None.

 

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

 

Required exhibits arelisted 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/ Bernadette M.  Madarieta                                                                                       |
|   | Bernadette M. Madarieta  Vice President and Controller  (As Duly Authorized Officer and Chief  Accounting Officer) |

 

Date:  August 7, 2008

 

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**BOISECASCADE HOLDINGS, L.L.C.**

 

**INDEXTO EXHIBITS**

 

Filed With theQuarterly Report on Form 10-Q for the Quarter Ended June 30, 2008

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                           |
| 10.1 (a)   |       | First Amendment to Loan  and Security Agreement dated April 17, 2008                                                                                                                                           |
|       |       |                                                                                                                                                                                                           |
| 10.2 (b)   |       | Letter Agreement with  Boise Inc. and Boise Paper Holdings, L.L.C., dated May 22, 2008                                                                                                                    |
|       |       |                                                                                                                                                                                                           |
| 10.3 (b)   |       | Form of Repurchase  Agreement and Amendment No. 1 to Management Equity Agreement dated May 23,  2008, between Forest Products Holdings, L.L.C., and each of the parties  listed on the signature pages thereto |
|       |       |                                                                                                                                                                                                           |
| 10.4 (c)   |       | Securities Purchase  Agreement dated June 10, 2008, between Boise Cascade Holdings, L.L.C.,  and each of the parties listed as Purchaser on the signature pages thereto                                   |
|       |       |                                                                                                                                                                                                           |
| 10.5 (d)   |       | Stock Purchase  Agreement dated July 1, 2008, between BC Brazil Investment Corporation  and Aracruz Celulose, S.A.                                                                                        |
|       |       |                                                                                                                                                                                                           |
| 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                                                                                                                                   |

 

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| (a)    |   | Incorporated  by reference to Current Report on Form 8-K filed April 21, 2008. |
|--------|--------|-------------------------------------------------------------------------------------|
|   |   |                                                                                |
| (b)    |   | Incorporated  by reference to Current Report on Form 8-K filed May 28, 2008.   |
|   |   |                                                                                |
| (c)    |   | Incorporated  by reference to Current Report on Form 8-K filed June 12, 2008.  |
|   |   |                                                                                |
| (d)    |   | Incorporated  by reference to Current Report on Form 8-K filed July 2, 2008.   |

 

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