**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

**For the quarterly period endedSeptember 30, 2006**

**or**

**o**                                 TRANSITIONREPORT 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 Cascade Holdings, 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.) |
|                                                                                                                            |   |                                  |
| **1111  West Jefferson Street**

**P.O.  Box 50**

**Boise,  Idaho 83728**

(Address of principal executive offices) (Zip Code) |
|                                                                                                                            |
| **(208)  384-6161**(Registrant’s telephone number, including area code)                                                    |

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.     Yes o     No x

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

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------|--------|----------------------|--------|--------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct).      Yes o     No x

As of October 31,2006, the registrant did not have any voting or nonvoting equity held bynonaffiliates.

Indicate the number ofshares outstanding of each of the issuer’s common stock, as of the latestpracticable date.

The registrant, a limitedliability company, has no common stock outstanding. Equity units issued andoutstanding on September 30, 2006, were as follows:
| Series                      | ** ** | **Units Outstanding as of September 30,  2006** |
|-----------------------------|------------|------------------------------------------------------|
| Series A  Common Units |       | 66,000,000                                           |
| Series B  Common Units |       | 547,569,845                                          |
| Series C  Common Units |       | 39,636,700                                           |

These units are neither registered norpublicly traded.

 

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**Table of Contents**
| **PART I—FINANCIAL INFORMATION** |                                                                                        | 1                                                               |
|---------------------------------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
| Item 1.                               | Consolidated  Financial Statements                                                          |                                                            | 1 |
|                                  | Notes to Unaudited Quarterly Consolidated Financial  Statements                             |                                                            | 7 |
|                                  | 1.                                                                                          | Basis of Presentation                                           |   | 7 |
|                                  | 2.                                                                                          | Purchase of  OfficeMax’s Forest Products and Paper Assets  |   | 7 |
|                                  | 3.                                                                                          | Purchase of  Central Texas Corrugated’s Assets             |   | 8 |
|                                  | 4.                                                                                          | Transactions  With Related Parties                              |   | 9 |
|                                  | 5.                                                                                          | Vendor and  Customer Rebates and Allowances                     |   | 10 |
|                                  | 6.                                                                                          | Other (Income)  Expense, Net                                    |   | 10 |
|                                  | 7.                                                                                          | Leases                                                          |   | 10 |
|                                  | 8.                                                                                          | Income  Taxes                                                   |   | 11 |
|                                  | 9.                                                                                          | Receivables                                                     |   | 12 |
|                                  | 10.                                                                                         | Inventories                                                     |   | 12 |
|                                  | 11.                                                                                         | Goodwill and  Intangible Assets                                 |   | 12 |
|                                  | 12.                                                                                         | Asset  Retirement Obligations                                   |   | 13 |
|                                  | 13.                                                                                         | Debt                                                            |   | 14 |
|                                  | 14.                                                                                         | Financial  Instruments                                          |   | 16 |
|                                  | 15.                                                                                         | New and  Recently Adopted Accounting Standards                  |   | 19 |
|                                  | 16.                                                                                         | Retirement and  Benefit Plans                                   |   | 21 |
|                                  | 17.                                                                                         | Redeemable Equity  Units                                        |   | 21 |
|                                  | 18.                                                                                         | Segment Information                                             |   | 22 |
|                                  | 19                                                                                          | Commitments and  Guarantees                                     |   | 24 |
|                                  | 20.                                                                                         | Consolidating  Guarantor and Nonguarantor Financial Information |   | 25 |
|                                  | 21.                                                                                         | Legal  Proceedings and Contingencies                            |   | 36 |
|                                  |                                                                                        |                                                            |   |   |
| Item 2.                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                            | 36 |
|                                  | Acquisition of Assets From OfficeMax                                                        |                                                            | 36 |
|                                  | Effects of the Forest Products Acquisition                                                  |                                                            | 36 |
|                                  | Purchase of Central Texas Corrugated’s Assets                                          |                                                            | 37 |
|                                  | Our Segments                                                                                |                                                            | 38 |
|                                  | Factors That Affect Our Operating Results                                                   |                                                            | 38 |
|                                  | Results  of Operations                                                                      |                                                            | 44 |
|                                  | Operational Outlook                                                                         |                                                            | 49 |
|                                  | Liquidity and Capital Resources                                                             |                                                            | 50 |
|                                  | Contractual  Obligations                                                                    |                                                            | 54 |
|                                  | Off-Balance-Sheet Activities                                                                |                                                            | 54 |
|                                  | Guarantees                                                                                  |                                                            | 54 |
|                                  | Inflationary and Seasonal Influences                                                        |                                                            | 54 |
|                                  | Environmental                                                                               |                                                            | 55 |
|                                  | Collective Bargaining Agreements                                                            |                                                            | 55 |
|                                  | Critical Accounting Estimates                                                               |                                                            | 55 |
|                                  |                                                                                        |                                                            |   |   |
| Item 3.                          | Quantitative  and Qualitative Disclosures About Market Risks                                |                                                            | 55 |
|                                  |                                                                                        |                                                            |   |   |
| Item 4.                          | Controls and  Procedures                                                                    |                                                            | 58 |
|                                  |                                                                                        |                                                            |   |   |
| **PART  II—OTHER INFORMATION**   | ** **                                                                                  | 59                                                              |
| Item 1.                          | Legal Proceedings                                                                           |                                                            |   | 59 |
| Item 1A.                         | Risk  Factors                                                                               |                                                            |   | 59 |
| Item 1B.                         | Unresolved  Staff Comments                                                                  |                                                            |   | 59 |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                            |   | 59 |
| Item 3.                               | Defaults  Upon Senior Securities                                                            |                                                            |   | 59 |
| Item 4.                               | Submission  of Matters to a Vote of Securityholders                                         |                                                            |   | 60 |
| Item 5.                               | Other Information                                                                           |                                                            |   | 60 |
| Item 6.                          | Exhibits                                                                                    |                                                            |   | 60 |
|                                       |                                                                                             |                                                                 |  |  |  |

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.

ii

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**PART 1—FINANCIAL INFORMATION**

***ITEM 1.          CONSOLIDATEDFINANCIAL STATEMENTS***

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

**(unaudited)**
| ** **                                      | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **September 30**            | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**                  | ** ** |
|                                            |       |                             |       |   |   |
| **Sales**                                       |       |                             |       |   |   |
| Trade                                           |       | $                                | 1,332,187  |   | $ | 1,423,005 |   |
| Related parties                                 |       | 148,159                          |       | 133,292 |   |
|                                            |       | 1,480,346                        |       | 1,556,297 |   |
|                                            |       |                             |       |   |   |
| **Costs and expenses**                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Materials, labor, and  other operating expenses |       | 1,286,763                        |       | 1,358,764 |   |
| Depreciation,  amortization, and depletion      |       | 39,274                           |       | 33,044 |   |
| Selling and distribution  expenses              |       | 71,555                           |       | 69,185 |   |
| General and  administrative expenses            |       | 19,725                           |       | 15,861 |   |
| Other (income) expense,  net                    |       | (105                             | )          | 60 |   |
|                                            |       | 1,417,212                        |       | 1,476,914 |   |
|                                            |       |                             |       |   |   |
| **Income from operations**                      |       | 63,134                           |       | 79,383 |   |
|                                            |       |                             |       |   |   |
| Foreign exchange gain  (loss)                   |       | (89                              | )          | 1,039 |   |
| Interest expense                                |       | (28,400                          | )          | (31,055 | ) |
| Interest income                                 |       | 909                              |       | 367 |   |
|                                            |       | (27,580                          | )          | (29,649 | ) |
|                                            |       |                             |       |   |   |
| **Income before income taxes**                  |       | 35,554                           |       | 49,734 |   |
| Income tax provision                            |       | (616                             | )          | (21,260 | ) |
| **Net income**                                  | ** ** | **$**                            | **34,938** | ** ** | **$** | **28,474** | ** ** |

See accompanying notes tounaudited quarterly consolidated financial statements.

1

----

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

**(unaudited)**
| ** **                                      | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**                                    | ** ** |
| **Sales**                                       |       |                                               |       |   |   |
| Trade                                           |       | $                                                  | 4,085,469  |   | $ | 4,057,406 |   |
| Related parties                                 |       | 424,929                                            |       | 425,773 |   |
|                                            |       | 4,510,398                                          |       | 4,483,179 |   |
|                                            |       |                                               |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 3,959,765                                          |       | 3,878,831 |   |
| Fiber costs from  related parties               |       | —                                             |       | 17,609 |   |
| Depreciation,  amortization, and depletion      |       | 114,390                                            |       | 95,393 |   |
| Selling and distribution  expenses              |       | 214,239                                            |       | 195,947 |   |
| General and  administrative expenses            |       | 67,345                                             |       | 53,101 |   |
| Other (income)  expense, net                    |       | 1,003                                              |       | 3,848 |   |
|                                            |       | 4,356,742                                          |       | 4,244,729 |   |
|                                            |       |                                               |       |   |   |
| **Income  from operations**                     |       | 153,656                                            |       | 238,450 |   |
|                                            |       |                                               |       |   |   |
| Foreign exchange  gain (loss)                   |       | 1,650                                              |       | (2 | ) |
| Change in fair  value of interest rate swaps    |       | —                                             |       | 9,886 |   |
| Interest expense                                |       | (87,186                                            | )          | (137,499 | ) |
| Interest income                                 |       | 2,447                                              |       | 2,151 |   |
|                                            |       | (83,089                                            | )          | (125,464 | ) |
|                                            |       |                                               |       |   |   |
| **Income  before income taxes**                 |       | 70,567                                             |       | 112,986 |   |
| Income tax  provision                           |       | (2,139                                             | )          | (34,242 | ) |
| **Net income**                                  | ** ** | **$**                                              | **68,428** | ** ** | **$** | **78,744** | ** ** |

See accompanying notes tounaudited quarterly consolidated financial statements.

2

----

**BoiseCascade Holdings, L.L.C.**

**ConsolidatedBalance Sheets**

(unaudited)
| ** **                                  | ** **   | **September 30,** | ** **    | **December 31,** | ** **   |
|---------------------------------------------|--------------|------------------------|---------------|-----------------------|--------------|
| ** **                                  | ** **   | **2006**               | ** **    | **2005**              | ** **   |
| ** **                                  | ** **   | **(thousands)**        | ** **    |
| **ASSETS**                                  | ** **   | ** **             | ** **    | ** **            | ** **   |
| ** **                                  | ** **   | ** **             | ** **    | ** **            | ** **   |
| **Current**                                 | ** **   | ** **             | ** **    | ** **            | ** **   |
| Cash and cash  equivalents                  |         | $                      | 59,876        |                  | $            | 88,171 |   |
| Receivables                                 |         |                   |          |                  |         |
| Trade, less allowances of $2,001 and $1,947 |         | 408,216                |          | 338,821               |         |
| Related parties                             |         | 47,137                 |          | 43,010                |         |
| Other                                       |         | 13,644                 |          | 20,980                |         |
| Inventories                                 |         | 663,698                |          | 633,783               |         |
| Other                                       |         | 16,052                 |          | 10,694                |         |
|                                        |         | 1,208,623              |          | 1,135,459             |         |
|                                        |         |                   |          |                  |         |
| **Property**                                | *** *** | *** ***           | *** ***  | *** ***          | *** *** |
| Property and  equipment                     |         |                   |          |                  |         |
| Land and land improvements                  |         | 68,750                 |          | 79,420                |         |
| Buildings and improvements                  |         | 222,996                |          | 226,232               |         |
| Machinery and equipment                     |         | 1,403,627              |          | 1,331,292             |         |
|                                        |         | 1,695,373              |          | 1,636,944             |         |
|                                        |         |                   |          |                  |         |
| Accumulated  depreciation                   |         | (243,539               | )             | (139,890              | )            |
|                                        |         | 1,451,834              |          | 1,497,054             |         |
| Fiber farms and  timber deposits            |         | 39,750                 |          | 52,236                |         |
|                                        |         | 1,491,584              |          | 1,549,290             |         |
|                                        |         |                   |          |                  |         |
| **Deferred  financing costs**               |         | 33,018                 |          | 37,778                |         |
| **Goodwill**                                |         | 21,846                 |          | 15,101                |         |
| **Intangible  assets**                      |         | 38,459                 |          | 31,804                |         |
| **Other  assets**                           |         | 28,676                 |          | 44,231                |         |
| **Total assets**                            | ** **   | **$**                  | **2,822,206** | ** **            | **$**        | **2,813,663** | ** ** |

See accompanying notes to unaudited quarterlyconsolidated financial statements.

3

----

**BoiseCascade Holdings, L.L.C.**

**ConsolidatedBalance Sheets (continued)**

(unaudited)
| ** **                                                                                                                                         | ** **   | **September 30,**                                       | ** **    | **December 31,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------------------------------------------|---------------|-----------------------|--------------|
| ** **                                                                                                                                         | ** **   | **2006**                                                     | ** **    | **2005**              | ** **   |
| ** **                                                                                                                                         | ** **   | **(thousands, except for equity units)** | ** **    |
| **LIABILITIES  AND CAPITAL**                                                                                                                       | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| ** **                                                                                                                                         | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| **Current**                                                                                                                                        | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Accounts payable                                                                                                                                   |         | $                                                            | 376,425       |                  | $            | 383,207 |   |
| Accrued  liabilities                                                                                                                               |         |                                                         |          |                  |         |
| Compensation and benefits                                                                                                                          |         | 114,784                                                      |          | 106,289               |         |
| Interest payable                                                                                                                                   |         | 19,157                                                       |          | 10,630                |         |
| Other                                                                                                                                              |         | 79,968                                                       |          | 46,244                |         |
|                                                                                                                                               |         | 590,334                                                      |          | 546,370               |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Debt**                                                                                                                                           | *** *** | *** ***                                                 | *** ***  | *** ***          | *** *** |
| Long-term debt                                                                                                                                     |         | 1,258,900                                                    |          | 1,365,800             |         |
| Note payable to  related party, net                                                                                                                |         | 279,916                                                      |          | 270,854               |         |
|                                                                                                                                               |         | 1,538,816                                                    |          | 1,636,654             |         |
| **Other**                                                                                                                                          | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Compensation and  benefits                                                                                                                         |         | 140,528                                                      |          | 121,269               |         |
| Other long-term  liabilities                                                                                                                       |         | 40,039                                                       |          | 31,937                |         |
|                                                                                                                                               |         | 180,567                                                      |          | 153,206               |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Redeemable  equity units**                                                                                                                       | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Series B  equity units – 17,213,244 and 17,296,624 units outstanding                                                                |         | 9,647                                                        |          | 9,508                 |         |
| Series C  equity units – 39,636,700 and 32,173,830 units outstanding                                                                |         | 5,641                                                        |          | 2,904                 |         |
|                                                                                                                                               |         | 15,288                                                       |          | 12,412                |         |
| ** **                                                                                                                                         | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| **Commitments  and contingent liabilities**                                                                                                        |         |                                                         |          |                  |         |
|                                                                                                                                               |         |                                                         |          |                  |         |
| **Capital**                                                                                                                                        | ** **   | ** **                                                   | ** **    | ** **            | ** **   |
| Series A  equity units – no par value; 66,000,000 units authorized and outstanding                                                  |         | 42,303                                                       |          | 39,885                |         |
| Series B  equity units – no par value; 550,000,000 and 549,000,000 units  authorized; 530,356,601 and 530,356,601 units outstanding |         | 445,668                                                      |          | 417,601               |         |
| Series C  equity units – no par value; 44,000,000 and 38,165,775 units authorized                                                   |         | 9,230                                                        |          | 7,535                 |         |
| **Total  capital**                                                                                                                                 |         | 497,201                                                      |          | 465,021               |         |
| **Total  liabilities and capital**                                                                                                                 | ** **   | **$**                                                        | **2,822,206** | ** **            | **$**        | **2,813,663** | ** ** |

See accompanying notes to unaudited quarterlyconsolidated financial statements.

4

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**BoiseCascade Holdings, L.L.C.**

**ConsolidatedStatements of Cash Flows**

(unaudited)
| ** **                                                                                                                              | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                                                                                                              | ** ** | **(thousands)**                                    | ** ** |
| **Cash  provided by (used for) operations**                                                                                             | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income                                                                                                                              |       | $                                                  | 68,428     |   | $ | 78,744 |   |
| Items in net  income not using (providing) cash  Depreciation, depletion, and amortization of deferred financing costs and  other costs |       | 116,629                                            |       | 145,867 |   |
| Related-party interest expense                                                                                                          |       | 12,559                                             |       | 13,690 |   |
| Deferred income tax provision                                                                                                           |       | 150                                                |       | 21,032 |   |
| Pension and other postretirement benefit expense                                                                                        |       | 20,671                                             |       | 21,388 |   |
| Gain on changes in retiree healthcare programs                                                                                          |       | (3,741                                             | )          | — |   |
| Change in fair value of interest rate swaps                                                                                             |       | —                                             |       | (9,886 | ) |
| Management equity units expense                                                                                                         |       | 2,750                                              |       | 2,188 |   |
| Other                                                                                                                                   |       | (525                                               | )          | (1,341 | ) |
| Decrease  (increase) in working capital, net of acquisitions                                                                            |       |                                               |       |   |   |
| Receivables                                                                                                                             |       | (54,524                                            | )          | (121,816 | ) |
| Inventories                                                                                                                             |       | (24,056                                            | )          | (26,467 | ) |
| Accounts payable and accrued liabilities                                                                                                |       | 38,406                                             |       | 93,705 |   |
| Pension and  other postretirement benefit payments                                                                                      |       | (842                                               | )          | (508 | ) |
| Income taxes  payable                                                                                                                   |       | (1,647                                             | )          | 5,917 |   |
| Other                                                                                                                                   |       | 2,844                                              |       | 4,827 |   |
| Cash provided by operations                                                                                                             |       | 177,102                                            |       | 227,340 |   |
|                                                                                                                                    |       |                                               |       |   |   |
| **Cash  provided by (used for) investment**                                                                                             | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Expenditures for  property and equipment                                                                                                |       | (105,095                                           | )          | (116,791 | ) |
| Acquisitions of  businesses and facilities                                                                                              |       | (42,549                                            | )          | — |   |
| Sales of assets                                                                                                                         |       | 42,953                                             |       | 12,575 |   |
| Repayment of  note receivable from related party, net                                                                                   |       | —                                             |       | 157,509 |   |
| Other                                                                                                                                   |       | 2,263                                              |       | 654 |   |
| Cash provided by (used for) investment                                                                                                  |       | (102,428                                           | )          | 53,947 |   |
|                                                                                                                                    |       |                                               |       |   |   |
| **Cash  provided by (used for) financing**                                                                                              | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Issuances of  long-term debt                                                                                                            |       | 293,300                                            |       | 840,000 |   |
| Payments of  long-term debt                                                                                                             |       | (400,200                                           | )          | (1,334,200 | ) |
| Tax  distributions to members                                                                                                           |       | (19,206                                            | )          | (23,295 | ) |
| Note payable to  related party, net                                                                                                     |       | (2,536                                             | )          | 251,042 |   |
| Proceeds from  changes to interest rate swaps                                                                                           |       | 25,620                                             |       | — |   |
| Other                                                                                                                                   |       | 53                                                 |       | (3,067 | ) |
| Cash used for financing                                                                                                                 |       | (102,969                                           | )          | (269,520 | ) |
|                                                                                                                                    |       |                                               |       |   |   |
| **Increase  (decrease) in cash and cash equivalents**                                                                                   |       | (28,295                                            | )          | 11,767 |   |
|                                                                                                                                    |       |                                               |       |   |   |
| **Balance  at beginning of the period**                                                                                                 |       | 88,171                                             |       | 163,345 |   |
|                                                                                                                                    |       |                                               |       |   |   |
| **Balance at end of the period**                                                                                                        | ** ** | **$**                                              | **59,876** | ** ** | **$** | **175,112** | ** ** |

See accompanying notes to unaudited quarterlyconsolidated financial statements.

5

----

**BoiseCascade Holdings, L.L.C.**

**ConsolidatedStatements of Capital**

(unaudited)
| ** **                                                   | ** ** | **Series A**     | ** ** | **Series B**     | ** ** | **Series C**     | ** **  | ** ** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|-------------|------------|------------|
| ** **                                                   | ** ** | **Equity Units** | ** ** | **Equity Units** | ** ** | **Equity Units** | ** **  | **Total**  | ** ** |
| ** **                                                   | ** ** | **Units**             | ** ** | **Amount**            | ** ** | **Units**             | ** **  | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| ** **                                                   | ** ** | **(thousands)**       | ** ** |
| ** **                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                           |       | 66,000                |       | $                     | 36,868     |                  | 530,357     |       | $          | 322,718 |   | — |   | $ | — |   | $ | 359,586 |   |
| ** **                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                |       | —                |       | —                |        | 121,367    |       | — |   | — |   | 121,367 |   |
| Other  comprehensive income (a) (b)                | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|    Cash  flow hedges                          |       | —                |       | —                |       | —                |        | 7,269      |       | — |   | — |   | 7,269 |   |
|    Minimum  pension liability adjustment      |       | —                |       | —                |       | —                |        | (58        | )          | — |   | — |   | (58 | ) |
| Paid-in-kind  dividend                                       |       | —                |       | 3,017                 |       | —                |        | (3,017     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                |       | —                |       | —                |       | —                |        | (23,143    | )          | — |   | — |   | (23,143 | ) |
| Allocation of  profit interest to Series C equity units |       | —                |       | —                |       | —                |        | (7,535     | )          | — |   | 7,535 |   | — |   |
| Balance at  December 31, 2005 (c)                  |       | 66,000                |       | 39,885                |       | 530,357               |        | 417,601    |       | — |   | 7,535 |   | 465,021 |   |
| ** **                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                |       | —                |       | —                |        | 68,428     |       | — |   | — |   | 68,428 |   |
| Other  comprehensive income (a) (b)                | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|    Cash  flow hedges                          |       | —                |       | —                |       | —                |        | (17,953    | )          | — |   | — |   | (17,953 | ) |
| Paid-in-kind  dividend                                       |       | —                |       | 2,418                 |       | —                |        | (2,418     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                |       | —                |       | —                |       | —                |        | (19,206    | )          | — |   | — |   | (19,206 | ) |
| Allocation of  profit interest to Series C equity units |       | —                |       | —                |       | —                |        | (1,695     | )          | — |   | 1,695 |   | — |   |
| Other                                                        |       | —                |       | —                |       | —                |        | 911        |       | — |   | — |   | 911 |   |
| **Balance at September 30,  2006 (c)**             | ** ** | **66,000**            | ** ** | **$**                 | **42,303** | ** **            | **530,357** | ** ** | **$**      | **445,668** | ** ** | **—** | ** ** | **$** | **9,230** | ** ** | **$** | **497,201** | ** ** |

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(a)                                  Total comprehensive income for the three andnine months ended September 30, 2006, was $17.8 million and$50.5 million, compared with $36.2 million and $83.6 million forthe three and nine months ended September 30, 2005.

(b)                                 Total other comprehensive income for the threeand nine months ended September 30, 2006, was $(17.2) million and $(18.0) million,compared with $7.7 million and $4.9 million for the three and nine months endedSeptember 30, 2005.

(c)                                  Accumulated other comprehensive income atSeptember 30, 2006, and December 31, 2005, was $(4.5) million and $13.5 million,respectively.

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

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

***1.             Basis ofPresentation***

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

We are adiversified North American paper and forest products company headquartered inBoise, Idaho. We operate our business in the following five reportablesegments: Building Materials Distribution, Wood Products, Paper,Packaging & Newsprint, and Corporate and Other. See Note 18,Segment Information, for additional information about our reportable segments.

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 for the three and nine months ended September 30,2006 and 2005, involved estimates and accruals. Actual results may vary fromthose estimates. Quarterly results are not necessarily indicative of resultsthat may be expected for the full year.

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

OnOctober 29, 2004, we acquired OfficeMax’s forest products and paperassets, other than its timberland operations, for an aggregate purchase priceof $2.2 billion, including approximately $140 million of related feesand expenses. See Note 2, Purchase of OfficeMax’s Forest Products andPaper Assets, of the Notes to Consolidated Financial Statements in “Item 8.Consolidated Financial Statements and Supplementary Data” of our 2005 AnnualReport on Form 10-K for more information.

We accounted for the Forest Products Acquisition using thepurchase method of accounting. We allocated the assets acquired and liabilitiesassumed based on their estimated fair values at the acquisition date. Theexcess of the purchase price over the fair value of assets acquired andliabilities assumed was allocated to goodwill. See Note 11, Goodwill andIntangible Assets, for more information.

# *Restructuring Activities*

Inconnection with the Forest Products Acquisition, we evaluated the acquiredfacilities and organizational structure. In accordance with the provisions ofEmerging Issues Task Force (EITF) 95-3, *Recognitionof Liabilities in Connection With a Purchase Business Combination*,exit activities related to the Forest Products Acquisition increased goodwill.We had one year from the acquisition date to finalize our restructuring plansand adjust goodwill.

AtSeptember 30, 2006, we had approximately $0.9 million ofrestructuring reserves related to severance costs recorded in “Accruedliabilities, Compensation and benefits,” and $0.1 million was recorded in “Accruedliabilities, Other.” The severance costs related to costs for approximately350 terminated employees. The remaining reserves relate to payments thatare being made over time and will be paid by the end of 2007. Of the$1.0 million remaining restructuring reserve, $0.8 million isrecorded in our Paper segment, and $0.2 million is in Corporate and Other.Restructuring reserve liability account activity related to these charges is asfollows:

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|                                                   | ** ** | **Severance**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **(thousands)** | ** ** |
| ** **                                        | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2004  restructuring reserve                       |       | $               | 13,768     |       | $          | 501        |       | $ | 14,269 |   |
| Charges against  reserve                          |       | (1,012          | )          | (1         | )          | (1,013     | )          |
| Restructuring  reserve at December 31, 2004  |       | 12,756          |       | 500        |       | 13,256     |       |
|                                              |       |            |       |       |       |       |       |
| Additions to  restructuring reserve               |       | 6,913           |       | 221        |       | 7,134      |       |
| Charges against  reserve                          |       | (16,162         | )          | (593       | )          | (16,755    | )          |
| Restructuring  reserve at December 31, 2005  |       | 3,507           |       | 128        |       | 3,635      |       |
|                                              |       |            |       |       |       |       |       |
| Charges against  reserve                          |       | (2,648          | )          | (6         | )          | (2,654     | )          |
| Restructuring reserve  at September 30, 2006 | ** ** | **$**           | **859**    | ** ** | **$**      | **122**    | ** ** | **$** | **981** | ** ** |

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

On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for an aggregatepurchase price of $43.8 million, including fees and expenses, but beforeworking capital adjustments. In 2006, we paid approximately $42.5 millionof cash for the acquisition, which is net of a $2.0 million holdback thatis payable in five years. At September 30, 2006, we recorded the$1.4 million discounted holdback (including accretion expense) in “Otherlong-term liabilities” on our Consolidated Balance Sheet. CTC manufacturescorrugated sheets that it sells primarily to regional container plants inTexas, Louisiana, Arkansas, and Mexico. CTC is located close to our mill inDeRidder, Louisiana, which produces linerboard used in CTC’s manufacturingprocesses.

We accounted forthe acquisition using the purchase method of accounting. As a result, thepurchase price was allocated to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date of theacquisition. The following table summarizes the estimated fair value of theassets acquired and liabilities assumed as of February 1, 2006. We had oneyear from the purchase date to finalize or receive information to determinechanges in estimates of the fair value of assets acquired and liabilitiesassumed. Adjustments recorded during the nine months ended September 30,2006, were not material.
|                         | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **(thousands)**            | ** ** |
|                    |       |                       |       |
| Current assets          |       | $                          | 16,407     |   |
| Property and  equipment |       | 15,368                     |       |
| Goodwill                |       | 7,046                      |       |
| Intangible  assets      |       | 9,400                      |       |
| Other assets            |       | 66                         |       |
| Assets acquired         |       | 48,287                     |       |
|                    |       |                       |       |
| Current  liabilities    |       | 4,438                      |       |
| Liabilities assumed     |       | 4,438                      |       |
|                    |       |                       |       |
| Net assets acquired     | ** ** | **$**                      | **43,849** | ** ** |

The excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill. We recorded $7.0 million of goodwill in ourPackaging & Newsprint segment. During the nine months endedSeptember 30, 2006, we recorded $0.3 million of purchase priceadjustments that decreased the recorded amount of goodwill. See Note 11,Goodwill and Intangible Assets, for more information.

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The amountallocated to intangible assets was attributed to the following categories ofintangibles:
|                         | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **(thousands)**            | ** ** |
|                    |       |                       |       |
| Trade name              |       | $                          | 1,800      |   |
| Customer  relationships |       | 6,400                      |       |
| Noncompete  agreements  |       | 1,200                      |       |
|                    | ** ** | **$**                      | **9,400**  | ** ** |

 

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

Pro forma resultsof operations have not been presented because the effects of the acquisitionwere not material to prior periods.

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

AtSeptember 30, 2006, and December 31, 2005, we had a$279.9 million and a $270.9 million note payable to a subsidiary ofTimber Holdings recorded as “Note payable to related party, net” on theConsolidated Balance Sheets. For more information, see Note 13, Debt. Alsoincluded in “Note payable to related party, net” were $31.5 million and$18.9 million of accrued interest expense at September 30, 2006, andDecember 31, 2005. For the three and nine months ended September 30, 2006,interest expense in our Consolidated Statements of Income included $3.6 millionand $12.6 million of related-party interest expense, compared with $5.4 millionand $13.7 million for the same periods in 2005.

During each of theperiods presented, we sold paper and paper products to OfficeMax at salesprices that were designed to approximate market prices. For the three and ninemonths ended September 30, 2006, sales to OfficeMax were$148.1 million and $424.9 million. For the three and nine monthsended September 30, 2005, sales to OfficeMax were $133.3 million and$425.8 million. These sales are included in “Sales, Related parties” inthe Consolidated Statements of Income.

In early 2005, wepurchased fiber from related parties at prices that approximated market prices.During the three and nine months ended September 30, 2005, fiber purchasesfrom Boise Land & Timber Corp., a subsidiary of Timber Holdings, were zeroand $17.6 million. The costs associated with these purchases are recordedas “Fiber costs from related parties” in the Consolidated Statement of Income.On February 4, 2005, Timber Holdings sold all of its timberlands.

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

The majority ofour businesses 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 Boise and affiliates to pay taxes.During the nine months ended September 30, 2006 and 2005, we paid FPH $19.2 millionand $23.3 million. FPH in turn paid $14.2 million and $16.3 million to MadisonDearborn Partners (MDP), our equity sponsor, and $1.8 million and $2.3 millionto management investors. During the nine months ended September 30, 2006 and2005, we also paid $3.2 million and

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$4.7 million toOfficeMax. These payments represented cash paid to fund their tax obligationsrelated 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. AtSeptember 30, 2006, and December 31, 2005, we had $3.2 millionand $3.6 million, respectively, of vendor rebates and allowances recordedin “Receivables, Other” on the Consolidated Balance Sheets. These rebates andallowances are accounted for in accordance with EITF 02-16, *Accounting by a Customer (Including a Reseller) for CertainConsideration Received From a Vendor*. Rebates and allowancesreceived from our vendors are recognized as a reduction of “Materials, labor,and other operating expenses” when the product is sold, unless the rebates andallowances are linked to a specific incremental cost to sell a vendor’sproduct. Amounts received from vendors that are linked to specific selling anddistribution expenses are recognized as a reduction of “Selling anddistribution expenses” in the period the 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*. At September 30,2006, and December 31, 2005, we had $29.3 million and $23.7 million,respectively, of rebates payable to our customers recorded in “Accruedliabilities, Other” on the Consolidated Balance Sheets.

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

“Other(income) expense, net” includes miscellaneous income and expense items. Thecomponents of “Other (income) expense, net” in the Consolidated Statements ofIncome are as follows:
|                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(thousands)**                  | ** ** |
| ** **                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Changes in  retiree healthcare programs (a) |       | $                                | —     |                            | $          | — |   | $ | (3,741 | ) | $ | — |   |
| Sales of assets,  net (b)                   |       | (164                             | )          | 77                              |       | 2,244 |   | 363 |   |
| Offering and  project costs (c)             |       | —                           |       | —                          |       | 2,135 |   | 3,600 |   |
| Other, net                                  |       | 59                               |       | (17                             | )          | 365 |   | (115 | ) |
| ** **                                  | ** ** | **$**                            | **(105**   | **)**                           | **$**      | **60** | ** ** | **$** | **1,003** | ** ** | **$** | **3,848** | ** ** |

 

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(a)           In firstquarter 2006, we communicated to our hourly employees at our St. Helens,Oregon, pulp and paper mill and our Salem, Oregon, converting operationschanges to our retiree healthcare programs. We discontinued healthcare coveragefor post-65 retirees and eliminated the company subsidy for some of our pre-65hourly retirees. As a result of this change, we recorded a $3.7 milliongain in our Consolidated Statement of Income for the nine months endedSeptember 30, 2006.

(b)           The nine months ended September 30, 2006, includes a$1.7 million loss related to the sale of our headquarters building inBoise, Idaho.

(c)           Represents expenses for the write-off of costs incurred in connectionwith the canceled initial public offering and other special projects.

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

We did not haveany capital leases during any of the periods presented. We lease a portion ofour distribution centers as well as other property and equipment underoperating leases. For purposes of determining straight-line rent expense, thelease term is calculated from the date we first take possession of thefacility, including any periods of free rent and any option periods we arereasonably assured of exercising. Straight-line rent expense is also adjustedto reflect any allowances or reimbursements provided by the lessor. Rentalexpense for operating leases was $6.9 million and $4.9 million forthe three 

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months endedSeptember 30, 2006 and 2005, and $18.1 million and $13.2 millionfor the nine months ended September 30, 2006 and 2005.

Sublease rentalincome 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 $4.6 million for the remainder of 2006,$16.6 million in 2007, $14.3 million in 2008, $13.1 million in2009, $12.0 million in 2010, and $9.7 million in 2011, with totalpayments thereafter of $46.3 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 first quarter 2006, we sold our headquarters building in Boise,Idaho, for $27.2 million, net of related fees and expenses, and recorded a$1.7 million loss in “Other (income) expense, net” in our ConsolidatedStatement of Income. The proceeds were used to pay down our Tranche D termloan, which decreased payments due in 2011 by that amount. In connection withthe sale, we leased back 65% of the building over a staggered lease term of tento 12 years. The lease is accounted for as an operating lease. The minimumlease payment requirements related to the transaction are included in theminimum lease payments disclosed above.

In August 2006, we sold andleased back our Lakeville, Minnesota, and Rochelle, Illinois, buildingmaterials distribution facilities. We collected $11.0 million of sale proceeds,net of related fees and expenses, which we used to pay down our Tranche Dterm loan. In connection with the sale, we recorded a $1.5 milliondeferred gain in “Other long-term liabilities” in our Consolidated BalanceSheet, which we will recognize as a reduction of lease expense over the life ofthe lease. The leases are accounted for as operating leases. The minimum leasepayment requirements related to the transactions are included in the minimumlease payments disclosed above.

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

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

On May 9, 2005, we converted to a C corporation from a limitedliability company. On December 20, 2005, acting pursuant to a RescissionAgreement among our shareholders, we rescinded our conversion to C corporationstatus by filing a conversion certificate with the Delaware Secretary of Statethat restored our status as a limited liability company. For the period ofMay 9 through September 30, 2005, we recorded income tax expense atan estimated annual effective tax provision rate of 43.5%. The effect ofestablishing deferred taxes upon conversion to a corporation was not materialto income tax expense.

As a result of the rescission, at September 30, 2006, themajority of our businesses and assets are held and operated by limitedliability companies, which are not subject to entity-level federal or stateincome taxation. The taxes in respect to these operations are payable by ourequity holders in accordance with their respective ownership percentages. Wemake cash distributions to permit the members of Boise and affiliates to paythese taxes. For the three and nine months ended September 30, 2006, wemade $8.5 million and $19.2 million of cash distributions to permitour equity holders to pay these taxes. We paid $3.7 million and$23.3 million for the same periods in 2005. Both our senior creditfacilities and the indenture governing our notes permit these distributions.

During the three and nine months ended September 30, 2006,our effective tax rates for our separate subsidiaries that are taxed ascorporations were 36.1% and 40.0%. During the three and nine months endedSeptember 30, 2006, we received $0.1 million and $6.1 million offederal and state income tax refunds as a result of rescinding ourC corporation status. The taxable corporations paid $0.7 million and$4.0 million of taxes, net of other refunds received.

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***9.******             Receivables***

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

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

***10.******          Inventories***

Inventories include the following:
|                                     | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|-------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                          | ** ** | **2006**               | ** **  | **2005**              | ** ** |
| ** **                          | ** ** | **(thousands)**        | ** **  |
|                                |       |                   |        |                  |       |
| Finished goods  and work in process |       | $                      | 445,341     |                  | $          | 414,035 |   |
| Logs                                |       | 45,771                 |        | 62,839                |       |
| Other raw  materials and supplies   |       | 172,586                |        | 156,909               |       |
| ** **                          | ** ** | **$**                  | **663,698** |                  | **$**      | **633,783** |   |

 

***11.******          Goodwill and IntangibleAssets***

Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and intangible assets of businesses acquired. Weaccount for goodwill in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangible Assets*. SFAS No. 142 requires us to assess ouracquired goodwill and intangible assets with indefinite lives for impairment atleast annually in the absence of an indicator of possible impairment andimmediately upon an indicator of possible impairment. We assess goodwill andintangible assets with indefinite lives in the fourth quarter of each yearusing a fair-value-based approach. We also evaluate the remaining useful livesof our finite-lived purchased intangible assets to determine whether anyadjustments to the useful lives are necessary. These intangible assets arediscussed in detail below. We completed our annual assessment in accordancewith SFAS No. 142 in fourth quarter 2005 and determined that there was noimpairment.

Weaccount for acquisitions using the purchase method of accounting. As a result,we allocate the purchase price to the tangible and intangible assets acquiredand liabilities assumed based on their respective fair values as of the date ofacquisition. In accordance with SFAS No. 141, *BusinessCombinations*, we have one year from the purchase date to finalize orreceive information to determine changes in estimates of the fair value ofassets acquired and liabilities assumed. During the nine months endedSeptember 30, 2006, we recorded $0.3 million of net purchase priceadjustments that decreased the recorded amount of goodwill. The adjustmentswere for fair value adjustments related to our acquisition of Central TexasCorrugated.

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Changesin the carrying amount of our goodwill by segment are as follows:
| ** **                                         | ** ** | **Building**     | ** ** | ** **   | ** ** | ** ** | ** ** | ** **               | ** ** | **Corporate** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------------|------------|--------------|------------|------------|------------|--------------------------|------------|---------------|------------|------------|------------|
| ** **                                         | ** ** | **Materials**    | ** ** | **Wood**     | ** ** | ** ** | ** ** | **Packaging &** | ** ** | **and**       | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Distribution** | ** ** | **Products** | ** ** | **Paper**  | ** ** | **Newsprint**            | ** ** | **Other**     | ** ** | **Total**  | ** ** |
| ** **                                         | ** ** | **(thousands)**  | ** ** |
| ** **                                         | ** ** | ** **       | ** ** | ** **   | ** ** | ** ** | ** ** | ** **               | ** ** | ** **    | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                 |       | $                | 5,593      |         | $          | 6,577      |       | $                        | 1,341      |          | $          | 1,590      |       | $ | — |   | $ | 15,101 |   |
|                                               |       |             |       |         |       |       |       |                     |       |          |       |       |       |
| Goodwill acquired  during the period (Note 3) |       | —           |       | —       |       | —     |       | 7,046                    |       | —        |       | 7,046      |       |
| Purchase price  adjustments                        |       | —           |       | —       |       | —     |       | (301                     | )          | —        |       | (301       | )          |
| Balance at September 30, 2006                 | ** ** | **$**            | **5,593**  | ** **   | **$**      | **6,577**  | ** ** | **$**                    | **1,341**  | ** **    | **$**      | **8,335**  | ** ** | **$** | **—** | ** ** | **$** | **21,846** | ** ** |

 

Intangible assets representthe values assigned to trade names and trademarks, customer relationships,noncompete agreements, and technology. The Central Texas Corrugated trade nameis amortized over five years. All other trade names and trademark assetshave an indefinite life and are not amortized. Customer relationships are amortizedover five to ten years, noncompete agreements are amortized overfour years, and technology is amortized over three to five years.Intangible assets consisted of the following:
|                             | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                                   | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | **(thousands)**                                                   | ** ** |
|                        |       |                                                              |       |   |   |   |   |
| Trade names and  trademarks |       | $                                                                 | 24,700     |   | $ | (250 | ) | $ | 24,450 |   |
| Customer  relationships     |       | 13,400                                                            |       | (3,292 | ) | 10,108 |   |
| Noncompete  agreements      |       | 1,200                                                             |       | (204 | ) | 996 |   |
| Technology                  |       | 4,960                                                             |       | (2,055 | ) | 2,905 |   |
|                        | ** ** | **$**                                                             | **44,260** |   | **$** | **(5,801** | **)** | **$** | **38,459** | ** ** |

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

 

Intangible assetamortization expense was $1.0 million and $3.0 million for the threeand nine months ended September 30, 2006, and $0.6 million and$1.9 million for the same periods in 2005. The estimated amortizationexpense is $1.0 million for the remainder of 2006 and $4.5 million,$4.1 million, $3.4 million, $1.1 million, and $0.5 million in2007, 2008, 2009, 2010, and 2011, respectively.

***12.******          AssetRetirement Obligations***

We account for asset retirementobligations in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations*, and FASB Interpretation (FIN)No. 47, *Accounting for Conditional Asset RetirementObligations — An Interpretation of Financial Accounting Standards Board (FASB)Statement No. 143*. We accrue for asset retirement obligationsin the period in which they are incurred if sufficient information is availableto reasonably estimate the fair value of the obligation. When we record theliability, we capitalize the cost by increasing the carrying amount of therelated long-lived asset. Over time, the liability is accreted to itssettlement value, and the capitalized cost is depreciated over the useful lifeof the related asset. Upon settlement of the liability, we will recognize again or loss for any difference between the settlement amount and the liabilityrecorded. On a pro forma basis, if the provisions of FIN No. 47 hadbeen in effect during all of 2005, our net income would not have changedmaterially.

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At September 30, 2006, and December31, 2005, we had $13.0 million and $11.5 million of asset retirementobligations recorded in “Other, Other long-term liabilities,” on ourConsolidated Balance Sheets. These liabilities related primarily to landfillclosure and closed-site monitoring costs. The liabilities are based on the bestestimate of current costs and are updated periodically to reflect currenttechnology, laws and regulations, inflation, and other economic factors. We donot have any assets legally restricted for purposes of settling assetretirement obligations. The table below describes changes to our assetretirement obligations for the nine months ended September 30, 2006, andthe year ended December 31, 2005:
|                                                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **(thousands)**              | ** ** |
|                                                |       |                         |       |                        |       |
| Asset retirement  obligation at beginning of period |       | $                            | 11,484     |                        | $          | 10,286 |   |
| Liabilities  incurred                               |       | 859                          |       | —                      |       |
| Net transition  adjustment                          |       | —                       |       | 485                         |       |
| Accretion expense                                   |       | 741                          |       | 789                         |       |
| Payments                                            |       | (37                          | )          | (76                         | )          |
| Asset retirement  obligation at end of period       | ** ** | **$**                        | **13,047** | ** **                  | **$**      | **11,484** | ** ** |

 

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

***13.******          Debt***

AtSeptember 30, 2006, and December 31, 2005, our long-term debt and theinterest rates on that debt were as follows:
|                                                 | ** ** | **September 30, 2006** | ** **    | **December 31, 2005**    | ** ** |
|-------------------------------------------------|------------|----------------------------------|---------------|------------------------------------|------------|
| ** **                                      | ** ** | **Amount**                       | ** **    | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** | **Amount** | ** ** | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** |
| ** **                                      | ** ** | **(thousands)**                  | ** **    | ** **                         | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                       | ** **    | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revolving credit  facility, due 2010            |       | $                                | —        |                               | 6.0        | % | N/A |   | $ | — |   | 5.1 | % | N/A |   |
| Tranche D term  loan, due 2011             |       | 538,900                          |          | 7.1                                | %          | 6.8 | % | 635,800 |   | 5.8 | % | 4.9 | % |
| Senior unsecured  floating-rate notes, due 2012 |       | 250,000                          |          | 8.4                                | %          | 7.6 | % | 250,000 |   | 7.0 | % | 6.6 | % |
| 7.125% senior  subordinated notes, due 2014     |       | 400,000                          |          | 7.1                                | %          | N/A |   | 400,000 |   | 7.1 | % | N/A |   |
| Borrowings secured by  receivables              |       | 70,000                           |          | 5.5                                | %          | N/A |   | 80,000 |   | 4.3 | % | N/A |   |
|                                            |       | 1,258,900                        |          | 7.3                                | %          | 7.0 | % | 1,365,800 |   | 6.3 | % | 5.8 | % |
| Note payable to related  party, net, due 2009   |       | 279,916                          |          | 5.0                                | %          | N/A |   | 270,854 |   | 8.0 | % | N/A |   |
| ** **                                      | ** ** | ** **                       | ** **    | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **$**                            | **1,538,816** | ** **                         | ** ** | ** ** | ** ** | ** ** | **$** | **1,636,654** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

*Senior Secured Credit Facilities*

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

Our revolving credit facility agreement permits us toborrow up to $475.0 million for general corporate purposes. AtSeptember 30, 2006, we had no borrowings outstanding under our revolving 

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credit facility; however, $62.2 million of lettersof credit were considered a draw on the revolver, reducing our borrowingcapacity to $412.8 million. Borrowings under our revolving credit facilityare based on the prime rate, the federal funds effective rate, orthe London Interbank Offered Rate (LIBOR). Pricing is subject to quarterlyadjustment based on the ratio of our total indebtedness to our last fourquarters of consolidated earnings before interest, taxes, depreciation, andamortization (EBITDA). The range of borrowing costs under the pricing gridis:  (i) the higher of prime plus0.50% to 1.25% or the federal funds effective rate plus 1.00% to 1.75% or(ii) LIBOR plus 1.50% to 2.25%. For the nine months endedSeptember 30, 2006, and the year ended December 31, 2005, the averageinterest rate for our borrowings under the revolver were 6.0% and 5.1%. Lettersof credit are subject to a 0.25% fronting fee payable to the issuing bank and afee payable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under our revolving credit facility and thedaily average amount available for drawing under the outstanding letters ofcredit. The minimum and maximum borrowings under the revolver were zero and$30.0 million during the nine months ended September 30, 2006, andzero and $126.5 million for the same period in 2005. The weighted averageamounts of borrowings outstanding under the revolver during the nine monthsended September 30, 2006 and 2005, were $1.0 million and$15.7 million. The revolving credit facility provides for a commitment feeof 0.50% per annum payable to the lenders on the average daily unused portionof the revolving credit facility. We also have a swingline option under therevolver, which allows us to borrow at negotiated rates up to an aggregate of$40.0 million from individual banks that are parties to the agreement.Swingline borrowings are considered borrowings under the revolving creditfacility agreement.

AtSeptember 30, 2006, and December 31, 2005, we had $538.9 millionand $635.8 million outstanding under the Tranche D term loan, and ourborrowing rates were 7.1% and 5.8%. Borrowings under the Tranche D termloan are based on (i) the higher of the prime rate plus 0.75% or the federalfunds effective rate plus 1.25% or (ii) LIBOR plus 1.75%. As a result of a$200.0 million prepayment in October 2005, we are not required to makescheduled principal payments on the Tranche D term loan until 2011, atwhich time the principal balance is due. However, during the nine months endedSeptember 30, 2006, we prepaid $96.9 million on our Tranche Dterm loan with $38.2 million of proceeds from asset sales,$25.6 million of proceeds from unwinding and resetting the fixed interestrate we pay under our interest rate swap agreements, and other cash flows.

Borrowings under the Facilities are subject tofinancial covenants and restrictions, including a minimum interest expensecoverage ratio, maximum leverage ratio, and limitations on capitalexpenditures.

*Senior Notes*

In October 2004, we issued $250.0 million ofsenior unsecured floating-rate notes due in 2012 and $400.0 million of7.125% senior subordinated notes due in 2014. Net proceeds from the notes wereused to fund a portion of the purchase price for the Forest ProductsAcquisition. In July 2005, we completed an exchange offer whereby all ofour senior unsecured floating-rate notes and senior subordinated notes wereexchanged for publicly traded, registered securities with identical terms(other than terms relating to registration rights) to the notes issued inOctober 2004. We may redeem all or part of the notes at any time at redemptionprices defined in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. Thesenior unsecured floating-rate notes bear interest at a floating rate equal toLIBOR plus 2.9%. At September 30, 2006, and December 31, 2005, ourborrowing rates for the $250.0 million senior unsecured floating-ratenotes were 8.4% and 7.0%.

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*Borrowings Secured by Receivables*

In October 2005, our wholly owned subsidiary,Boise LLC, and several of its subsidiaries, including Birch Creek Investments,L.L.C. (Birch Creek), entered into an accounts receivable securitizationprogram with Bank of America National Association and Calyon New York Branch(the Investors). Under this three-year program, Boise LLC sells its interest ina defined pool of accounts receivable generated by its domestic operations on arevolving basis to Birch Creek, a consolidated, wholly owned, special-purposesubsidiary. In turn, Birch Creek sells the receivables to the affiliates of theInvestors. Because Boise LLC has the right to repurchase the sold receivables,sales of receivables under the program are accounted for as a securedborrowing. At September 30, 2006, and December 31, 2005, we had$70.0 million and $80.0 million outstanding under our accountsreceivable securitization program. The receivables outstanding and thecorresponding debt are included as “Receivables” and “Long-term debt,” respectively,on our Consolidated Balance Sheets. We record the financing costs associatedwith the program in “Interest expense” in our Consolidated Statements ofIncome. The cost of funds under this program varies based on changes ininterest rates. At September 30, 2006, and December 31, 2005, theinterest rates for borrowings secured by receivables were 5.5% and 4.3%.

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

*Note Payable to Related Party, Net*

At September 30, 2006, we had a$279.9 million note payable to a subsidiary of Timber Holdings recorded as“Note payable to related party, net” on our Consolidated Balance Sheet. Theamount of the note payable was $270.9 million at December 31, 2005.The note is subject to adjustment based on transactions between the subsidiaryand us. Effective April 1, 2006, we amended and restated our note payableto Timber Holdings. Our borrowing rate under the amended and restated note is5%, and the note matures March 31, 2009. Included in “Note payable torelated party, net” were $31.5 million and $18.9 million of accruedinterest expense related to the note at September 30, 2006, andDecember 31, 2005, respectively. Timber Holdings is a guarantor of ourdebt; see Note 20, Consolidating Guarantor and Nonguarantor FinancialInformation.

*Other*

We have entered into interest rate swaps to hedge themajority of the cash flow risk from the variable interest payments on ourvariable-rate debt. These swaps gave us effective interest rates on all of ourvariable-rate debt of 6.9% and 5.3% at September 30, 2006, andDecember 31, 2005, respectively. For additional information on ourinterest rate swaps, see Note 14, Financial Instruments.

We paid approximately$85.9 million of fees and expenses associated with our senior securedcredit facilities, our senior unsecured floating-rate notes, and our seniorsubordinated notes, which we entered into in October 2004. The fees are beingamortized over the terms of the loans, which range from six to ten years. AtSeptember 30, 2006, and December 31, 2005, we had $33.0 millionand $37.8 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan in second quarter 2005, we recorded a$43.0 million charge for the write-off of the deferred financing costs in “Interestexpense” in our Consolidated Statements of Income (Loss).

AtSeptember 30, 2006, and December 31, 2005, our average effectiveinterest rates, including the effect of our interest rate swaps, on all of ournon-related party debt, were 7.0% and 5.8%.

Cashpayments for interest, net of interest capitalized, were $18.3 million and$63.9 million for the three and nine months ended September 30, 2006,and $16.8 million and $65.7 million for the three and nine monthsended September 30, 2005.

***14.******          Financial Instruments***

We areexposed to risks such as changes in interest rates, energy prices, and foreigncurrency exchange rates. We employ a variety of practices to manage theserisks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative 

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instruments are used onlyfor risk management purposes and not for speculation or trading. Derivativesare such that a specific debt instrument, contract, or anticipated purchasedetermines the amount, maturity, and other specifics of the hedge. If aderivative 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 hedgeditem, as well as our risk management objectives and strategy for undertakingvarious hedged transactions. For those derivatives designated as cash flow orfair value hedges, we formally assess, both at the hedge’s inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in the hedged items. The ineffectiveportion of hedging transactions is recognized in income (loss).

Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, werecord all derivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. The fair value of these instruments is determined bythird parties. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income,” as appropriate. The gain orloss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). The gain or loss on derivativesdesignated as fair value hedges and the offsetting gain or loss on the hedgeditem attributable to the hedged risk are included in income (loss) in theperiod in which changes in fair value occur. The gain or loss on derivativesthat have not been designated as hedging instruments is included in income(loss) in the period in which changes in fair value occur.

*Interest Rate Risk*

Our debt ispredominantly variable-rate. We manage interest rate risk on our variable-ratedebt by entering into interest rate swaps. At September 30, 2006, theestimated current market value of our fixed-rate debt, including our notepayable to related party, based on then-current interest rates for similarobligations with like maturities, was approximately $45.6 million lessthan the amount reported on our Consolidated Balance Sheet.

*Swaps onour Facilities. *Ourobligations under our senior secured credit facilities and senior notes exposeus to changes in short-term interest rates since interest rates on this debtare variable. In November 2004, we entered into four interest rate swapswith a total notional amount of $550 million to hedge the exposure tointerest rate fluctuations associated with our Tranche B term loan (whichwas paid in full in April 2005). The swaps on $300 million of ourTranche B term loan were fixed at an average pay rate of 3.3% and wouldhave expired in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche B termloan, these interest rate swaps were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or$15.2 million, in “Change in fair value of interest rate swaps” in ourConsolidated Statement of Income. In second quarter 2005, we redesignated the$550 million of interest rate swaps as hedges of the cash flow fromthe LIBOR-based variable interest payments on amounts borrowed under theFacilities, and prior to the redesignation, we recognized $5.3 million ofnoncash expense in “Change in fair value of interest rate swaps” in ourConsolidated Statement of Loss. The net $9.9 million of value thatwas recorded in “Other assets” on our Consolidated Balance Sheet results inhigher interest expense over the remaining life of the interest rate swaps.Changes in the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt.Ineffectiveness related to the redesignated hedges was not significant. Thefour interest rate swaps with a total notional amount of $550 million gaveus an effective interest rate of 4.9% at December 31, 2005. AtDecember 31, 2005, the fair market value of these instruments was$16.9 million, which we recorded in “Other assets” on our ConsolidatedBalance Sheet.

In April 2006, we terminated our 3.3%$300 million interest rate swap agreements that hedged our exposure tointerest rate fluctuations associated with our Facilities. In addition, wereset the fixed interest rate we pay on the remaining $250 million ofinterest rate swap agreements under our Facilities from 3.5% to 4.75%. Thereset interest rate swaps with a total notional amount of $250 milliongave us an effective interest rate of 6.8% on the Facilities atSeptember 30, 2006. At September 30, 2006, the fair 

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market value of theseinstruments was $1.3 million, which we recorded in “Other assets” on ourConsolidated Balance Sheet. There was no ineffectiveness related to the hedges.

In October 2006, we entered into two 5.0% interest rate swaps with anaggregate notional amount of $250 million to hedge our exposure tointerest rate fluctuations associated with our Facilities for the period ofDecember 2008 through December 2010. These swaps were designated as cash flowhedges. Accordingly, changes in the fair value of the interest rate swaps willbe recorded in “Other comprehensive income.”

*Swaps onour senior unsecured floating-rate notes. *In November 2004, we entered into two 3.7% interestrate swaps with an aggregate notional amount of $250 million to hedge theexposure to floating-rate interest rate risks associated with our seniorunsecured floating-rate notes, which gave us an effective interest rate on thatdebt of 6.6% at December 31, 2005. In April 2006, we reset the fixedinterest rate we pay on the $250 million of interest rate swap agreementsto 4.75%, which gave us an effective interest rate on our senior unsecuredfloating-rate notes of 7.6% at September 30, 2006. These swaps expire inOctober 2009. These swaps were designated as cash flow hedges. Accordingly,changes in the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt. Therewas no ineffectiveness related to these hedges. At September 30, 2006, andDecember 31, 2005, the fair market values of these instruments were$1.8 million and $9.3 million, which we recorded in “Other assets” onour Consolidated Balance Sheets.

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

For the three andnine months ended September 30, 2006, amounts reclassified to “Interestexpense” for all of our cash flow hedges decreased interest expense $2.7 million and $6.7 million,compared with $0.7 million and $4.8 million increases in interestexpense for the same periods in 2005. At September 30, 2006, assuming nochange in interest rates, $2.2 million would be reclassified as a decreasein interest expense during the remainder of 2006.

*Energy Risk*

We enter into natural gas swaps to hedge the variablecash flow risk of natural gas purchases to a fixed price. As ofSeptember 30, 2006, we had entered into swap agreements to hedge thevariable cash flow risk of natural gas purchases for the period of October 2006through February 2007. We designated all of the swaps as cash flow hedges.Accordingly, changes in the fair value of these swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Materials,labor, and other operating expenses” in our Consolidated Statements of Income(Loss) as natural gas was consumed. Amounts reclassified in the three monthsended September 30, 2006, increased “Materials, labor, and other operatingexpenses” $5.7 million, and amounts reclassified in the nine months endedSeptember 30, 2006, increased these expenses $10.3 million. Assumingnatural gas prices follow the futures curve in effect at September 30,2006, $12.9 million would be reclassified as an increase in “Materials, labor, and other operating expenses” duringthe remainder of 2006. At September 30, 2006, and December 31, 2005,the fair market values of these instruments were a negative $18.1 millionand $0.1 million, which we recorded in “Accrued liabilities, Other” on ourConsolidated Balance Sheets. There was no ineffectiveness related to thesehedges.

In addition, as of September 30, 2006, we hadsold written call options on a portion of the natural gas swaps discussedabove. These written call options do not qualify for hedge accounting underSFAS No. 133. We sold the options to lower the cost of the natural gasswaps (described above) that are designated as hedges. At September 30,2006, we recognized an unrealized gain of $1.2 million based on the fairmarket value of the options we sold, which we recorded in “Receivables, other”on our Consolidated Balance Sheet with the offset as a reduction to “Materials,labor, and other operating expenses” in our Consolidated Statement of Income.

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*Foreign Currency Risk*

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

In second quarter 2006, we entered into a series of forward foreignexchange contracts to hedge our commitment to purchase capital equipmentdenominated in euros. These contracts are for a total amount of12.4 million euros with settlement dates which began in April 2006 andextend through April 2007. We are accounting for these as fair value hedges andrecognize any gains or losses from remeasuring the forward contracts at fairvalue in the Consolidated Statements of Income (Loss). We also adjust thecommitment for the capital equipment purchase for any gains or lossesattributable to fluctuations in foreign currency exchange rates. At September 30,2006, the fair market value of these contracts was $0.1 million, which werecorded in “Receivables, Other,” and we recorded the same amount for theincrease in the purchase commitment in “Accounts payable” on our ConsolidatedBalance Sheet.

***15.******          New and RecentlyAdopted Accounting Standards***

*New Accounting Standards*

In September 2006, the FASB issued FASB Staff Position (FSP) No. AUG AIR-1,*Accounting for Planned Major MaintenanceActivities*. This FSP prohibits companies from accruing a liabilityfor the future costs of periodic major overhauls and maintenance of plant andequipment in annual and interim financial reporting periods. Currently, wecharge planned shutdown maintenance costs in our Paper and Packaging &Newsprint segments to income (loss) ratably over the year. This statementprohibits that practice and requires us to use one of three alternative methodsof accounting for planned major maintenance activities, including directexpense, built-in overhaul, or the deferral method. We will adopt this FSPJanuary 1, 2007, and recast prior interim periods using the direct expensemethod. The FSP increases the volatility of earnings in the period a plannedshutdown occurs, but it has no impact on our annual results of operations.

In September 2006, the FASB issued SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of SFAS No. 87, 88, 106, and 132(R)*. This statement requirescompanies to recognize the funded status of their pension and otherpostretirement benefit plans on their balance sheets and requires thatcompanies measure their pension assets and liabilities at year-end. We will voluntarilyadopt this standard in December 2006. We do not expect it to have a materialimpact on our financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)Topic 1N, *Financial Statements — Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements* (SAB 108). SAB 108 addresses howthe effects of prior-year uncorrected misstatements should be considered whenquantifying misstatements in current-year financial statements. SAB 108requires registrants to quantify misstatements using both the balance sheet andincome statement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors. We will adopt SAB 108 in December 2006. Uponadoption, we do not expect SAB 108 to have a material impact on ourfinancial position or results of operations.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*. This Statementdefines fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements. This statement applies underother accounting pronouncements that require or permit fair value measurements,the FASB having previously concluded in those accounting pronouncements thatfair value is the relevant measurement attribute. Accordingly, this statementdoes not require any new fair value measurements. We will adopt this standard January1, 2008. We do not expect it to have a material impact on our financialposition or results of operations.

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In June 2006, the FASB issued FIN No. 48, *Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109*.  FIN No. 48 clarifies the criteria forrecognizing tax benefits under FASB Statement No. 109, *Accounting for Income Taxes*.  It also requires additional financialstatement disclosures about uncertain tax positions.  FIN 48 is effective January 2007.  Because the majority of our businesses andassets are held and operated by limited liability companies, and the taxes ofthese operations are payable by our equity holders, we do not expect FIN No. 48to have a material impact on our financial position or results ofoperations.  If our tax status were tochange in the future, we would have to reevaluate the impact of FIN No. 48 onour financial position and results of operations at that time.

*Recently Adopted Accounting Standards*

In February 2006, the FASB issued FSP SFAS No. 123(R)-4, *Classification of Options and Similar Instruments Issued as EmployeeCompensation That Allow for Cash Settlement Upon the Occurrence of a ContingentEvent*. SFAS No. 123(R)-4 requires companies to assess theprobability that a contingent cash settlement event will occur when it determinesthe classification of options or other similar instruments issued as part ofemployee compensation arrangements. Because Forest Products Holdings’ (ourequity sponsor) redemption and the expected parallel redemptions of theSeries B and Series C equity units granted to our employees under theManagement Equity Agreement are a contingent event outside employees’ controland not currently deemed probable of occurring, we account for the units usingequity plan accounting in accordance with SFAS No. 123(R)-4.

In September 2005,the FASB’s EITF reached a consensus on EITF 04-13, *Accountingfor Purchases and Sales of Inventory With the Same Counterparty*. Theconsensus identifies circumstances under which two or more transactionsinvolving inventory with the same counterparty should be viewed as a singlenonmonetary transaction within the scope of Accounting Principles Board (APB)Opinion No. 29, *Accounting for NonmonetaryTransactions*. We adopted this standard effective January 2006, andit required us to report our inventory buy/sell transactions in ourPackaging & Newsprint and Paper segments on a net basis in ourConsolidated Statements of Income. Previously, in accordance with EITF 99-19,*Reporting Revenue Gross as a Principal Versus Netas an Agent,* and SABNo. 104, *Revenue Recognition*, we recordedsales and purchases related to our inventory buy/sell arrangements on a grossbasis. This consensus had no impact on net income. Had this consensuspreviously been in effect, it would have reduced sales $16.9 million and $59.0 millionfor the three and nine months ended September 30, 2005, and would havereduced “Materials, labor, and other operating expenses” by about the sameamount. In accordance with the provisions of EITF 04-13, prior-periodfinancial information has not been reclassified to conform with the current period’spresentation.

In March 2005, the FASB issued FIN No. 47,*Accounting for Conditional Asset RetirementObligations — An Interpretation of FASB Statement No. 143*.FIN No. 47 clarifies that the term “conditional asset retirementobligation,” as used in SFAS No. 143, *Accounting for AssetRetirement Obligations*, refers to a legal obligation to perform anasset retirement activity in which the timing and/or method of settlement isconditional on a future event that may or may not be within the control of theentity. FIN No. 47 also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. We adopted FIN No. 47 in December 2005, and it did nothave a material impact on our financial position or results of operations. Formore information, see Note 12, Asset Retirement Obligations.

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***16.******          Retirement and BenefitPlans***

The following tablepresents the components of net periodic pension and postretirement benefitcosts in accordance with revised SFAS No. 132, *Employers’Disclosures About Pensions and Other Postretirement Benefits*:
| ** **                                     | ** ** | **Pension Benefits**                           | ** ** | **Other Benefits**                             | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended  September 30** | ** ** | **Three Months Ended  September 30** | ** ** |
| ** **                                     | ** ** | **2006**                                            | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                     | ** ** |
|                                           |       |                                                |       |                                                |       |   |   |   |   |
| Service cost                                   |       | $                                                   | 6,246      |                                                | $          | 6,363 |   | $ | 54 |   | $ | 162 |   |
| Interest cost                                  |       | 8,835                                               |       | 7,703                                               |       | 97 |   | 266 |   |
| Expected return  on plan assets                |       | (8,902                                              | )          | (7,585                                              | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 69                                                  |       | 94                                                  |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 186                                                 |       | —                                              |       | — |   | — |   |
| Company-sponsored  plans                       |       | 6,434                                               |       | 6,575                                               |       | 151 |   | 428 |   |
| Multiemployer  pension plans                   |       | 108                                                 |       | 119                                                 |       | — |   | — |   |
| Net periodic benefit  cost                     | ** ** | **$**                                               | **6,542**  | ** **                                          | **$**      | **6,694** | ** ** | **$** | **151** | ** ** | **$** | **428** | ** ** |

 
| ** **                                     | ** ** | **Pension Benefits**       | ** ** | **Other Benefits**         | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Nine Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **                                     | ** ** | **September 30**           | ** ** | **September 30**           | ** ** |
| ** **                                     | ** ** | **2006**                        | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(thousands)**                 | ** ** |
|                                           |       |                            |       |                            |       |   |   |   |   |
| Service cost                                   |       | $                               | 18,684     |                            | $          | 19,088 |   | $ | 161 |   | $ | 483 |   |
| Interest cost                                  |       | 25,726                          |       | 23,110                          |       | 283 |   | 802 |   |
| Expected return  on plan assets                |       | (26,013                         | )          | (22,753                         | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 208                             |       | 280                             |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 410                             |       | —                          |       | — |   | — |   |
| Plan  settlement/curtailment expense           |       | 822                             |       | —                          |       | — |   | — |   |
| Company-sponsored  plans                       |       | 19,837                          |       | 19,725                          |       | 444 |   | 1,285 |   |
| Multiemployer  pension plans                   |       | 390                             |       | 378                             |       | — |   | — |   |
| Net periodic benefit  cost                     | ** ** | **$**                           | **20,227** | ** **                      | **$**      | **20,103** | ** ** | **$** | **444** | ** ** | **$** | **1,285** | ** ** |

 

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

***17.******          Redeemable Equity Units***

In April 2006, two of our key managers purchased, pursuant to the terms ofa Management Equity Agreement (Equity Plan), a total of 0.3 million 2006Series B equity units in FPH at $2.00 per unit. Those who purchased FPH’sSeries B equity units also received a grant of 5.3 million of FPH’s Series Cequity units (profits interests). The 2006 Series C equity units representthe right to participate in profits after the holders of the FPH Series B and 2004Series C equity units receive a specified threshold return as defined in theEquity Plan. In addition, in April 2006, FPH issued 2.6 million 2006 Series Cequity units of FPH to two other key managers and our four nonaffiliateddirectors for no consideration.

The 2006 equity units vest on the same dates the units issued in 2004 vest.We did not recognize compensation expense on the date of grant for the 2006 Series Bequity units because the fair value of the units issued by FPH was equal to orless than the amount each employee was required to pay. We recognizecompensation expense for the fair value of the 2006 Series C equity units overthe vesting periods. During the three and nine months ended September 30,2006, we recognized $0.06 million and $0.3 million of compensationexpense related to the 2006 Series C equity unit grants.

21

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***18.******         ******Segment Information***

Thereare no differences in our basis of segmentation or in our basis of measurementof segment profit or loss from those disclosed in Note 16 of “Item 8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K.

An analysis of ouroperations by segment is as follows:
| ** **                                      | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|-------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                      | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| ** **                                      | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(f)**    | ** ** |
| ** **                                      | ** ** | **(millions)** | ** **  |
| **Three  Months Ended September 30, 2006** | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Building  Materials Distribution                |       | $              | 756.6       |        | $          | —            |       | $          | —     |       | $          | 756.6             |       | $          | 19.4       |   | $ | 2.4 |   | $ | 21.7 |   |
| Wood Products                                   |       | 176.6          |        | —      |       | 122.5             |       | 299.1      |       | 5.6        |       | 7.1               |       | 12.7       |       |
| Paper                                           |       | 209.5          |        | 148.1       |       | 15.9              |       | 373.5      |       | 30.8       |       | 15.7              |       | 46.5       |       |
| Packaging &  Newsprint                 |       | 185.3          |        | —      |       | 21.5              |       | 206.8      | (a)        | 15.5       |       | 12.8              |       | 28.3       |       |
| Corporate and  Other                            |       | 4.2            |        | —      |       | 10.6              |       | 14.8       |       | (8.3       | )          | 1.3               |       | (6.9       | )          |
|                                            |       | 1,332.2        |        | 148.1       |       | 170.5             |       | 1,650.8    |       | 63.0       |       | 39.3              |       | 102.3      |       |
| Intersegment  eliminations                      |       | —         |        | —      |       | (170.5            | )          | (170.5     | )          | —     |       | —            |       | —     |       |
| Interest expense                                |       | —         |        | —      |       | —            |       | —     |       | (28.4      | )          | —            |       | —     |       |
| Interest income                                 |       | —         |        | —      |       | —            |       | —     |       | 0.9        |       | —            |       | —     |       |
| ** **                                      | ** ** | **$**          | **1,332.2** | ** **  | **$**      | **148.1**         | ** ** | **$**      | **—** | ** ** | **$**      | **1,480.3**       | ** ** | **$**      | **35.5**   | ** ** | **$** | **39.3** | ** ** | **$** | **102.3** | ** ** |

 
| ** **                                           | ** ** | **Sales**  | ** **  | **Income   (Loss)** | ** ** | **Depreciation,   Amortization,** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|-------------|--------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | ** ** | ** **  | **Related**              | ** ** | **Inter-**                             | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                           | ** ** | **Trade**  | ** **  | **Party**                | ** ** | **segment**                            | ** ** | **Total**  | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(f)** | ** ** |
|                                                 |       |       |        |                     |       |                                   |       | (millions) |       |   |   |   |   |   |   |
| **Three  Months Ended September 30, 2005** |       |       |        |                     |       |                                   |       |       |       |   |   |   |   |   |   |
| Building  Materials Distribution                     |       | $          | 842.5       |                     | $          | —                                 |       | $          | 0.2        |   | $ | 842.7 |   | $ | 34.4 |   | $ | 2.4 |   | $ | 36.8 |   |
| Wood Products                                        |       | 206.2      |        | —                   |       | 132.4                                  |       | 338.6      |       | 34.7 |   | 6.2 |   | 41.0 |   |
| Paper                                                |       | 207.1      |        | 133.3                    |       | 9.7                                    |       | 350.1      |       | 10.1 |   | 13.8 |   | 23.9 |   |
| Packaging &  Newsprint                      |       | 161.1      |        | —                   |       | 22.4                                   |       | 183.5      |       | 6.3 |   | 9.2 |   | 15.5 |   |
| Corporate and  Other                                 |       | 6.1        |        | —                   |       | 11.7                                   |       | 17.8       |       | (5.1 | ) | 1.4 |   | (3.7 | ) |
|                                                 |       | 1,423.0    |        | 133.3                    |       | 176.4                                  |       | 1,732.7    |       | 80.4 |   | 33.0 |   | 113.5 |   |
| Intersegment  eliminations                           |       | —     |        | —                   |       | (176.4                                 | )          | (176.4     | )          | — |   | — |   | — |   |
| Interest expense                                     |       | —     |        | —                   |       | —                                 |       | —     |       | (31.1 | ) | — |   | — |   |
| Interest income                                      |       | —     |        | —                   |       | —                                 |       | —     |       | 0.4 |   | — |   | — |   |
| ** **                                           | ** ** | **$**      | **1,423.0** | ** **               | **$**      | **133.3**                              | ** ** | **$**      | **—** | ** ** | **$** | **1,556.3** | ** ** | **$** | **49.7** | ** ** | **$** | **33.0** | ** ** | **$** | **113.5** | ** ** |

22

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| ** **                                     | ** ** | ** ** | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Deprecation,** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|-------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                     | ** ** | **Sales**  | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** ** | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**          | ** ** | **EBITDA** | ** ** |
| ** **                                     | ** ** | **Trade**  | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**    | ** ** | **(f)**    | ** ** |
|                                           |       |       |        |        |       |              |       | (millions) |       |       |       |             |       |       |       |
| **Nine  Months Ended September 30, 2006** |       |       |        |        |       |              |       |       |       |       |       |             |       |       |       |
| Building  Materials Distribution               |       | $          | 2,351.1     |        | $          | —            |       | $          | 0.1        |       | $          | 2,351.2          |       | $          | 63.3       |   | $ | 7.1 |   | $ | 70.4 |   |
| Wood Products                                  |       | 545.4      |        | —      |       | 381.0             |       | 926.4      |       | 41.6       |       | 20.1             |       | 61.7       |       |
| Paper                                          |       | 658.7      |        | 424.9       |       | 41.9              |       | 1,125.5    |       | 44.8       |       | 45.8             |       | 90.5       |       |
| Packaging &  Newsprint                |       | 516.5      |        | —      |       | 59.9              |       | 576.4      | (a)        | 31.7       |       | 37.5             |       | 69.2       |       |
| Corporate and  Other                           |       | 13.8       |        | —      |       | 33.5              |       | 47.3       |       | (26.1      | )(b)       | 3.9              |       | (22.1      | )(b)       |
|                                           |       | 4,085.5    |        | 424.9       |       | 516.4             |       | 5,026.8    |       | 155.3      |       | 114.4            |       | 269.7      |       |
| Intersegment  eliminations                     |       | —     |        | —      |       | (516.4            | )          | (516.4     | )          | —     |       | —           |       | —     |       |
| Interest expense                               |       | —     |        | —      |       | —            |       | —     |       | (87.2      | )          | —           |       | —     |       |
| Interest income                                |       | —     |        | —      |       | —            |       | —     |       | 2.4        |       | —           |       | —     |       |
| ** **                                     | ** ** | **$**      | **4,085.5** | ** **  | **$**      | **424.9**         | ** ** | **$**      | **—** | ** ** | **$**      | **4,510.4**      | ** ** | **$**      | **70.5**   | ** ** | **$** | **114.4** | ** ** | **$** | **269.7** | ** ** |

 
| ** **                                            | ** ** | **Sales**  | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** **  | **Related**        | ** ** | **Inter-**                       | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                            | ** ** | **Trade**  | ** **  | **Party**          | ** ** | **segment**                      | ** ** | **Total**  | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(f)** | ** ** |
|                                                  |       |       |        |               |       |                             |       | (millions) |       |   |   |   |   |   |   |
| **Nine  Months Ended September 30, 2005**   |       |       |        |               |       |                             |       |       |       |   |   |   |   |   |   |
| Building  Materials Distribution                      |       | $          | 2,334.4     |               | $          | —                           |       | $          | 0.5        |   | $ | 2,334.9 |   | $ | 79.8 |   | $ | 6.7 |   | $ | 86.5 |   |
| Wood Products                                         |       | 620.3      |        | —             |       | 375.7                            |       | 996.0      |       | 99.2 |   | 16.9 |   | 116.0 |   |
| Paper                                                 |       | 601.8      |        | 425.8              |       | 33.1                             |       | 1,060.7    |       | 66.5 |   | 40.2 |   | 106.6 |   |
| Packaging &  Newsprint                       |       | 483.1      |        | —             |       | 62.0                             |       | 545.1      |       | 20.9 |   | 27.7 |   | 48.5 |   |
| Corporate and  Other                                  |       | 17.8       |        | —             |       | 35.6                             |       | 53.4       |       | (28.0 | )(c) | 3.9 |   | (23.8 | )(c) |
|                                                  |       | 4,057.4    |        | 425.8              |       | 506.9                            |       | 4,990.1    |       | 238.4 |   | 95.4 |   | 333.8 |   |
| Intersegment  eliminations                            |       | —     |        | —             |       | (506.9                           | )          | (506.9     | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate swaps (d) |       | —     |        | —             |       | —                           |       | —     |       | 9.9 |   | — |   | — |   |
| Interest  expense (e)                            |       | —     |        | —             |       | —                           |       | —     |       | (137.5 | ) | — |   | — |   |
| Interest income                                       |       | —     |        | —             |       | —                           |       | —     |       | 2.2 |   | — |   | — |   |
| ** **                                            | ** ** | **$**      | **4,057.4** | ** **         | **$**      | **425.8**                        | ** ** | **$**      | **—** | ** ** | **$** | **4,483.2** | ** ** | **$** | **113.0** | ** ** | **$** | **95.4** | ** ** | **$** | **333.8** | ** ** |

 

----

(a)           Includes the impact of adopting EITF 04-13 effective January 1,2006, which required us to report our inventory buy/sell transactions with thesame counterparty on a net basis. See Note 15, New and Recently AdoptedAccounting Standards.

(b)           Includes a $3.7 million gain for changes in our retiree healthcareprograms and a $1.7 million loss related to the sale of our headquartersbuilding.

(c)           Includes $3.6 million for the write-off of costs incurred inconnection with the canceled initial public offering.

(d)           Includes the change in the fair value of interest rate swaps related toour amended and restated senior credit facilities.

(e)           Includes the write-off of $43.0 million of deferred financing costsresulting from the repayment of the Tranche B term loan.

(f)            EBITDA represents income (loss) beforeinterest (interest expense, interest income, and change in fair value ofinterest rate swaps), income tax provision (benefit), and depreciation,amortization, and depletion. EBITDA is the primary measure used by our chiefoperating decision makers to evaluate segment operating performance and todecide how to allocate resources to segments. We believe EBITDA is useful toinvestors because it provides a means to evaluate the operating performance ofour segments and our company on an ongoing basis using criteria that are usedby our internal decision makers and because it is frequently used by investorsand other interested parties in the evaluation of companies with substantialfinancial leverage. We believe EBITDA is a meaningful measure because itpresents a transparent view of our 

23

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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 practices (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, change in the fair value of interest rateswaps, and associated significant cash requirements; and the exclusion ofdepreciation, amortization, and depletion, which represent significant andunavoidable operating costs, given the level of our indebtedness and thecapital expenditures needed to maintain our businesses. Management compensatesfor these limitations by relying on our GAAP results. Our measures of EBITDAare not necessarily comparable to other similarly titled captions of othercompanies due to potential inconsistencies in the methods of calculation.

The following is a reconciliation of net income toEBITDA:
|                                              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                   | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                         |       |                                                |       | (millions)                                         |       |   |   |
|                                         |       |                                                |       |                                               |       |   |   |   |   |
| Net income                                   |       | $                                                   | 34.9       |                                               | $          | 28.5 |   | $ | 68.4 |   | $ | 78.7 |   |
| Change in fair  value of interest rate swaps |       | —                                              |       | —                                             |       | — |   | (9.9 | ) |
| Interest expense                             |       | 28.4                                                |       | 31.1                                               |       | 87.2 |   | 137.5 |   |
| Interest income                              |       | (0.9                                                | )          | (0.4                                               | )          | (2.4 | ) | (2.2 | ) |
| Income tax  provision                        |       | 0.6                                                 |       | 21.3                                               |       | 2.1 |   | 34.2 |   |
| Depreciation,  amortization, and depletion   |       | 39.3                                                |       | 33.0                                               |       | 114.4 |   | 95.4 |   |
| EBITDA                                       | ** ** | **$**                                               | **102.3**  | ** **                                         | **$**      | **113.5** | ** ** | **$** | **269.7** | ** ** | **$** | **333.8** | ** ** |

***19.******          Commitments andGuarantees***

*Commitments*

As discussed in Notes 1, 6, and 11 of “Item 8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K, we have commitmentsfor timber contracts, leases, and long-term debt. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business. Except as disclosed below, at September 30,2006, there have been no material changes to our contractual obligationsoutside the normal course of business.

During the nine months ended September 30, 2006, we decreased theamount of borrowings secured under our accounts receivable securitizationprogram from $80.0 million at December 31, 2005, to $70.0 millionat September 30, 2006. Additionally, we prepaid $96.9 million on ourTranche D term loan with $38.2 million of proceeds from asset sales,$25.6 million of proceeds from unwinding and resetting the fixed interestrate we pay under our interest rate swap agreements, and other cash flows.

# *Guarantees*

We provideguarantees, indemnifications, and assurances to others, which constituteguarantees as defined under FIN No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others*. Note 17,Commitments and Guarantees, of “Item 8. Consolidated Financial Statements and Supplementary Data” in our 2005Annual Report on Form 10-K, 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. Except as disclosed below, at September 30, 2006, there have beenno material changes to the guarantees disclosed in our 2005 Annual Report onForm 10-K.

In August 2006, Boise Building Solutions Distribution, L.L.C., aconsolidated subsidiary, sold and leased back two distribution facilities. Underthe operating leases, we guaranteed the performance and 

24

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payment obligations of our consolidated subsidiary, Boise BuildingSolutions Distribution, L.L.C. Our exposure is limited to the minimum leasepayment requirements under the leases, which we have included in our futurelease payment stream in Note 7, Leases.

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

The followingconsolidating financial information presents the Statements of Income (Loss),Balance Sheets, and Cash Flows related to our business. The senior notes areguaranteed on a senior basis, and the senior subordinated notes are guaranteedon a senior subordinated basis, in each case jointly and severally by Boise,Timber Holdings, and each of their existing and future subsidiaries (other thanthe co-issuers, Boise LLC and Boise Cascade Finance Corporation). Thenonguarantors include our foreign subsidiaries and Birch Creek. Other than theconsolidated financial statements and footnotes for Boise Cascade Holdings,L.L.C., and Boise Land & Timber Holdings Corp., financial statementsand other disclosures concerning the guarantors have not been presented becausemanagement believes that such information is not material to investors. SeeExhibit 99 of this Form 10-Q for Boise Land & TimberHoldings Corp. consolidated financial statements and notes to consolidatedfinancial statements.

25

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

**ConsolidatingStatements of Income (Loss)**

**Forthe Three Months Ended September 30, 2006**
|                                                                                      | ** ** | **Boise   Cascade  Holdings,  L.L.C.   (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | **(thousands)**                   | ** ** | ** **                            | ** ** | ** **       | ** ** |
| **Sales**                                                                            | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                                           | —     |                                    | $          | —                            |       | $                                     | 1,317,055  |             | $          | 15,132           |       | $ | — |   | $ | 1,332,187 |   |
| Intercompany                                                                         |       | —                                                      |       | 855                                     |       | 2                                 |       | 20,670                                |       | (21,527          | )          | —           |       |
| Related parties                                                                      |       | —                                                      |       | —                                  |       | 148,159                           |       | —                                |       | —           |       | 148,159          |       |
|                                                                                 |       | —                                                      |       | 855                                     |       | 1,465,216                         |       | 35,802                                |       | (21,527          | )          | 1,480,346        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                            | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                                      |       | 2,931                                   |       | 1,268,896                         |       | 27,703                                |       | (12,767          | )          | 1,286,763        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                                      |       | 977                                     |       | 37,219                            |       | 1,078                                 |       | —           |       | 39,274           |       |
| Selling and  distribution expenses                                                   |       | —                                                      |       | —                                  |       | 71,029                            |       | 526                                   |       | —           |       | 71,555           |       |
| General and  administrative expenses                                            |       | —                                                      |       | 5,590                                   |       | 22,173                            |       | 722                                   |       | (8,760           | )          | 19,725           |       |
| Other (income)  expense, net                                                         |       | —                                                      |       | 72                                      |       | (931                              | )          | 754                                   |       | —           |       | (105             | )          |
|                                                                                 |       | —                                                      |       | 9,570                                   |       | 1,398,386                         |       | 30,783                                |       | (21,527          | )          | 1,417,212        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                                      |       | (8,715                                  | )          | 66,830                            |       | 5,019                                 |       | —           |       | 63,134           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                                      |       | (182                                    | )          | (125                              | )          | 218                                   |       | —           |       | (89              | )          |
| Interest expense                                                                     |       | —                                                      |       | (25,649                                 | )          | —                            |       | (2,751                                | )          | —           |       | (28,400          | )          |
| Interest  expense—intercompany                                                  |       | —                                                      |       | (133                                    | )          | —                            |       | (5,555                                | )          | 5,688            |       | —           |       |
| Interest income                                                                      |       | —                                                      |       | 844                                     |       | 37                                |       | 28                                    |       | —           |       | 909              |       |
| Interest  income—intercompany                                                   |       | —                                                      |       | 47                                      |       | 5,641                             |       | —                                |       | (5,688           | )          | —           |       |
|                                                                                 |       | —                                                      |       | (25,073                                 | )          | 5,553                             |       | (8,060                                | )          | —           |       | (27,580          | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                                      |       | (33,788                                 | )          | 72,383                            |       | (3,041                                | )          | —           |       | 35,554           |       |
| Income tax  provision                                                                |       | —                                                      |       | (5                                      | )          | (611                              | )          | —                                |       | —           |       | (616             | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                                      |       | (33,793                                 | )          | 71,772                            |       | (3,041                                | )          | —           |       | 34,938           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                  |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 34,938                                                      |       | 68,731                                  |       | —                            |       | —                                |       | (103,669         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                                       | **34,938** | ** **                              | **$**      | **34,938**                        | ** ** | **$**                                 | **71,772** | ** **       | **$**      | **(3,041**       | **)**      | **$** | **(103,669** | **)** | **$** | **34,938** | ** ** |

 

26

----

 

**Boise Cascade Holdings, L.L.C., andSubsidiaries****Consolidating Statements of Income (Loss)****Forthe Three Months Ended September 30, 2005**
| ** **                                                                           | ** ** | **Boise   Cascade  Holdings,  L.L.C.   (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | **(thousands)**                   | ** ** | ** **                              | ** ** | ** **       | ** ** |
| **Sales**                                                                            | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                                           | —     |                                    | $          | —                            |       | $                                       | 1,405,686  |             | $          | 17,319           |       | $ | — |   | $ | 1,423,005 |   |
| Intercompany                                                                         |       | —                                                      |       | 855                                     |       | 3,020                             |       | 14,040                                  |       | (17,915          | )          | —           |       |
| Related parties                                                                      |       | —                                                      |       | —                                  |       | 133,292                           |       | —                                  |       | —           |       | 133,292          |       |
|                                                                                 |       | —                                                      |       | 855                                     |       | 1,541,998                         |       | 31,359                                  |       | (17,915          | )          | 1,556,297        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                                      |       | 271                                     |       | 1,345,277                         |       | 31,131                                  |       | (17,915          | )          | 1,358,764        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                                      |       | 948                                     |       | 31,155                            |       | 941                                     |       | —           |       | 33,044           |       |
| Selling and  distribution expenses                                                   |       | —                                                      |       | —                                  |       | 68,613                            |       | 572                                     |       | —           |       | 69,185           |       |
| General and  administrative expenses                                            |       | —                                                      |       | 6,660                                   |       | 9,201                             |       | —                                  |       | —           |       | 15,861           |       |
| Other (income)  expense, net                                                         |       | —                                                      |       | 36                                      |       | (772                              | )          | 796                                     |       | —           |       | 60               |       |
|                                                                                 |       | —                                                      |       | 7,915                                   |       | 1,453,474                         |       | 33,440                                  |       | (17,915          | )          | 1,476,914        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                                      |       | (7,060                                  | )          | 88,524                            |       | (2,081                                  | )          | —           |       | 79,383           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                                      |       | 3,987                                   |       | 278                               |       | (3,226                                  | )          | —           |       | 1,039            |       |
| Interest expense                                                                     |       | —                                                      |       | (31,054                                 | )          | —                            |       | (1                                      | )          | —           |       | (31,055          | )          |
| Interest  expense—intercompany                                                  |       | —                                                      |       | (71                                     | )          | —                            |       | (357                                    | )          | 428              |       | —           |       |
| Interest income                                                                      |       | —                                                      |       | 282                                     |       | 71                                |       | 14                                      |       | —           |       | 367              |       |
| Interest  income—intercompany                                                   |       | —                                                      |       | 357                                     |       | 71                                |       | —                                  |       | (428             | )          | —           |       |
|                                                                                 |       | —                                                      |       | (26,499                                 | )          | 420                               |       | (3,570                                  | )          | —           |       | (29,649          | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                                      |       | (33,559                                 | )          | 88,944                            |       | (5,651                                  | )          | —           |       | 49,734           |       |
| Income tax  (provision) benefit                                                      |       | (20,705                                                     | )          | (12                                     | )          | (572                              | )          | 29                                      |       | —           |       | (21,260          | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (20,705                                                     | )          | (33,571                                 | )          | 88,372                            |       | (5,622                                  | )          | —           |       | 28,474           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 49,179                                                      |       | 82,750                                  |       | —                            |       | —                                  |       | (131,929         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                                       | **28,474** | ** **                              | **$**      | **49,179**                        | ** ** | **$**                                   | **88,372** | ** **       | **$**      | **(5,622**       | **)**      | **$** | **(131,929** | **)** | **$** | **28,474** | ** ** |

 

27

----

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Nine Months Ended September 30,2006**
| ** **                                                                           | ** ** | **Boise   Cascade  Holdings,  L.L.C.   (Parent)** | ** ** | **Boise   Cascade,   L.L.C.** | ** ** | **Guarantor   Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|-------------|------------------|------------|------------------|------------|
|                                                                                 |       |                                                        |       |                                    |       | (thousands)                       |       |                                    |        |             |       |
| **Sales**                                                                            | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** **  | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                                           | —     |                                    | $          | —                            |       | $                                       | 4,037,032   |             | $          | 48,437           |       | $ | — |   | $ | 4,085,469 |   |
| Intercompany                                                                         |       | —                                                      |       | 3,422                                   |       | 1,238                             |       | 59,494                                  |        | (64,154          | )          | —           |       |
| Related parties                                                                      |       | —                                                      |       | —                                  |       | 424,929                           |       | —                                  |        | —           |       | 424,929          |       |
|                                                                                 |       | —                                                      |       | 3,422                                   |       | 4,463,199                         |       | 107,931                                 |        | (64,154          | )          | 4,510,398        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| **Costs and expenses**                                                               | ** ** | ** **                                                  | ** ** | ** **                              | ** ** | ** **                        | ** ** | ** **                              | ** **  | ** **       | ** ** | ** **       | ** ** |
| Materials, labor, and  other operating expenses                                      |       | —                                                      |       | 4,325                                   |       | 3,908,329                         |       | 89,745                                  |        | (42,634          | )          | 3,959,765        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                                      |       | 2,844                                   |       | 108,404                           |       | 3,142                                   |        | —           |       | 114,390          |       |
| Selling and  distribution expenses                                                   |       | —                                                      |       | —                                  |       | 212,527                           |       | 1,712                                   |        | —           |       | 214,239          |       |
| General and  administrative expenses                                            |       | —                                                      |       | 26,091                                  |       | 60,801                            |       | 1,973                                   |        | (21,520          | )          | 67,345           |       |
| Other (income) expense,  net                                                         |       | —                                                      |       | 419                                     |       | (1,819                            | )          | 2,403                                   |        | —           |       | 1,003            |       |
|                                                                                 |       | —                                                      |       | 33,679                                  |       | 4,288,242                         |       | 98,975                                  |        | (64,154          | )          | 4,356,742        |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| **Income (loss) from operations**                                                    |       | —                                                      |       | (30,257                                 | )          | 174,957                           |       | 8,956                                   |        | —           |       | 153,656          |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| Foreign exchange gain  (loss)                                                        |       | —                                                      |       | 4,511                                   |       | 278                               |       | (3,139                                  | )           | —           |       | 1,650            |       |
| Interest expense                                                                     |       | —                                                      |       | (79,436                                 | )          | —                            |       | (7,750                                  | )           | —           |       | (87,186          | )          |
| Interest  expense—intercompany                                                  |       | —                                                      |       | (379                                    | )          | —                            |       | (14,067                                 | )           | 14,446           |       | —           |       |
| Interest income                                                                      |       | —                                                      |       | 2,230                                   |       | 156                               |       | 61                                      |        | —           |       | 2,447            |       |
| Interest  income—intercompany                                                   |       | —                                                      |       | 160                                     |       | 14,286                            |       | —                                  |        | (14,446          | )          | —           |       |
|                                                                                 |       | —                                                      |       | (72,914                                 | )          | 14,720                            |       | (24,895                                 | )           | —           |       | (83,089          | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| **Income (loss) before income  taxes and equity in net income (loss) of affiliates** |       | —                                                      |       | (103,171                                | )          | 189,677                           |       | (15,939                                 | )           | —           |       | 70,567           |       |
| Income tax provision                                                                 |       | —                                                      |       | (10                                     | )          | (2,129                            | )          | —                                  |        | —           |       | (2,139           | )          |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| **Income (loss) before equity in  net income (loss) of affiliates**                  |       | —                                                      |       | (103,181                                | )          | 187,548                           |       | (15,939                                 | )           | —           |       | 68,428           |       |
|                                                                                 |       |                                                        |       |                                    |       |                              |       |                                    |        |             |       |             |       |
| **Equity in net income (loss) of  affiliates**                                       |       | 68,428                                                      |       | 171,609                                 |       | —                            |       | —                                  |        | (240,037         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                                       | **68,428** | ** **                              | **$**      | **68,428**                        | ** ** | **$**                                   | **187,548** | ** **       | **$**      | **(15,939**      | **)**      | **$** | **(240,037** | **)** | **$** | **68,428** | ** ** |

 

28

----

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

**Consolidating Statements ofIncome (Loss)**

**For the NineMonths Ended September 30, 2005**
|                                                                                      | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| Trade                                                                                |       | $                                               | —     |                              | $          | —                      |       | $                                       | 4,006,126   |             | $          | 51,280           |       | $ | — |   | $ | 4,057,406 |   |
| Intercompany                                                                         |       | —                                          |       | 1,711                             |       | 7,497                       |       | 42,304                                  |        | (51,512          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                            |       | 425,773                     |       | —                                  |        | —           |       | 425,773          |       |
|                                                                                 |       | —                                          |       | 1,711                             |       | 4,439,396                   |       | 93,584                                  |        | (51,512          | )          | 4,483,179        |       |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| **Costs and expenses**                                                               |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| Materials, labor, and  other operating expenses                                      |       | —                                          |       | 1,215                             |       | 3,835,283                   |       | 93,845                                  |        | (51,512          | )          | 3,878,831        |       |
| Fiber costs from  related parties                                                    |       | —                                          |       | —                            |       | 17,609                      |       | —                                  |        | —           |       | 17,609           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 2,784                             |       | 90,082                      |       | 2,527                                   |        | —           |       | 95,393           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                            |       | 194,395                     |       | 1,552                                   |        | —           |       | 195,947          |       |
| General and  administrative expenses                                            |       | —                                          |       | 24,003                            |       | 29,070                      |       | 28                                      |        | —           |       | 53,101           |       |
| Other (income) expense,  net                                                         |       | —                                          |       | 3,686                             |       | (2,694                      | )          | 2,856                                   |        | —           |       | 3,848            |       |
|                                                                                 |       | —                                          |       | 31,688                            |       | 4,163,745                   |       | 100,808                                 |        | (51,512          | )          | 4,244,729        |       |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| **Income (loss) from operations**                                                    |       | —                                          |       | (29,977                           | )          | 275,651                     |       | (7,224                                  | )           | —           |       | 238,450          |       |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| Foreign exchange gain  (loss)                                                        |       | —                                          |       | 4,027                             |       | 47                          |       | (4,076                                  | )           | —           |       | (2               | )          |
| Change in fair value of  interest rate swaps                                         |       | —                                          |       | 9,886                             |       | —                      |       | —                                  |        | —           |       | 9,886            |       |
| Interest expense                                                                     |       | —                                          |       | (137,495                          | )          | —                      |       | (4                                      | )           | —           |       | (137,499         | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (126                              | )          | —                      |       | (738                                    | )           | 864              |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 1,900                             |       | 210                         |       | 41                                      |        | —           |       | 2,151            |       |
| Interest income—intercompany                                                    |       | —                                          |       | 738                               |       | 126                         |       | —                                  |        | (864             | )          | —           |       |
|                                                                                 |       | —                                          |       | (121,070                          | )          | 383                         |       | (4,777                                  | )           | —           |       | (125,464         | )          |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| **Income (loss) before income  taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (151,047                          | )          | 276,034                     |       | (12,001                                 | )           | —           |       | 112,986          |       |
| Income tax provision                                                                 |       | (32,564                                         | )          | (106                              | )          | (1,552                      | )          | (20                                     | )           | —           |       | (34,242          | )          |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| **Income (loss) before equity in  net income (loss) of affiliates**                  |       | (32,564                                         | )          | (151,153                          | )          | 274,482                     |       | (12,021                                 | )           | —           |       | 78,744           |       |
|                                                                                 |       |                                            |       |                              |       |                        |       |                                    |        |             |       |             |       |
| **Equity in net income (loss) of  affiliates**                                       |       | 111,308                                         |       | 262,461                           |       | —                      |       | —                                  |        | (373,769         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                           | **78,744** | ** **                        | **$**      | **111,308**                 | ** ** | **$**                                   | **274,482** | ** **       | **$**      | **(12,021**      | **)**      | **$** | **(373,769** | **)** | **$** | **78,744** | ** ** |

 

29

----

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

**September 30, 2006**
| ** **                       | ** ** | **Boise  Cascade**  | ** **  | ** **   | ** ** | ** **       | ** ** | ** **       | ** **    | ** **       | ** ** | ** **       | ** ** |
|----------------------------------|------------|---------------------|-------------|--------------|------------|------------------|------------|------------------|---------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **Holdings, ** | ** **  | **Boise**    | ** ** | ** **       | ** ** | **Non-**         | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                       | ** ** | **L.L.C. **    | ** **  | **Cascade,** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                       | ** ** | **(Parent)**        | ** **  | **L.L.C.**   | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                       | ** ** | **(thousands)**     | ** **  |
| **ASSETS**                       |       |                |        |         |       |             |       |             |          |             |       |             |       |
| ** **                       |       |                |        |         |       |             |       |             |          |             |       |             |       |
| **Current**                      |       |                |        |         |       |             |       |             |          |             |       |             |       |
| Cash and cash  equivalents       |       | $                   | —      |         | $          | 57,519           |       | $                | 33            |             | $          | 2,324            |       | $ | — |   | $ | 59,876 |   |
| Receivables                      |       |                |        |         |       |             |       |             |          |             |       |             |       |
| Trade, less  allowances          |       | —              |        | —       |       | 3,021            |       | 405,195          |          | —           |       | 408,216          |       |
| Intercompany                     |       | —              |        | —       |       | 3,473            |       | 1,801            |          | (5,274           | )          | —           |       |
| Related parties                  |       | —              |        | —       |       | 3,970            |       | 43,167           |          | —           |       | 47,137           |       |
| Other                            |       | —              |        | 1,125        |       | 10,322           |       | 2,197            |          | —           |       | 13,644           |       |
| Inventories                      |       | —              |        | 18           |       | 643,727          |       | 19,953           |          | —           |       | 663,698          |       |
| Other                            |       | —              |        | 6,698        |       | 8,619            |       | 735              |          | —           |       | 16,052           |       |
|                             |       | —              |        | 65,360       |       | 673,165          |       | 475,372          |          | (5,274           | )          | 1,208,623        |       |
| ** **                       |       |                |        |         |       |             |       |             |          |             |       |             |       |
| **Property**                     |       |                |        |         |       |             |       |             |          |             |       |             |       |
| Property and equipment           |       |                |        |         |       |             |       |             |          |             |       |             |       |
| Land and land  improvements      |       | —              |        | —       |       | 67,930           |       | 820              |          | —           |       | 68,750           |       |
| Buildings and  improvements      |       | —              |        | 1,544        |       | 212,450          |       | 9,002            |          | —           |       | 222,996          |       |
| Machinery and  equipment         |       | —              |        | 10,119       |       | 1,358,107        |       | 35,401           |          | —           |       | 1,403,627        |       |
|                             |       | —              |        | 11,663       |       | 1,638,487        |       | 45,223           |          | —           |       | 1,695,373        |       |
| Accumulated  depreciation        |       | —              |        | (3,201       | )          | (226,865         | )          | (13,473          | )             | —           |       | (243,539         | )          |
|                             |       | —              |        | 8,462        |       | 1,411,622        |       | 31,750           |          | —           |       | 1,451,834        |       |
|                             |       |                |        |         |       |             |       |             |          |             |       |             |       |
| Fiber farms and timber  deposits |       | —              |        | —       |       | 27,488           |       | 12,262           |          | —           |       | 39,750           |       |
|                             |       | —              |        | 8,462        |       | 1,439,110        |       | 44,012           |          | —           |       | 1,491,584        |       |
| ** **                       |       |                |        |         |       |             |       |             |          |             |       |             |       |
| **Deferred financing costs**     |       | —              |        | 32,656       |       | —           |       | 362              |          | —           |       | 33,018           |       |
| **Goodwill**                     |       | —              |        | —       |       | 21,846           |       | —           |          | —           |       | 21,846           |       |
| **Intangible assets**            |       | —              |        | —       |       | 38,459           |       | —           |          | —           |       | 38,459           |       |
| **Investments in affiliates**    |       | 512,489             |        | 642,196      |       | —           |       | —           |          | (1,154,685       | )          | —           |       |
| **Other assets**                 |       | —              |        | 9,063        |       | 16,621           |       | 2,992            |          | —           |       | 28,676           |       |
| **Total assets**                 | ** ** | **$**               | **512,489** | ** **   | **$**      | **757,737**      | ** ** | **$**            | **2,189,201** | ** **       | **$**      | **522,738**      | ** ** | **$** | **(1,159,959** | **)** | **$** | **2,822,206** | ** ** |

** **

30

----

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets**

**September 30,2006 (continued)**
| ** **                                  | ** ** | **Boise  Cascade**  | ** **  | ** **   | ** ** | ** **       | ** ** | ** **          | ** **    | ** **       | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|---------------------|-------------|--------------|------------|------------------|------------|---------------------|---------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **Holdings, ** | ** **  | **Boise**    | ** ** | ** **       | ** ** | **Non-**            | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | **L.L.C. **    | ** **  | **Cascade,** | ** ** | **Guarantor**    | ** ** | **Guarantor ** | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | **(Parent)**        | ** **  | **L.L.C.**   | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**    | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                  | ** ** | **(thousands)**     | ** **  |
| **LIABILITIES AND CAPITAL**                 |       |                |        |         |       |             |       |                |          |             |       |             |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Current**                                 |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Accounts payable                            |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Trade                                       |       | $                   | —      |         | $          | 24,814           |       | $                   | 347,766       |             | $          | 3,845            |       | $ | — |   | $ | 376,425 |   |
| Intercompany                                |       | —              |        | 2,753        |       | 1,317            |       | 1,204               |          | (5,274           | )          | —           |       |
| Accrued liabilities                         |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Compensation and  benefits                  |       | —              |        | 47,041       |       | 66,670           |       | 1,073               |          | —           |       | 114,784          |       |
| Interest payable                            |       | —              |        | 18,351       |       | —           |       | 806                 |          | —           |       | 19,157           |       |
| Other                                       |       | —              |        | 22,422       |       | 50,087           |       | 7,459               |          | —           |       | 79,968           |       |
|                                        |       | —              |        | 115,381      |       | 465,840          |       | 14,387              |          | (5,274           | )          | 590,334          |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Debt**                                    |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Long-term debt                              |       | —              |        | 1,188,900    |       | —           |       | 70,000              |          | —           |       | 1,258,900        |       |
| Note payable to related  party, net         |       | —              |        | 279,916      |       | —           |       | —              |          | —           |       | 279,916          |       |
|                                        |       | —              |        | 1,468,816    |       | —           |       | 70,000              |          | —           |       | 1,538,816        |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Other**                                   |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Compensation and  benefits                  |       | —              |        | 140,528      |       | —           |       | —              |          | —           |       | 140,528          |       |
| Other long-term  liabilities                |       | —              |        | 25,024       |       | 15,015           |       | —              |          | —           |       | 40,039           |       |
|                                        |       | —              |        | 165,552      |       | 15,015           |       | —              |          | —           |       | 180,567          |       |
|                                        |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Due to (from) affiliates**                |       | —              |        | (1,504,501   | )          | 1,145,528        |       | 358,973             |          | —           |       | —           |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Redeemable equity units**                 |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Series B  equity units                 |       | 9,647               |        | —       |       | —           |       | —              |          | —           |       | 9,647            |       |
| Series C  equity units                 |       | 5,641               |        | —       |       | —           |       | —              |          | —           |       | 5,641            |       |
| Redeemable  equity units                    |       | —              |        | 15,288       |       | —           |       | —              |          | (15,288          | )          | —           |       |
|                                        |       | 15,288              |        | 15,288       |       | —           |       | —              |          | (15,288          | )          | 15,288           |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Commitments and contingent  liabilities** |       |                |        |         |       |             |       |                |          |             |       |             |       |
| ** **                                  |       |                |        |         |       |             |       |                |          |             |       |             |       |
| **Capital**                                 |       |                |        |         |       |             |       |                |          |             |       |             |       |
| Series A equity units                       |       | 42,303              |        | —       |       | —           |       | —              |          | —           |       | 42,303           |       |
| Series B equity units                       |       | 445,668             |        | —       |       | —           |       | —              |          | —           |       | 445,668          |       |
| Series C equity units                       |       | 9,230               |        | —       |       | —           |       | —              |          | —           |       | 9,230            |       |
| Subsidiary equity                           |       | —              |        | 497,201      |       | 562,818          |       | 79,378              |          | (1,139,397       | )          | —           |       |
| **Total capital**                           |       | 497,201             |        | 497,201      |       | 562,818          |       | 79,378              |          | (1,139,397       | )          | 497,201          |       |
| **Total liabilities and capital**           | ** ** | **$**               | **512,489** | ** **   | **$**      | **757,737**      | ** ** | **$**               | **2,189,201** | ** **       | **$**      | **522,738**      | ** ** | **$** | **(1,159,959** | **)** | **$** | **2,822,206** | ** ** |

 

31

----

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

**Consolidating Balance Sheets**

**December 31, 2005**

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

** **

32

----

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets**

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

 

33

----

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Nine Months Ended September 30, 2006**
| ** **                                                                             | ** ** | **Boise  Cascade ** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **       | ** **  | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------|------------|------------------|------------|------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **Holdings,**            | ** ** | **Boise**    | ** ** | ** **       | ** ** | **Non-**         | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **L.L.C. **         | ** ** | **Cascade,** | ** ** | **Guarantor**    | ** ** | **Guarantor**    | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                             | ** ** | **(Parent)**             | ** ** | **L.L.C.**   | ** ** | **Subsidiaries** | ** ** | **Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**          | ** ** |
| ** **                                                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| **Cash provided by (used  for) operations**                                       |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Net income (loss)                                                                      |       | $                        | 68,428     |         | $          | 68,428           |       | $                | 187,548     |             | $          | (15,939          | )          | $ | (240,037 | ) | $ | 68,428 |   |
| Items in net income  (loss) not using (providing) cash                                 |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Equity in net  (income) loss of affiliates                                             |       | (68,428                  | )          | (171,609     | )          | —           |       | —           |        | 240,037          |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | —                   |       | 4,952        |       | 108,405          |       | 3,272            |        | —           |       | 116,629          |       |
| Related-party  interest expense                                                        |       | —                   |       | 12,938       |       | —           |       | 14,067           |        | (14,446          | )          | 12,559           |       |
| Related-party interest  income                                                         |       | —                   |       | (160         | )          | (14,286          | )          | —           |        | 14,446           |       | —           |       |
| Deferred income  tax provision                                                         |       |                     |       | 3            |       | 147              |       | —           |        | —           |       | 150              |       |
| Pension and  other postretirement benefit expense                                      |       | —                   |       | 20,671       |       | —           |       | —           |        | —           |       | 20,671           |       |
| Gain on changes  in retiree healthcare programs                                        |       | —                   |       | (3,741       | )          | —           |       | —           |        | —           |       | (3,741           | )          |
| Management  equity units expense                                                  |       | —                   |       | 2,750        |       | —           |       | —           |        | —           |       | 2,750            |       |
| Other                                                                                  |       | —                   |       | (4,084       | )          | 420              |       | 3,139            |        | —           |       | (525             | )          |
| Decrease (increase) in  working capital, net of acquisitions                           |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Receivables                                                                            |       | —                   |       | 10,154       |       | 7,478            |       | (72,156          | )           | —           |       | (54,524          | )          |
| Inventories                                                                            |       | —                   |       | 106          |       | (27,450          | )          | 3,288            |        | —           |       | (24,056          | )          |
| Accounts payable  and accrued liabilities                                         |       | —                   |       | (3,969       | )          | 37,520           |       | 4,855            |        | —           |       | 38,406           |       |
| Pension and other  postretirement benefit payments                                     |       | —                   |       | (842         | )          | —           |       | —           |        | —           |       | (842             | )          |
| Income taxes payable                                                                   |       | —                   |       | 366          |       | (2,013           | )          | —           |        | —           |       | (1,647           | )          |
| Other                                                                                  |       | —                   |       | 3,724        |       | (662             | )          | (218             | )           | —           |       | 2,844            |       |
| Cash provided by  (used for) operations                                                |       | —                   |       | (60,313      | )          | 297,107          |       | (59,692          | )           | —           |       | 177,102          |       |
| ** **                                                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| **Cash provided by (used for) investment**                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Expenditures for  property and equipment                                          |       | —                   |       | (2,125       | )          | (100,418         | )          | (2,552           | )           | —           |       | (105,095         | )          |
| Acquisitions of  businesses and facilities                                             |       | —                   |       | —       |       | (42,549          | )          | —           |        | —           |       | (42,549          | )          |
| Sales of assets                                                                        |       | —                   |       | 27,744       |       | 15,209           |       | —           |        | —           |       | 42,953           |       |
| Investments in related  parties                                                        |       | 19,130                   |       | 171,609      |       | —           |       | —           |        | (190,739         | )          | —           |       |
| Other                                                                                  |       | —                   |       | 4,429        |       | 790              |       | (2,956           | )           | —           |       | 2,263            |       |
| Cash provided by  (used for) investment                                           |       | 19,130                   |       | 201,657      |       | (126,968         | )          | (5,508           | )           | (190,739         | )          | (102,428         | )          |
| ** **                                                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| **Cash provided by (used for)  financing**                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Issuances of long-term  debt                                                           |       | —                   |       | 68,300       |       | —           |       | 225,000          |        | —           |       | 293,300          |       |
| Payments of long-term  debt                                                            |       | —                   |       | (165,200     | )          | —           |       | (235,000         | )           | —           |       | (400,200         | )          |
| Tax distributions to  members                                                          |       | (19,206                  | )          | —       |       | —           |       | —           |        | —           |       | (19,206          | )          |
| Tax distributions to  Boise Cascade Holdings, L.L.C.                                   |       | —                   |       | (19,206      | )          | —           |       | —           |        | 19,206           |       | —           |       |
| Note payable to related  party, net                                                    |       | —                   |       | (2,536       | )          | —           |       | —           |        | —           |       | (2,536           | )          |
| Proceeds from changes  in interest rate swaps                                     |       | —                   |       | 25,620       |       | —           |       | —           |        | —           |       | 25,620           |       |
| Proceeds from equity  units issued, net of repurchases                                 |       | 76                       |       | —       |       | —           |       | —           |        | (76              | )          | —           |       |
| Other                                                                                  |       | —                   |       | 61           |       | —           |       | (8               | )           | —           |       | 53               |       |
| Cash provided by  (used for) financing                                                 |       | (19,130                  | )          | (92,961      | )          | —           |       | (10,008          | )           | 19,130           |       | (102,969         | )          |
|                                                                                   |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                   |       | (78,816      | )          | (184,392         | )          | 91,599           |        | 171,609          |       | —           |       |
| ** **                                                                             |       |                     |       |         |       |             |       |             |        |             |       |             |       |
| **Increase (decrease) in cash and  cash equivalents**                             |       | —                   |       | (30,433      | )          | (14,253          | )          | 16,391           |        | —           |       | (28,295          | )          |
| **Balance at beginning of the  period**                                                |       | —                   |       | 88,171       |       | —           |       | —           |        | —           |       | 88,171           |       |
| **Balance at end of the period**                                                       | ** ** | **$**                    | **—** | ** **   | **$**      | **57,738**       | ** ** | **$**            | **(14,253** | **)**            | **$**      | **16,391**       | ** ** | **$** | **—** | ** ** | **$** | **59,876** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries****Consolidating Statementsof Cash Flows**

**For theNine Months Ended September 30, 2005**
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash provided by (used  for) operations**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                      |       | $                                               | 78,744     |                              | $          | 111,308                     |       | $                                 | 274,482    |             | $          | (12,021          | )          | $ | (373,769 | ) | $ | 78,744 |   |
| Items in net income not  using (providing) cash                                        |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Equity in net (income)  loss of affiliates                                             |       | (111,308                                        | )          | (262,461                          | )          | —                      |       | —                            |       | 373,769          |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | —                                          |       | 53,258                            |       | 90,082                      |       | 2,527                             |       | —           |       | 145,867          |       |
| Related-party  interest expense                                                        |       | —                                          |       | 13,690                            |       | —                      |       | —                            |       | —           |       | 13,690           |       |
| Deferred income  tax provision (benefit)                                               |       | 21,616                                          |       | (584                              | )          | —                      |       | —                            |       | —           |       | 21,032           |       |
| Pension and  other postretirement benefit expense                                 |       | —                                          |       | 21,388                            |       | —                      |       | —                            |       | —           |       | 21,388           |       |
| Change in fair  value of interest rate swaps                                           |       | —                                          |       | (9,886                            | )          | —                      |       | —                            |       | —           |       | (9,886           | )          |
| Management  equity units expense                                                  |       | —                                          |       | 2,188                             |       | —                      |       | —                            |       | —           |       | 2,188            |       |
| Other                                                                                  |       | —                                          |       | (5,370                            | )          | (47                         | )          | 4,076                             |       | —           |       | (1,341           | )          |
| Decrease (increase) in  working capital                                                |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | (4,637                                          | )          | (6,291                            | )          | (107,845                    | )          | (7,680                            | )          | 4,637            |       | (121,816         | )          |
| Inventories                                                                            |       | —                                          |       | (5,147                            | )          | (13,402                     | )          | (7,918                            | )          | —           |       | (26,467          | )          |
| Accounts payable  and accrued liabilities                                         |       | —                                          |       | 8,874                             |       | 86,578                      |       | 2,890                             |       | (4,637           | )          | 93,705           |       |
| Pension and other  postretirement benefit payments                                     |       | —                                          |       | (508                              | )          | —                      |       | —                            |       | —           |       | (508             | )          |
| Income taxes payable                                                                   |       | 4,637                                           |       | —                            |       | 1,287                       |       | (7                                | )          | —           |       | 5,917            |       |
| Other                                                                                  |       | —                                          |       | 10,363                            |       | (5,331                      | )          | (205                              | )          | —           |       | 4,827            |       |
| Cash provided by  (used for) operations                                                |       | (10,948                                         | )          | (69,178                           | )          | 325,804                     |       | (18,338                           | )          | —           |       | 227,340          |       |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash provided by (used  for) investment**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                          |       | —                                          |       | (3,974                            | )          | (107,095                    | )          | (5,722                            | )          | —           |       | (116,791         | )          |
| Sales of assets                                                                        |       | —                                          |       | —                            |       | 12,575                      |       | —                            |       | —           |       | 12,575           |       |
| Repayment of note receivable  from related party                                       |       | —                                          |       | 157,509                           |       | —                      |       | —                            |       | —           |       | 157,509          |       |
| Investments in related  parties                                                        |       | 34,328                                          |       | 262,461                           |       | —                      |       | —                            |       | (296,789         | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 3,854                             |       | 968                         |       | (4,168                            | )          | —           |       | 654              |       |
| Cash provided by  (used for) investment                                           |       | 34,328                                          |       | 419,850                           |       | (93,552                     | )          | (9,890                            | )          | (296,789         | )          | 53,947           |       |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash provided by (used for)  financing**                                             | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of long-term  debt                                                           |       | —                                          |       | 840,000                           |       | —                      |       | —                            |       | —           |       | 840,000          |       |
| Payments of long-term  debt                                                            |       | —                                          |       | (1,334,200                        | )          | —                      |       | —                            |       | —           |       | (1,334,200       | )          |
| Tax distributions to  members                                                          |       | (23,295                                         | )          | —                            |       | —                      |       | —                            |       | —           |       | (23,295          | )          |
| Tax distributions to  Boise Cascade Holdings, L.L.C.                                   |       | —                                          |       | (23,295                           | )          | —                      |       | —                            |       | 23,295           |       | —           |       |
| Note payable to related  party, net                                                    |       | —                                          |       | 251,042                           |       | —                      |       | —                            |       | —           |       | 251,042          |       |
| Repurchase of equity  units                                                            |       | (85                                             | )          | —                            |       | —                      |       | —                            |       | 85               |       | —           |       |
| Other                                                                                  |       | —                                          |       | (14,015                           | )          | —                      |       | —                            |       | 10,948           |       | (3,067           | )          |
| Cash used  for financing                                                          |       | (23,380                                         | )          | (280,468                          | )          | —                      |       | —                            |       | 34,328           |       | (269,520         | )          |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                                          |       | (58,767                           | )          | (232,232                    | )          | 28,538                            |       | 262,461          |       | —           |       |
|                                                                                   |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Increase in cash and  cash equivalents**                                        |       | —                                          |       | 11,437                            |       | 20                          |       | 310                               |       | —           |       | 11,767           |       |
| **Balance at beginning of the  period**                                                |       | —                                          |       | 160,559                           |       | 39                          |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance at end of the period**                                                       | ** ** | **$**                                           | **—** | ** **                        | **$**      | **171,996**                 | ** ** | **$**                             | **59**     | ** **       | **$**      | **3,057**        | ** ** | **$** | **—** | ** ** | **$** | **175,112** | ** ** |

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***21.          Legal Proceedings and Contingencies***

*LegalProceedings*

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

*Environmental Matters*

We are not currently involved in any materialenvironmental proceedings. OfficeMax retained responsibility for environmentalclaims and liabilities related to businesses, facilities, and other assets notpurchased by us in the Forest Products Acquisition. In addition, OfficeMaxindemnifies us for hazardous substance releases and other environmentalregulatory violations that relate to the businesses we purchased and thatoccurred before the Forest Products Acquisition or arose from pre-ForestProducts Acquisition operations. OfficeMax, however, may not have sufficientfunds to satisfy in full its indemnification obligations, and in some cases, wemay not be entitled to indemnification. Management does not believe that thepotential exposure to the company for environmental matters would have amaterial adverse effect on our financial position, results of operations, orcash flows even if OfficeMax failed to fulfill its indemnificationresponsibilities.
| ***ITEM  2.*** | ***MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*** |
|----------------|---------------------------------------------------------------------------------------------------|

This Management’s Discussion and Analysis of Financial Condition andResults of Operations includes statements regarding our expectations withrespect to our performance, liquidity, and capital resources. Such statements,along with any other nonhistorical statements in the discussion, are forwardlooking. These forward-looking statements are subject to numerous risks anduncertainties, including, but not limited to the risks and uncertainties describedin “Item 1A.  Risk Factors” of our2005 Annual Report on Form 10-K, as well as those factors listed in otherdocuments we file with the Securities and Exchange Commission (SEC). There havebeen no material changes to our risk factors for the nine months endedSeptember 30, 2006, from those listed in our 2005 Annual Report. We do notassume an obligation to update any forward-looking statement. Our actualresults may differ materially from those contained in or implied by any ofthese forward-looking statements.

***Acquisition of Assets From OfficeMax***

Our operationsbegan on October 29, 2004, when we acquired the forest products and paperassets of OfficeMax (the Forest Products Acquisition). Before the ForestProducts Acquisition, OfficeMax was known as Boise Cascade Corporation. Weacquired the names “Boise” and “Boise Cascade” as part of the Forest ProductsAcquisition. We acquired OfficeMax’s forest products and paper assets, otherthan its timberland operations, for an aggregate purchase price of $2.2 billion,including approximately $140 million of related fees and expenses.Concurrently with the Forest Products Acquisition, Boise Land & TimberHoldings Corp. (Timber Holdings), an entity that is majority-owned by ourmajority owner, Forest Products Holdings, L.L.C. (FPH), acquiredOfficeMax’s timberland operations.

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

*Purchase Accounting*

We accounted forthe Forest Products Acquisition using the purchase method of accounting. As aresult, the purchase price of $2.2 billion was allocated to the tangibleand intangible assets acquired and liabilities assumed based on theirrespective fair values as of the date of the Forest Products Acquisition. Thepurchase price was determined based on negotiations between OfficeMax andMadison Dearborn Partners (MDP), our equity sponsor who controls FPH. Theexcess of the purchase price over the fair value of assets acquired andliabilities assumed was allocated to goodwill.

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*Restructuring Activities*

In connection withthe Forest Products Acquisition, we evaluated the acquired facilities andorganizational structure. In accordance with the provisions of Emerging IssuesTask Force (EITF) 95-3, *Recognition of Liabilitiesin Connection With a Purchase Business Combination*, exit activitiesrelated to the Forest Products Acquisition increased goodwill. We had one yearfrom the acquisition date to finalize our restructuring plans and adjustgoodwill.

AtSeptember 30, 2006, we had approximately $0.9 million ofrestructuring reserves related to severance costs recorded in “Accruedliabilities, Compensation and benefits,” and $0.1 million was recorded in“Accrued liabilities, Other.” The severance costs related to costs forapproximately 350 terminated employees. The remaining reserves relate topayments that are being made over time and will be paid by the end of 2007. Ofthe $1.0 million remaining restructuring reserve, $0.8 million isrecorded in our Paper segment, and $0.2 million is in Corporate and Other.Restructuring reserve liability account activity related to these charges is asfollows:
|                                                   | ** ** | **Severance** | ** ** | **Other**      | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|---------------|------------|----------------|------------|------------|------------|
| ** **                                        | ** ** | ** **    | ** ** | **(millions)** | ** ** | ** ** | ** ** |
|                                              |       |          |       |           |       |       |       |
| 2004 restructuring  reserve                       |       | $             | 13.8       |           | $          | 0.5        |       | $ | 14.3 |   |
| Charges against reserve                           |       | (1.0          | )          | —         |       | (1.0       | )          |
| Restructuring reserve  at December 31, 2004  |       | 12.8          |       | 0.5            |       | 13.3       |       |
|                                              |       |          |       |           |       |       |       |
| Additions to  restructuring reserve               |       | 6.9           |       | 0.2            |       | 7.1        |       |
| Charges against reserve                           |       | (16.2         | )          | (0.6           | )          | (16.8      | )          |
| Restructuring reserve  at December 31, 2005  |       | 3.5           |       | 0.1            |       | 3.6        |       |
|                                              |       |          |       |           |       |       |       |
| Charges against reserve                           |       | (2.6          | )          | —         |       | (2.6       | )          |
| Restructuring reserve  at September 30, 2006 | ** ** | **$**         | **0.9**    | ** **     | **$**      | **0.1**    | ** ** | **$** | **1.0** | ** ** |

*Forest Products Acquisition Financing*

To finance theForest Products Acquisition, we incurred $2.0 billion of debt. AtSeptember 30, 2006, we had $1.5 billion of long-term debt, includinga $279.9 million note payable to a related party. These borrowings aresubject to financial covenants and restrictions, including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At September 30, 2006, we were in compliance with our debtcovenants. Our level of debt makes us more vulnerable to a downturn in ouroperations, the forest products and paper industry, or the economy in general.See “Financing Activities” under the “Liquidity and Capital Resources”discussion in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations in this Form 10-Q for more information.

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

On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for an aggregatepurchase price of $43.8 million, including fees and expenses, but beforeworking capital adjustments. In 2006, we paid approximately $42.5 millionof cash for the acquisition, which is net of a $2.0 million holdback thatis payable in five years. At September 30, 2006, we recorded the$1.4 million discounted holdback (including accretion expense) in “Otherlong-term liabilities” on our Consolidated Balance Sheet. CTC manufactures corrugatedsheets that it sells primarily to regional container plants in Texas,Louisiana, Arkansas, and Mexico. CTC is located close to our mill in DeRidder,Louisiana, which produces linerboard used in CTC’s manufacturing processes.During the nine months ended September 30, 2006, we used 383,000 tons ofcontainerboard and produced 515,000 tons of containerboard, resulting ineconomic integration of 74%. Before the CTC acquisition, our economicintegration of containerboard in our system was 55%.

We accounted for the acquisition using the purchasemethod of accounting. As a result, the purchase price was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirrespective fair values as of the date of the acquisition. For more information,see Note 3, 

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Purchase of Central Texas Corrugated’s Assets, in“Item 1.  Consolidated FinancialStatements” of this Form 10-Q.

***Our Segments***

Weare a diversified North American paper and forest products companyheadquartered in Boise, Idaho. We operate our business using five reportablesegments:  Building MaterialsDistribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other. These segments represent distinct businesses that are managedseparately because of differing products and services. Each of these businessesrequires distinct operating and marketing strategies. Management reviews theperformance of the company based on these segments.

*BuildingMaterials Distribution. *OurBuilding Materials Distribution segment is a leading nationalinventory-carrying wholesale distributor of building materials. We distribute abroad line of building materials, including engineered wood products (EWP),oriented strand board (OSB), plywood, lumber, and general line items such asframing accessories, composite decking, roofing, siding, and insulation. Wepurchase most of these building materials from third-party suppliers and marketthem primarily to customers that resell building materials to professionalbuilders in the residential, light commercial construction, andrepair-and-remodeling markets.

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

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

*Packaging & Newsprint*.  Our Packaging & Newsprint segmentmanufactures and sells containerboard (linerboard) and newsprint at our mill inDeRidder, Louisiana. We also operate five corrugated container plants in thePacific Northwest and a sheet feeder plant in Waco, Texas, which we acquired inFebruary 2006. Our corrugated containers are used in the packaging of freshfruit and vegetables, processed food, beverages, and other industrial andconsumer products. Our Waco plant, known as Central Texas Corrugated, or CTC,produces corrugated sheets that are sold to sheet plants in the region, wherethey are converted into corrugated containers for a variety of customers. Ourcontainerboard and corrugated products are sold by brokers or our own salespersonnel. We market our newsprint through Abitibi-Consolidated (Abitibi)pursuant to an arrangement whereby Abitibi purchases all of the newsprint weproduce at a price equal to the price at which Abitibi sells newsprint producedat its mills located in the southern United States, less associated expensesand a sales and marketing discount. The newsprint price is verified through athird-party audit.

*Corporate and Other*.  Our Corporate and Other segment includescorporate support staff services, related assets and liabilities, and foreignexchange gains and losses.

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

Our results ofoperations and financial performance are influenced by a variety of factors,including the following:

·                  General economic conditions,including but not limited to housing starts, repair-and-remodel 

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activity, nonresidential construction, white-collaremployment, electronic substitution, durable goods production, and relativecurrency values;

·                  Volatility in raw material and energyprices;

·                  Pricing volatility in ourdistribution business;

·                  The commodity nature of our productsand our ability to maintain margins;

·                  Industry cycles and capacityutilization rates;

·                  Actions of suppliers, customers, andcompetitors; and

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

*Commodity and Value-AddedProducts and Product Margins*

Many of theproducts we manufacture and distribute are widely available and can be readilyproduced by our competitors. Because commodity products have few distinguishingqualities from producer to producer, competition for these products isprimarily based on price, which is determined by supply relative to demand.Generally, market conditions beyond our control determine the price for ourcommodity products, and the price for any one or more of these products mayfall below our cash production costs. Therefore, our profitability with respectto these products depends on managing our cost structure, particularly rawmaterials and energy prices, which also exhibit commodity characteristics.

Not all of ourproducts are commodities. Our EWP and specialty papers are differentiated fromcompeting products based on quality and product design, as well as relatedcustomer service. In the case of these value-added products, we are generallyable to influence price based on the strength of differentiation and levels ofcustomer service and are generally able to sell these products at highermargins than our commodity products. In order to reduce our sensitivity to thecyclicality of our industry, a fundamental component of our strategy is toincrease production of EWP as a share of our total Wood Products segment salesand increase specialty and premium papers as a percent of our total Papersegment sales. We believe these products are less susceptible to commoditydynamics. Comparing the nine months ended September 30, 2006 with the sameperiod in 2005, we increased sales of EWP from our Wood Products segment from45% of segment sales in the first nine months of 2005 to 48% of sales in thefirst nine months of 2006. The increase in EWP production capacity weimplemented in 2005 has allowed us to continue to grow this business; however,the recent slowdown in new residential construction will make it challenging tocontinue to grow our EWP sales in the short term. In our Paper segment, weincreased sales of specialty and premium papers from 28% of uncoated free sheettons sold during the first nine months of 2005 to 33% of uncoated free sheetpaper tons sold during the first nine months of 2006. The announced project toconvert our Wallula, Washington, #3 paper machine to enable it to producepressure-sensitive grades is a key step to providing us with the capacity toincrease production of specialty and premium paper grades.

*Demand*

The overall levelof demand for the products we make and distribute, and consequently ourfinancial results, is affected by, among other things, construction activity,manufacturing activity, employment, and consumer spending. Accordingly, webelieve that our financial results depend in large part on generalmacroeconomic conditions in North America, as well as on regional economicconditions in the geographic markets in which we operate. While no singleproduct line drives our overall financial performance, individual product linesare influenced by conditions in their respective industries. For example:

·                  Demand forbuilding materials, including wood products, depends on new residential andlight commercial construction and residential repair-and-remodeling activity,which are impacted by demographic trends, interest rate levels, weather, andgeneral economic conditions. In recent years, demand for wood products has beenhigh due to strong new housing starts, the increasing size of new homes, arobust repair-and-remodeling market, and a recovering light commercialconstruction market. However, in recent months, there has been a significantincrease in the number of homes for sale relative to the monthly salesactivity. This has led to a drop in new 

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homeconstruction activity, as evidenced by the U.S. Commerce Department statisticsfor housing starts in August 2006 at a seasonally adjusted annual rate of1.67 million units relative to 2.08 million units in August 2005.  This has resulted in significant pricedeclines for many commodity products. For example, relative to third quarter2005, our third quarter 2006 Wood Products segment sales prices for plywooddeclined 16% and *Random Lengths*reported pricesfor 1⁄2” 5-ply plywood during the last week in September, were 7% below theaverage price for the quarter. In addition, non commodity products volumes havebeen impacted. For example, the sales volume of I-joists by our Wood Productssegment during third quarter 2006 were down 16% from the same period of 2005.

·                  Historically,demand for uncoated free sheet correlated positively with general economicactivity. More recently, demand for some communications paper grades such ascut-size paper, which we produce, has decreased as the use of electronictransmission and document storage alternatives has become more widespread andmore efficient. At the same time, the expansion of electronic bar code readerdevices has helped drive growth in demand for label and release papers, whichwe also produce.

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

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

*Supply*

Industry supply ofcommodity wood products and paper is affected by the number of operational oridled facilities, the building of new capacity, and the shutting down ofexisting capacity. 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 whensupply significantly exceeds demand and margins are poor. Because of relativelylower capital investments, lower shutdown and start-up costs, and the abilityin most facilities to reduce production economically by curtailing shifts, woodproducts manufacturing producers tend to react more quickly to oversupplysituations, by removing shifts or curtailing facilities, than pulp and papermanufacturers. For example, during third quarter 2006, as structural panelprices fell dramatically, a number of our competitors reduced shifts or shutdown facilities entirely in response to dramatically reduced margins.

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. Currently, a number of OSB producers (a substitute for plywood, whichwe produce) are starting up or building new capacity. These projects wereannounced during the recent period of high residential construction activity.This increase in supply, coupled with dramatically lower pricing, has had anegative impact on the price of all structural panel products, includingplywood. However, two major OSB producers, both of whom are adding newcapacity, have announced indefinite shutdowns of existing facilities in theface of declining prices. In addition, a number of OSB producers have announcedthe intention to produce a strand lumber product that would be intended to be asubstitute for EWP in some applications.

While paper producers are typically slower to shut down capacity, in 2005,faced with declining demand, rising costs (especially energy costs), ongoingdissatisfaction with financial performance, and in some cases, a declining U.S.dollar, several North American paper producers announced mill closures thatdecreased or will decrease supply. From 2001 to 2005, North Americanuncoated free sheet, containerboard, and newsprint capacities declined 5%, 2%,and 15%, respectively, according to RISI.

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Industry supply ofcommodity wood products and papers is also influenced by the level of importsand overseas production capacity, which has grown in recent years. While theweakness of the U.S. dollar has mitigated the level of imports in recent years,a strengthening in the U.S. dollar would potentially lead to increased importsof commodity wood products and papers from overseas, thereby offsettingdomestic capacity rationalization and putting downward pressure on prices.Recent increases in U.S. paper prices have begun to attract some imports, asoverseas prices have not risen as quickly.

*RecentTrends*

New residential construction activity has dropped significantly during thethird quarter from both the same period of 2005 and from the second quarter of 2006.As mentioned above, the U.S. Department of Commerce reported housing starts ata seasonally adjusted annual rate of 1.67 million units in August 2006,compared with 2.08 million units in August 2005 and 1.95 millionunits in May 2006. This reduction in new residential construction activityresulted in decreased demand for the wood and building products that wemanufacture and sell. This reduction in demand was met with lower pricing forcommodity products such as structural panels and structural lumber. These pricereductions have caused some producers to reduce production through curtailmentof operations or, in some cases, indefinite closure of facilities. Residualchip supply markets in the Pacific Northwest have been very tight. Thissituation has been compounded by curtailments and closures of wood productsfacilities as the housing market has cooled.

As we entered the third quarter, demand for uncoated free sheet papersoutpaced supply, which prompted price increases early in the period. As the thirdquarter developed, supply and demand appeared to have regained balance causingmany producers to defer further price increases on commodity grades. Prices forspecialty and premium papers also rose during the quarter.

Demand for packaging papers continued to be strong, and in our view, supplyand demand in this product area appear to be in balance.

Newsprint pricing appears to be softening as demand declines. This couldresult in further price decreases if capacity is not adjusted to meet demand.

*OperatingCosts*

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

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

*Woodfiber.*Our primary raw material is wood fiber, whichrepresents the following percentages of materials, labor, and other operatingexpenses, including fiber costs, for our Wood Products, Paper, andPackaging & Newsprint segments:
|                            | ** ** | **Nine Months  Ended  September 30** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
|                       |       |                                           |       |   |   |
| Wood Products              |       | 33                                             | %          | 32 | % |
| Paper                      |       | 17                                             | %          | 17 | % |
| Packaging &  Newsprint |       | 13                                             | %          | 13 | % |

 

Our primarysources of logs and wood fiber are timber and byproducts of timber, such aswood chips, wood shavings, and sawdust. In February 2005, Timber Holdings soldall of its timberlands to Forest Capital Partners, L.L.C., an unrelated party(Timberlands Sale). After the Timberlands Sale, we have acquired substantiallyall of our fiber from outside sources, including pursuant to supply agreements 

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with the buyer of thetimberlands operations. In our Wood Products segment, we convert logs intolumber and veneer, and in turn, we convert veneer into EWP and plywood. Logsare a lower percentage of the total cost of materials, labor, and otheroperating expenses in producing engineered wood than commodity products such aslumber and plywood. While log costs are still a significant component of costs,as we continue to produce more engineered wood relative to commodity products,direct log costs decline as a percent of the total cost of materials, labor,and other operating expenses. We also convert residual wood fiber from ouroperations, as well as from third parties, into particleboard. In our Paper andPackaging & Newsprint segments, we convert logs and wood chips intopulp, which we sell or use at our paper mills to produce paper. On an aggregatebasis, we are able to produce all of our pulp needs, generally purchasing andselling similar amounts on the open market.

Logs and woodfiber are commodities, and prices for logs and wood fiber have historicallybeen cyclical due to changing levels of demand. Timber supply may be limited bypublic policy or government regulation as well as fire, insect infestation,disease, ice storms, windstorms, hurricanes, flooding, other weatherconditions, and other natural and man-made causes. Residual chip supply may belimited due to reduction in primary manufacturing at sawmills and plywoodplants. In recent years, declines in timber supply, driven primarily by changesin public policy and government regulation, have been severe enough to causethe closure of numerous facilities in some of the regions in which we operate.During third quarter 2006, we temporarily reduced pulp production at ourSt. Helens, Oregon, pulp and paper mill due to the inability to sourcewood fiber on a cost-effective basis. This resulted in approximately 9,000 tonsof lost pulp production at St. Helens. Any sustained undersupply and resultingincrease in wood fiber prices could decrease our production volumes and/orincrease our operating costs. Prices for our products might not reflectincreases or decreases in log and wood fiber prices, and as a result, ouroperating margins could fluctuate. Our sensitivity to these fluctuationsincreased after the Timberlands Sale. Market prices for a variety of fibersources, including logs and chips for our Northwest operations and logs for ourMinnesota and Louisiana operations, were higher in the first half of 2006 thanin the first half of 2005. While log costs have come down in Minnesota andLouisiana in recent months, they are still high by historical standards. In thePacific Northwest, residual chip costs continue to be high, and availabilitycontinues to be challenging. Because residual fiber in the Pacific Northwestcomes predominately from sawmills and plywood plants, curtailments in thesemills as a result of decreased demand for these products related to the housingslowdown will continue to impact the availability of chips for our PacificNorthwest pulp and paper operations.

*Other rawmaterials and energy purchasing and pricing.*We purchaseother raw materials and energy used to manufacture our products in both theopen market and through long-term contracts. These contracts are generally withregional suppliers, who agree to supply all of our needs for a certain rawmaterial or energy at one of our facilities. These contracts normally containminimum purchase requirements and are for terms of various lengths. They alsocontain price adjustment mechanisms that take into account changes in market prices.Therefore, although our long-term contracts provide us with supplies of rawmaterials and energy that are more stable than open-market purchases, in manycases, they may not alleviate fluctuations in market prices.

Our costs will rise if prices for our raw materials or energyrise, and our margins are impacted by how much and how quickly we can pass suchprice increases through to our customers. Specifically, some of our keychemicals, including pulping and bleaching chemicals consumed in our Paper andPackaging & Newsprint mills and glues and resins consumed in our woodproducts operations, are heavily influenced by energy costs. A number of ourmajor suppliers have requested price increases tied to their increased energycosts. Our ability to pass through price increases depends on several factors,which vary by product line.

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

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|                            | ** ** | **Nine Months  Ended  September 30** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
|                       |       |                                           |       |   |   |
| Wood Products              |       | 3                                              | %          | 3 | % |
| Paper                      |       | 15                                             | %          | 15 | % |
| Packaging &  Newsprint |       | 15                                             | %          | 14 | % |

 

For the ninemonths ended September 30, 2006, we reduced consumption of purchased fossilfuel in our paper mills by approximately 9% per unit of production, comparedwith the same period in 2005. This reduction was achieved with a variety ofconsumption reduction and fuel-switching activities, including the use of morepurchased biomass fuel to replace purchased fossil fuels. We have limitedflexibility to switch between fuel sources in the short term; accordingly, wehave significant exposure to natural gas and fuel oil price changes. To reduceour exposure to price increases, we have entered into a variety of contracts tolimit our susceptibility to changes in energy costs. As of September 30,2006, we have mitigated our exposure to higher energy prices by hedgingapproximately 90% to 95% of our expected natural gas usage for the period ofOctober 1, 2006, through February 2007. As a result of no hurricanes affectingthe Gulf of Mexico production region and mild weather, at September 30,2006, the fair market value of our energy swaps was a negative$18.1 million, which we recorded in “Accrued liabilities, Other” on ourConsolidated Balance Sheet. During the three and nine months ended September30, 2006, our energy costs were approximately $5.7 million and $10.3 millionhigher than they would have been had we not hedged our exposure to changingprices.

While energyprices in the first nine months of 2006 were generally lower than levels infourth quarter 2005, pricing remains high by historical standards. In addition,increased demand (which could be driven by weather), further supplyconstraints, or other factors could drive prices higher. In the event thecurrent fuel prices persist and we are unable to pass these increases on to ourcustomers in the form of higher prices, we will experience a negative financialimpact relative to our 2005 performance. In addition, the rates we are chargedby our electrical suppliers are affected by the increase in natural gas prices,although the degree of impact depends on each utility’s mix of energy resourcesand regulatory situation.

*Chemicals.*Important chemicals weuse in the production of our products include precipitated calcium carbonate,sodium chlorate, sodium hydroxide, dyes, resins, and adhesives. Purchases ofchemicals represented the following percentages of materials, labor, and otheroperating expenses, including fiber costs, for our Wood Products, Paper, andPackaging & Newsprint segments:
|                            | ** ** | **Nine Months  Ended  September 30** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                       | ** ** | **2005** | ** ** |
|                       |       |                                           |       |   |   |
| Wood Products              |       | 6                                              | %          | 6 | % |
| Paper                      |       | 14                                             | %          | 13 | % |
| Packaging &  Newsprint |       | 5                                              | %          | 4 | % |

 

We have experienced higher chemical costs during the first ninemonths of 2006, compared with the same period in 2005, due in part to increasesin energy and transportation costs sustained by our chemical suppliers thatthey have partly passed through to us.

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***Resultsof Operations***

The following tables setforth the results of operations in dollars and as a percentage of sales for thethree and nine months ended September 30, 2006 and 2005:
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **September 30**            | ** ** | **September 30**           | ** ** |
| ** **                                      | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(millions)**                   | ** ** |
| **Sales**                                       |       |                             |       |                            |       |   |   |   |   |
| Trade                                           |       | $                                | 1,332.2    |                            | $          | 1,423.0 |   | $ | 4,085.5 |   | $ | 4,057.4 |   |
| Related parties                                 |       | 148.1                            |       | 133.3                           |       | 424.9 |   | 425.8 |   |
|                                            |       | 1,480.3                          |       | 1,556.3                         |       | 4,510.4 |   | 4,483.2 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Costs  and expenses**                         |       |                             |       |                            |       |   |   |   |   |
| Materials,  labor, and other operating expenses |       | 1,286.8                          |       | 1,358.8                         |       | 3,959.8 |   | 3,878.8 |   |
| Fiber costs from  related parties               |       | —                           |       | —                          |       | — |   | 17.6 |   |
| Depreciation,  amortization, and depletion      |       | 39.3                             |       | 33.0                            |       | 114.4 |   | 95.4 |   |
| Selling and distribution  expenses              |       | 71.5                             |       | 69.2                            |       | 214.2 |   | 195.9 |   |
| General and  administrative expenses            |       | 19.7                             |       | 15.9                            |       | 67.3 |   | 53.1 |   |
| Other (income)  expense, net                    |       | (0.1                             | )          | —                          |       | 1.0 |   | 3.9 |   |
|                                            |       | 1,417.2                          |       | 1,476.9                         |       | 4,356.7 |   | 4,244.7 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| **Income  from operations**                     | ** ** | **$**                            | **63.1**   | ** **                      | **$**      | **79.4** | ** ** | **$** | **153.7** | ** ** | **$** | **238.5** | ** ** |

 
| ** **                                                                           |       | **(percentage of sales)** |   |
|--------------------------------------------------------------------------------------|------------|---------------------------|--------|
| **Sales**                                                                            |       |                      |   |   |   |   |   |   |   |
| Trade                                                                                |       | 90.0                      | %      | 91.4 | % | 90.6 | % | 90.5 | % |
| Related parties                                                                      |       | 10.0                      |   | 8.6 |   | 9.4 |   | 9.5 |   |
|                                                                                 |       | 100.0                     | %      | 100.0 | % | 100.0 | % | 100.0 | % |
|                                                                                 |       |                      |   |   |   |   |   |   |   |
| **Costs  and expenses**                                                              |       |                      |   |   |   |   |   |   |   |
| Materials,  labor, and other operating expenses and fiber costs from related parties |       | 86.9                      | %      | 87.3 | % | 87.8 | % | 86.9 | % |
| Depreciation,  amortization, and depletion                                           |       | 2.7                       |   | 2.1 |   | 2.5 |   | 2.1 |   |
| Selling and  distribution expenses                                                   |       | 4.8                       |   | 4.5 |   | 4.8 |   | 4.4 |   |
| General and  administrative expenses                                                 |       | 1.3                       |   | 1.0 |   | 1.5 |   | 1.2 |   |
| Other (income) expense,  net                                                         |       | —                    |   | — |   | — |   | 0.1 |   |
|                                                                                 |       | 95.7                      | %      | 94.9 | % | 96.6 | % | 94.7 | % |
|                                                                                 |       |                      |   |   |   |   |   |   |   |
| **Income from operations**                                                           | ** ** | **4.3**                   | **%**  | **5.1** | **%** | **3.4** | **%** | **5.3** | **%** |

 

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***Sales Volumes and Prices***

Set forth below areour segment sales volumes and average net selling prices for our principalproducts for the three and nine months ended September 30, 2006 and 2005:
|                                      | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(millions)**                                      | ** ** |
| **Building  Materials Distribution** |       |                                                |       |                                               |       |   |   |   |   |
| Sales dollars                        |       | $                                                   | 756.6      |                                               | $          | 842.7 |   | $ | 2,351.2 |   | $ | 2,334.9 |   |
|                                      |            |                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 
|                                             |       | **(percentage of  Building Materials Distribution sales)** |       |
|---------------------------------------------|------------|------------------------------------------------------------|------------|
| Product Line  Sales                         | ** ** | ** **                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commodity                                   |       | 43.4                                                       | %          | 50.3 | % | 45.8 | % | 51.8 | % |
| Engineered wood  products                   |       | 16.2                                                       |       | 16.6 |   | 15.6 |   | 16.1 |   |
| General line  items                         |       | 40.4                                                       |       | 33.1 |   | 38.6 |   | 32.1 |   |
| ** **                                  |       |                                                       |       |   |   |   |   |   |   |
| **Sales  Volumes**                          |       |                                                       |       |   |   |   |   |   |   |
| **Wood  Products**                          |       |                                                       |       |   |   |   |   |   |   |
| Laminated veneer  lumber (LVL) (cubic feet) |       | 3.2                                                        |       | 3.2 |   | 9.9 |   | 9.6 |   |
| I-joists  (equivalent lineal feet)          |       | 57                                                         |       | 68 |   | 180 |   | 189 |   |
| Plywood (sq.  ft.) (3/8” basis)        |       | 316                                                        |       | 349 |   | 964 |   | 1,002 |   |
| Lumber (board  feet)                        |       | 69                                                         |       | 80 |   | 219 |   | 253 |   |
| Particleboard  (sq. ft.) (3/4” basis)  |       | 45                                                         |       | 43 |   | 126 |   | 126 |   |

 
|                                          |       | **(thousands  of short tons,  except corrugated containers)** |       |
|------------------------------------------|------------|---------------------------------------------------------------|------------|
| **Paper**                                |       |                                                          |       |   |   |   |   |   |   |
| Uncoated free  sheet                     |       | 363                                                           |       | 380 |   | 1,142 |   | 1,130 |   |
| Containerboard  (medium)                 |       | 35                                                            |       | 32 |   | 102 |   | 96 |   |
| Market pulp                              |       | 20                                                            |       | 45 |   | 87 |   | 102 |   |
| ** **                               | ** ** | **418**                                                       | ** ** | **457** | ** ** | **1,331** | ** ** | **1,328** | ** ** |
| ** **                               |       |                                                          |       |   |   |   |   |   |   |
| **Packaging &  Newsprint**      |       |                                                          |       |   |   |   |   |   |   |
| Containerboard  (linerboard) (a)    |       | 65                                                            |       | 104 |   | 203 |   | 332 |   |
| Newsprint                                |       | 109                                                           |       | 100 |   | 307 |   | 302 |   |
| Corrugated  containers and sheets (mmsf) |       | 1,705                                                         |       | 1,226 |   | 4,964 |   | 3,515 |   |

 
|                                                      | ** ** | **(dollars  per unit)** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| **Average  Net Selling Prices**                      | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                                   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet) |       | $                       | 1,860      |   | $ | 1,972 |   | $ | 1,893 |   | $ | 1,948 |   |
| I-joists  (1,000 equivalent lineal feet)             |       | 1,109                   |       | 1,114 |   | 1,104 |   | 1,095 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)           |       | 248                     |       | 294 |   | 263 |   | 290 |   |
| Lumber (1,000  board feet)                           |       | 462                     |       | 468 |   | 489 |   | 494 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis)     |       | 399                     |       | 254 |   | 334 |   | 264 |   |
|                                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 
|                                           | ** ** | **(dollars  per short ton,  except corrugated containers)** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Paper**                                 |       |                                                        |       |   |   |   |   |   |   |
| Uncoated free  sheet                      |       | $                                                           | 834        |   | $ | 732 |   | $ | 789 |   | $ | 748 |   |
| Containerboard  (medium)                  |       | 418                                                         |       | 313 |   | 384 |   | 339 |   |
| Market pulp                               |       | 477                                                         |       | 384 |   | 419 |   | 401 |   |
| ** **                                |       |                                                        |       |   |   |   |   |   |   |
| **Packaging &  Newsprint**       |       |                                                        |       |   |   |   |   |   |   |
| Containerboard  (linerboard) (a)     |       | $                                                           | 383        |   | $ | 326 |   | $ | 350 |   | $ | 361 |   |
| Newsprint                                 |       | 533                                                         |       | 505 |   | 536 |   | 481 |   |
| Corrugated containers  and sheets ($/msf) |       | 52                                                          |       | 51 |   | 50 |   | 51 |   |

 

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(a)                                  Includes the impact of adopting EITF 04-13, *Accounting for Purchases and Sales of Inventory With the SameCounterparty*, effective January 1, 2006, which required us toreport our inventory buy/sell transactions on a net basis. In accordance withthe provisions of EITF 04-13, prior-period financial 

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information has not been reclassified to conform with thecurrent period’s presentation. See Note 15, New and Recently AdoptedAccounting Standards, for more information.

***Operating Results***

# ***Sales***

For the threemonths ended September 30, 2006, total sales decreased $76.0 million,or 5%, to $1,480.3 million, compared with $1,556.3 million a yearago. For the nine months ended September 30, 2006, total sales increased$27.2 million, or 1%, to $4,510.4 million, compared with$4,483.2 million in the prior year. Relative to the three months endedSeptember 30, 2005, segment sales decreased in Building Materials Distributionand Wood Products and increased in Paper and Packaging & Newsprint.For the nine months ended September 30, 2006, sales increased in Paper,Packaging & Newsprint, and Building Materials Distribution anddecreased in Wood Products, compared with the same period of 2005.

*BuildingMaterials Distribution.*Sales decreased $86.1 million,or 10%, to $756.6 million for the three months ended September 30,2006, from $842.7 million in the prior year. The decrease in sales duringthe period was driven by decreases in both sales prices and sales volumes,which were down 5.1% and 5.4%, respectively, as the reduction in newresidential construction activity negatively impacted product demand andprices. While we continued to make progress in increasing our sales of generalline and EWP items as a percent of our total sales mix, which made up over 56%of our sales during the period, compared with less than 50% for the same periodof 2005, these increases were more than offset by lower commodity prices andvolumes.

During the ninemonths ended September 30, 2006, sales increased $16.3 million, or1%, to $2,351.2 million from $2,334.9 million in the prior year. Thesales increase during the period was driven by higher sales volumes during thefirst half of the year, when the new residential construction market continuedto be strong, offset in part by lower sales prices and sales volumes during thelast three months of the period, as new residential construction marketsweakened.

*Wood Products*.Sales decreased $39.5 million, or 12%, to $299.1 million for thethree months ended September 30, 2006, from $338.6 million for thethree months ended September 30, 2005. The sales decrease for the periodwas due primarily to lower prices for plywood, which decreased 16% during thethree months ended September 30, 2006, compared with the same period in 2005.In addition, we experienced lower LVL prices and lower I-joist and plywoodsales volumes, which were down 16% and 9%, respectively. These decreases weredriven by the slowdown in new residential construction during third quarter2006. These decreases were offset, in part, by increased particleboard prices,which were 57% higher during the period, compared with the same period in 2005,as competitor shutdowns, coupled with relatively strong demand, allowed us toincrease prices.

During the ninemonths ended September 30, 2006, sales decreased $69.6 million, or 7%, to$926.4 million from $996.0 million in the same period a year ago. The decreasewas primarily the result of lower plywood prices, which were 9% lower duringthe period compared with the same period in 2005. In addition, we experiencedLVL prices that were 3% lower for the period and lower I-joist and plywoodsales volumes. These decreases were driven by the slowdown in new residentialconstruction during the third quarter and the anticipation of that slowdown byparticipants in the distribution channel. These were offset, in part, byparticleboard prices, which were 27% higher in the period, compared with thesame period of 2005, driven by competitor shutdowns of capacity, coupled withrelatively strong demand, which allowed us to raise prices.

*Paper.*Salesincreased $23.4 million, or 7%, to $373.5 million, for the three months endedSeptember 30, 2006, from $350.1 million for the three months ended September 30,2005. The increase was driven primarily by a 13% increase in the volume ofhigher-priced specialty and premium papers, as we continued to implement ourstrategy of growing specialty and premium papers, coupled with higher pricesfor commodity uncoated free sheet papers, which increased 18% for the period,compared with the same period in 2005, as the result of a tighter supply/demandrelationship. These increases were partially offset by lower sales volumes ofmarket pulp resulting from reduced chip availability in the Pacific Northwestas wood products facilities took downtime, as well as lower sales volumes ofcommodity uncoated free sheet papers late in the quarter as the market began tostabilize.

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During the ninemonths ended September 30, 2006, sales increased $64.8 million, or 6%, to$1,125.5 million from $1,060.7 million in the same period a year ago. Theincrease in sales was primarily the result of an increase in the volume ofhigher-priced specialty and premium papers, which was up 16%, compared with thesame period in 2005, coupled with an increase in the sales price of commoditypapers, which was up 7%, compared with the same period in 2005.

*Packaging& Newsprint*. For the three months ended September 30,2006, sales increased $23.3 million, or 13%, to $206.8 million, compared with$183.5 million a year ago. The sales increase was primarily the result of theacquisition of CTC in February 2006, coupled with higher prices for corrugatedcontainers and sheets, newsprint, and linerboard and higher newsprint volumes.The price increases were driven by relatively strong demand, coupled with nonew capacity. These increases were partially offset by lower linerboard salesvolumes, driven primarily by the adoption of EITF 04-13.

During the ninemonths ended September 30, 2006, sales increased $31.3 million, or 6%, to$576.4 million from $545.1 million in the prior year. The increase was drivenprimarily by increased corrugated sheet sales from CTC, coupled with higherprices for newsprint and modestly higher sales volumes of newsprint, offset inpart, by lower linerboard sales volumes, driven primarily by the adoption ofEITF 04-13, and lower linerboard prices. Excluding the impact of EITF 04-13,linerboard sales volumes increased 9% and 1%, compared with the three and ninemonths ended September 30, 2005.

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

Materials, labor, and other operatingexpenses, including fiber costs from related parties, decreased $72.0 million,or 5%, to $1.3 billion from $1.4 billion for the three months endedSeptember 30, 2005. The decrease was primarily attributable to lower salesvolumes in our Building Materials Distribution segment. These decreases wereoffset in part by higher costs for fiber, energy, and chemicals in most of ourmanufacturing segments. Compared with the nine months ended September 30,2005, these costs increased $63.4 million, or 2%, to $4.0 billion from$3.9 billion in the prior year. As a percentage of sales, these costsdecreased to 86.9% for the three months ended September 30, 2006, from87.3% for the three months ended September 30, 2005. During the ninemonths ended September 30, 2006, these costs increased to 87.8% of salesfrom 86.9% a year ago. The increases were driven primarily by higher wood,energy, and chemical costs in most of our manufacturing businesses and byhigher volumes in our building materials distribution business.

Depreciation, amortization, and depletionexpenses increased $6.3 million, or 19%, to $39.3 million for thethree months ended September 30, 2006, compared with$33.0 million for the three months ended September 30, 2005. Forthe nine months ended September 30, 2006, depreciation, amortization, anddepletion expenses increased $19.0 million, or 20%, to$114.4 million, compared with $95.4 million a year ago. As apercentage of sales, these costs increased to 2.7% and 2.5%, respectively, forthe three and nine months ended September 30, 2006, from 2.1% in each ofthe same periods in the prior year. The increases in depreciation,amortization, and depletion are generally the result of higher levels ofcapital investment.

Selling and distribution expenses increased$2.3 million, or 3%, to $71.5 million for the three months endedSeptember 30, 2006, compared with $69.2 million for the same periodin the prior year. For the nine months ended September 30, 2006, thesecosts increased $18.3 million,or 9%, to $214.2 million, compared with $195.9 million in the sameperiod a year ago. As a percentage of sales, selling and distribution expensesincreased to 4.8% for both the three and nine months ended September 30,2006, compared with 4.5% and 4.4%, respectively, in the three and nine monthsended September 30, 2005. During both periods, the increase primarilyrelates to increased costs in our Building Materials Distribution segment,where we added personnel for expanding and growing locations. We also incurredhigher outside carrier distribution costs. In the three and nine months endedSeptember 30, 2006, we recorded higher compensation and benefit costs. Inaddition, during the nine months ended September 30, 2006, our Papersegment recorded a $2.3 million write-off of bad debt related to thebankruptcy of a customer.

General and administrative expenses increased $3.8 million,or 24%, to $19.7 million for the three months ended September 30, 2006,compared with $15.9 million for the three months ended September 30, 2005.General and administrative expenses as a percentage of sales increased to 1.3%for the three months ended September 30, 2006, from 1.0% for the threemonths ended September 30, 2005. For the nine months endedSeptember 30, 2006, general and administrative expenses increased 

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$14.2 million, or 27%, to $67.3 million,compared with $53.1 million a year ago. As a percentage of sales, thesecosts increased to 1.5% from 1.2% in the prior year. Relative to the three and nine months ended September 30, 2005, generaland administrative expenses increased in 2006 due primarily to higher outsideprofessional fees, benefit costs, training expenditures, and lease costs.

Other (income)expense, net, was $0.1 million of income, for the three months ended September 30,2006. For the nine months ended September 30, 2006, other (income) expense, net,decreased $2.9 million to $1.0 million of expense, compared with $3.9 millionof expense a year ago. During the nine months ended September 30, 2006, other(income) expense, net, included $3.7 million of income for changes in ourretiree healthcare programs and $1.7 million of expense for the loss on thesale of our headquarters building, as well as other miscellaneous income andexpense items. The nine months ended September 30, 2005, included $3.6 millionof expense for the write-off of costs incurred in connection with the canceledinitial public offering.

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

For the three months ended September 30, 2006,income from operations decreased $16.3 million, or 20%, to$63.1 million, compared with $79.4 million in the same period a yearago. The decrease was primarily the result of lower income in the BuildingMaterials Distribution and Wood Products segments, offset in part, by improvedperformance in the Paper and Packaging & Newsprint segments.

Income from operations decreased $84.8 million,or 36%, from $238.5 million for the nine months ended September 30,2005, to $153.7 million for the nine months ended September 30, 2006.The decrease was primarily the result of lower income in the Wood Products, BuildingMaterials Distribution, and Paper segments, offset in part by improvedperformance in the Packaging & Newsprint segment.

*BuildingMaterials Distribution.*Segment income decreased$15.0 million, or 44%, to $19.4 million for the three months endedSeptember 30, 2006, from $34.4 million for the three months endedSeptember 30, 2005. During the nine months ended September 30, 2006,segment income decreased $16.5 million, or 21%, to $63.3 million,compared with $79.8 million during the same period in the prior year. Inboth periods, the decrease was driven primarily by declining commodity pricesand higher operating expenses as we continued to ramp-up at locations we addedin recent years. In addition, lower sales volumes contributed to lower earningscomparing the three months ended September 30, 2006, with the same periodin 2005.

*WoodProducts.*Segment income decreased $29.1 million, or84%, to $5.6 million for the three months ended September 30, 2006,compared with $34.7 million for the three months ended September 30,2005. Relative to the nine months ended September 30, 2005, segment incomedecreased $57.6 million, or 58%, from $99.2 million to$41.6 million during the same period in the current year. The decrease inboth periods was driven largely by lower plywood prices and lower EWP prices.These decreases were offset in part by higher particleboard prices. We alsoexperienced higher log and conversion costs, which were driven largely byenergy and resin cost increases.

*Paper.*Segmentincome increased $20.7 million, or 206%, to $30.8 million for thethree months ended September 30, 2006, compared with $10.1 millionfor the three months ended September 30, 2005. The increase was drivenprimarily by improved sales mix as we sold more higher margin specialty andpremium papers and higher commodity uncoated free sheet prices. These increaseswere offset, in part, by lower sales volumes for market pulp driven bycurtailment of the pulp mill at St. Helens, lower commodity uncoated free sheetsales volumes as order volumes decreased during that second half of the period,higher fiber costs, especially in the Pacific Northwest, and higher chemicaland energy costs.

During the ninemonths ended September 30, 2006, segment income decreased$21.7 million, or 33%, to $44.8 million, compared with$66.5 million in the same period a year ago. This decrease was primarilydue to significantly higher costs for both fiber and energy, as well as higherchemical costs as suppliers raised prices in response to higher energy costs.In addition, we experienced a reduction in commodity sales volumes as we movedmore of our production to specialty and premium grades, as well as a reductionin market pulp sales as we curtailed operations at our St. Helens, Oregon, pulpmill in response to high wood costs. The decrease in income was partiallyoffset by a 16% increase in sales volume of specialty and premium papers andincreased sales prices for all grades, compared with the same period of 2005.

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*Packaging &Newsprint.*Segment income increased $9.2 million, or 147%,to $15.5 million for the three months ended September 30, 2006, comparedwith $6.3 million for the three months ended September 30, 2005.During the nine months ended September 30, 2006, segment income increased$10.8 million, or 52%, to $31.7 million, compared with$20.9 million in the same period a year ago. The increase in both periodswas primarily the result of the addition of CTC, coupled with higher newsprint salesprices and volumes. In addition, the increase in income for the three monthsended September 30, 2006, reflects higher linerboard sales prices. The threeand nine months ended September 30, 2005, included downtime taken as a resultof Hurricane Rita.

*Other*

*Changein fair value of interest rate swaps.*For the three and ninemonths ended September 30, 2005, we recorded zero and $9.9 million ofincome in “Change in fair value of interest swaps” in our ConsolidatedStatements of Income for the change in the fair value of interest rate swapsrelated to our amended and restated credit facilities. In connection with theamendment and restatement and the anticipated repayment of the Tranche Bterm loan, the interest rate swaps associated with this debt were no longerconsidered hedges of the variable interest payments on that loan. OnApril 28, 2005, we redesignated the $550 million of interest rateswaps as hedges of the cash flow from the London Interbank Offered Rate(LIBOR)-based variable interest payments on amounts borrowed under our seniorsecured credit facilities (the Facilities) and recognized $5.3 million ofnoncash expense in “Change in fair value of interest rate swaps” in ourConsolidated Statement of Loss during second quarter 2005. The net$9.9 million of value that was recorded in “Other assets” on ourConsolidated Balance Sheet will result in higher interest expense over theremaining life of the interest rate swaps.

*Interest expense.*Forthe three and nine months ended September 30, 2006, interest expense was$28.4 million and $87.2 million, respectively, compared with$31.1 million and $137.5 million in the same periods a year ago. Theexpense recorded for the nine months ended September 30, 2005, includes a$43.0 million charge for the write-off of deferred financing costs resultingfrom the repayment of the Tranche B term loan. Excluding the impact of thedeferred financing costs, the decrease in interest expense is attributedprimarily to a decrease in long-term debt. At September 30, 2006, our long-termdebt was $1.5 billion, compared with $1.7 billion a year ago. Arelated-party note of $279.9 million payable to a subsidiary of TimberHoldings was included in long-term debt at September 30, 2006. The related-party note was$266.4 million at September 30, 2005.

*Income tax provision.*For thethree and nine months ended September 30, 2006, income tax expense was$0.6 million and $2.1 million, respectively, compared with$21.3 million and $34.2 million for the same periods a year ago. OnMay 9, 2005, we converted to a C corporation from a limited liabilitycompany. As a result, tax expenses and benefits for the period of May 9 toSeptember 30, 2005, were recognized by the corporation. For the period ofMay 9 through September 30, 2005, we recorded income tax expense at anestimated annual effective tax provision rate of 43.5%. In December 2005, werescinded our conversion to C corporation status by filing a conversioncertificate with the Delaware Secretary of State that restored our status as alimited liability company. Except for our separate subsidiaries that are taxedas corporations, tax expenses and benefits related to the three and nine monthsended September 30, 2006, were recognized by the partners of the limitedliability company.

***Operational Outlook***

Most forecasters are projecting continuing softness innew residential construction markets, which will continue to negatively impactour Building Materials Distribution and Wood Products segments. Historically,significant reductions in commodity wood products prices have been followed bya reduction in log costs. If log costs stay high, this will continue tonegatively impact our margins. While particleboard prices were strong duringthe nine months ended September 30, 2006, they have weakened since that time asthe new residential construction slowdown has moved through to particleboardmarkets.

Commodity uncoated free sheet markets appear to be inbalance at this time, and if the economy continues to maintain modest levels ofgrowth, we expect this to continue. Many specialty paper grades continue toexperience strong growth, and we anticipate being able to participate in thisgrowth with the reconfigured Wallula, Washington, #3 paper machine, which weexpect to bring on-line in the first half of 2007. As we bring the reconfiguredmachine on-line, we will experience downtime. We plan on managing our inventorylevels to meet customer demand during this time period.

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Packaging paper markets have stabilized and in ourview, supply and demand in these grades appear to be balanced. We continue tomove containerboard price increases through to corrugated container customers.

Newsprint continues to experience declining demand andmay experience price erosion if capacity is not shut down in response toreduced demand.

We anticipate that wood costs in most geographies willcome down in response to lower wood products demand, including OSB mill demand.We continue to be concerned about chip prices and availability in the PacificNorthwest, which we believe will become more problematic if wood productsfacilities continue to reduce the availability of residual fiber. We anticipatecontinued high prices and challenging supply conditions in this region.

***Liquidity and CapitalResources***

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

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

***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 nine monthsended September 30, 2006 and 2005, our operating activities provided$177.1 million and $227.3 million of cash. In 2006, items included innet income provided $216.9 million of cash. Unfavorable changes in working capital and other items used$39.8 million of cash from operations. Working capital is subject tocyclical operating needs, the timing of the collection of receivables, thepayment of payables and expenses, and to a lesser extent, seasonal fluctuationsin our operations. The 2006 increase in working capital items was primarilyattributable to higher receivables in Buildings Materials Distribution andPackaging & Newsprint and, to a lesser extent, increased company inventorylevels. The higher receivables reflect differences in the timing of collectionsand higher sales in Buildings Materials Distribution and Packaging &Newsprint, comparing September 2006 sales with December 2005 sales. Theincrease in receivable and inventory levels was partially offset by higheroverall combined accounts payable and accrued liabilities. For the ninemonths ended September 30, 2005, items included in net income provided $271.7 million of cash,and increases in working capital and other items used $44.4 million ofcash from operations.

***Investment Activities***

Cash investing activities used $102.4 million forthe nine months ended September 30, 2006, and provided $53.9 millionduring the same period in 2005. In 2006, investing activities included$105.1 million of capital expendituresfor the purchase of property and equipment. Capital expenditures for propertyand equipment consisted primarily of expansion, business improvement andquality/efficiency projects, replacement projects, and ongoing environmentalcompliance. Investing activities also included $42.5 million of cash paid for the purchaseof CTC’s assets in Waco, Texas. These expenditures were partially offset by$43.0 million of proceeds from the sale of assets. This included$27.2 million of proceeds from the sale of our headquarters building inBoise, Idaho, $11.0 million of proceeds from the sale of our Lakeville,Minnesota, and Rochelle, Illinois, building materials distribution facilities,and $4.8 million of proceeds from other miscellaneous asset sales. Inconnection with the sale of our headquarters building, we leased back 65% ofthe building over a staggered lease term of ten to 12 years, and we leased backour building materials distribution facilities over a 35-year lease termincluding renewal options.

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Forthe nine months ended September 30, 2005, investing activities included $157.5 millionfor the collection of a related-party note received from a subsidiary of TimberHoldings and $12.6 million of proceeds received from the sale of assets.Approximately $10.4 million of the proceeds related to the sale of aportion of our fiber farms. These proceeds were partially offset by $116.8 millionused for the purchase of property and equipment. Capital expenditures for property andequipment consisted primarily of expansion, business improvement and quality/efficiencyprojects, replacement projects, and ongoing environmental compliance.

Weexpect capital investments in 2006 to total $165 million to $175 million,excluding acquisitions. 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 2006 will be for expansion(such as the project described below), business improvement and quality/efficiencyprojects, replacement projects, and ongoing environmental compliance. During2005, we spent $17 million on environmental compliance. We expect to spendapproximately $8 million in 2006 for this purpose.

In April 2006, we announced that we willexpand our production of pressure-sensitive papers by reconfiguring an existingpaper machine at our pulp and paper mill in Wallula, Washington, to produceboth pressure-sensitive paper and commodity uncoated free sheet. We estimateapproximately $70 million of capital spending for the project. We expectto spend approximately one-half of this amount in 2006 and the remainder in2007. As of September 30, 2006, spending on this project totaled $19 million.

Wepreviously announced an agreement to sell the Minnesota, Dakota & WesternRailway (MD&W) in International Falls, Minnesota, to Watco Companies, Inc.In September 2006, we announced the sale would not proceed as all conditionsfor the sale were not met within the time frame specified under the purchase andsale agreement.

***FinancingActivities***

Cash used for financingactivities was $103.0 million for the nine months ended September 30,2006, compared with $269.5 million for the same period in 2005. Cashused for financing activities included $96.9 million of prepayments on ourTranche D term loan, which was paid with $38.2 million of proceedsfrom asset sales, $25.6 million of proceeds from unwinding and resetting thefixed interest rate we pay on our interest rate swap agreements, and other cashflows. Additionally, we had a $10.0 million decrease in our borrowingsunder our accounts receivable securitization program, and we used $19.2 millionof cash to pay our equity investors amounts to fund their tax obligationrelated to their investment in us.

Cash used for financing activities in thefirst nine months of 2005 included $1,330.0 million of debt prepaymentsrelated to our Tranche B term loan, which was paid down primarily with theproceeds from our new $840.0 million Tranche D term loan,$157.5 million related to the collection of a loan to a subsidiary ofTimber Holdings, and $251.0 million received in connection with arelated-party note payable to a subsidiary of Timber Holdings, as well as cashflow from operations. Additionally, $23.3 million of cash was used to payour equity investors amounts to fund their tax obligation related to theirinvestment in us.

Thefollowing discussion describes our debt transactions in more detail. At September 30,2006, and December 31, 2005, our long-term debt and the interest rates onthat debt were as follows:

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| ** **                                      | ** ** | **September 30, 2006** | ** **    | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| ** **                                      | ** ** | ** **                       | ** **    | **Interest**                    | ** ** | **Interest** | ** ** | ** ** | ** ** | **Interest** | ** ** | **Interest** | ** ** |
| ** **                                      | ** ** | ** **                       | ** **    | **Rate**                        | ** ** | **Rate** | ** ** | ** ** | ** ** | **Rate** | ** ** | **Rate** | ** ** |
| ** **                                      | ** ** | ** **                       | ** **    | **Without**                     | ** ** | **With** | ** ** | ** ** | ** ** | **Without** | ** ** | **With** | ** ** |
| ** **                                      | ** ** | **Amount**                       | ** **    | **Swaps**                       | ** ** | **Swaps** | ** ** | **Amount** | ** ** | **Swaps** | ** ** | **Swaps** | ** ** |
| ** **                                      | ** ** | **(thousands)**                  | ** **    | ** **                      | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       |                             |          |                            |       |   |   |   |   |   |   |   |   |
| Revolving credit  facility, due 2010            |       | $                                | —        |                            | 6.0        | % | N/A |   | $ | — |   | 5.1 | % | N/A |   |
| Tranche D  term loan, due 2011             |       | 538,900                          |          | 7.1                             | %          | 6.8 | % | 635,800 |   | 5.8 | % | 4.9 | % |
| Senior unsecured  floating-rate notes, due 2012 |       | 250,000                          |          | 8.4                             | %          | 7.6 | % | 250,000 |   | 7.0 | % | 6.6 | % |
| 7.125% senior  subordinated notes, due 2014     |       | 400,000                          |          | 7.1                             | %          | N/A |   | 400,000 |   | 7.1 | % | N/A |   |
| Borrowings  secured by receivables              |       | 70,000                           |          | 5.5                             | %          | N/A |   | 80,000 |   | 4.3 | % | N/A |   |
|                                            |       | 1,258,900                        |          | 7.3                             | %          | 7.0 | % | 1,365,800 |   | 6.3 | % | 5.8 | % |
| Note payable to  related party, net, due 2009   |       | 279,916                          |          | 5.0                             | %          | N/A |   | 270,854 |   | 8.0 | % | N/A |   |
| ** **                                      | ** ** | ** **                       | ** **    | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **$**                            | **1,538,816** | ** **                      | ** ** | ** ** | ** ** | ** ** | **$** | **1,636,654** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

*SeniorSecured**Credit Facilities*

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

Our revolving creditfacility agreement permits us to borrow up to $475.0 million for general corporatepurposes. At September 30, 2006, we had no borrowings outstanding underour revolving credit facility; however, $62.2 million of letters of creditwere considered a draw on the revolver, reducing our borrowing capacity to $412.8 million.Borrowings under our revolving credit facility are based on the prime rate, thefederal funds effective rate, or the LIBOR. Pricing is subject toquarterly adjustment based on the ratio of our total indebtedness to our lastfour quarters of consolidated earnings before interest, taxes, depreciation,and amortization (EBITDA). The range of borrowing costs under the pricing gridis:  (i) the higher of prime plus0.50% to 1.25% or the federal funds effective rate plus 1.00% to 1.75% or(ii) LIBOR plus 1.50% to 2.25%. For the nine months ended September 30,2006, and the year ended December 31, 2005, the average interest rate forour borrowings under the revolver were 6.0% and 5.1%. Letters of credit aresubject to a 0.25% fronting fee payable to the issuing bank and a fee payableto the lenders equal to the product of the interest rate spread applicableto LIBOR borrowings under our revolving credit facility and the dailyaverage amount available for drawing under the outstanding letters of credit.The minimum and maximum borrowings under the revolver were zero and $30.0 millionduring the nine months ended September 30, 2006, and zero and $126.5 millionfor the same period in 2005. The weighted average amounts of borrowingsoutstanding under the revolver during the nine months ended September 30,2006 and 2005, were $1.0 million and $15.7 million. The revolvingcredit facility provides for a commitment fee of 0.50% per annum payable to thelenders on the average daily unused portion of the revolving credit facility.We also have a swingline option under the revolver, which allows us to borrowat negotiated rates up to an aggregate of $40.0 million from individualbanks that are parties to the agreement. Swingline borrowings are consideredborrowings under the revolving credit facility agreement.

At September 30,2006, and December 31, 2005, we had $538.9 million and$635.8 million outstanding under the Tranche D term loan, and ourborrowing rates were 7.1% and 5.8%. Borrowings under the Tranche D termloan are based on (i) the higher of the prime rate plus 0.75% or the federalfunds effective rate plus 1.25% or (ii) LIBOR plus 1.75%. As a result of a$200.0 million prepayment in October 2005, we are not required to makescheduled principal payments on the Tranche D term loan until 2011, atwhich time the principal balance is due. However, during the nine months ended September 30,2006, we prepaid $96.9 million on our Tranche D term loan, with $38.2 millionof proceeds from asset sales, $25.6 million of proceeds from unwinding andresetting the fixed interest rate we pay under our interest rate swapagreements, and other cash flows.

Borrowings under theFacilities are subject to financial covenants and restrictions, including aminimum interest expense coverage ratio, maximum leverage ratio, andlimitations on capital expenditures. At September 30, 2006, andDecember 31, 2005, we were in compliance with these covenants.

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*Senior Notes*

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Forest Products Acquisition. In July 2005, we completed an exchangeoffer whereby all of our senior unsecured floating-rate notes and seniorsubordinated notes were exchanged for publicly traded, registered securitieswith identical terms (other than terms relating to registration rights) to thenotes issued in October 2004. We may redeem all or part of the notes at anytime at redemption prices defined in the indenture. If we sell specific assetsor experience specific kinds of changes in control, we must offer to purchasethe notes. The senior unsecured floating-rate notes bear interest at a floatingrate equal to LIBOR plus 2.9%. At September 30, 2006, andDecember 31, 2005, our borrowing rates for the $250.0 million seniorunsecured floating-rate notes were 8.4% and 7.0%.

*BorrowingsSecured by Receivables*

In October2005, our wholly owned subsidiary, Boise LLC, and several of its subsidiaries,including Birch Creek Investments, L.L.C. (Birch Creek), entered into anaccounts receivable securitization program with Bank of America NationalAssociation and Calyon New York Branch (the Investors). Under this three-yearprogram, Boise LLC sells its interest in a defined pool of accounts receivablegenerated by its domestic operations on a revolving basis to Birch Creek, aconsolidated, wholly owned, special-purpose subsidiary. In turn, Birch Creeksells the receivables to the affiliates of the Investors. Because Boise LLC hasthe right to repurchase the sold receivables, sales of receivables under theprogram are accounted for as a secured borrowing. At September 30, 2006,and December 31, 2005, we had $70.0 million and $80.0 millionoutstanding under our accounts receivable securitization program. Thereceivables outstanding and the corresponding debt are included as “Receivables”and “Long-term debt,” respectively, on our Consolidated Balance Sheets. Werecord the financing costs associated with the program in “Interest expense” inour Consolidated Statements of Income. The cost of funds under this programvaries based on changes in interest rates. At September 30, 2006, andDecember 31, 2005, the interest rates for borrowings secured byreceivables were 5.5% and 4.3%.

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

*Note Payable to Related Party, Net*

At September 30, 2006, we had a $279.9 millionnote payable to a subsidiary of Timber Holdings recorded as “Note payable torelated party, net” on our Consolidated Balance Sheet. The amount of the notepayable was $270.9 million at December 31, 2005. The note is subjectto adjustment based on transactions between the subsidiary and us. EffectiveApril 1, 2006, we amended and restated our note payable to TimberHoldings. Our borrowing rate under the amended and restated note is 5%, and thenote matures March 31, 2009. Included in “Note payable to related party,net” were $31.5 million and $18.9 million of accrued interest expenserelated to the note at September 30, 2006, and December 31, 2005,respectively. Timber Holdings is a guarantor of our debt; see Note 20,Consolidating Guarantor and Nonguarantor Financial Information, in “Item 1.  Consolidated Financial Statements” of thisForm 10-Q.

*Other*

We have entered intointerest rate swaps to hedge the majority of the cash flow risk from thevariable interest payments on our variable-rate debt. These swaps gave useffective interest rates on all of our variable-rate debt of 6.9% and 5.3% at September 30,2006, and December 31, 2005, respectively. For additional information onour interest rate swaps, see Note 14, Financial Instruments, in “Item 1.Consolidated Financial Statements” of this Form 10-Q.

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We paid approximately$85.9 million of fees and expenses associated with our senior securedcredit facilities, our senior unsecured floating-rate notes, and our seniorsubordinated notes, which we entered into in October 2004. The fees are beingamortized over the terms of the loans, which range from six to ten years. At September 30,2006, and December 31, 2005, we had $33.0 million and$37.8 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan in second quarter 2005, we recorded a$43.0 million charge for the write-off of the deferred financing costs in “Interestexpense” in our Consolidated Statements of Income (Loss).

At September 30,2006, and December 31, 2005, our average effective interest rates,including the effect of our interest rate swaps, on all of our non-relatedparty debt, were 7.0% and 5.8%.

Cashpayments for interest, net of interest capitalized, were $18.3 million and$63.9 million for the three and nine months ended September 30, 2006,and $16.8 million and $65.7 million for the three and nine monthsended September 30, 2005.

***Contractual Obligations***

For information oncontractual obligations, see Contractual Obligations in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2005 Annual Report onForm 10-K. Except as disclosed below, at September 30, 2006,there have been no material changes to our contractual obligations outside thenormal course of business.

During the nine months ended September 30,2006, we decreased the amount of borrowings secured under our accountsreceivable securitization program from $80.0 million at December 31,2005, to $70.0 million at September 30, 2006. Additionally, we prepaid$96.9 million on our Tranche D term loan, with $38.2 million ofproceeds from asset sales, $25.6 million of proceeds from unwinding andresetting the fixed interest rate we pay under our interest rate swap agreements,and other cash flows. For more information, see “Financing Activities” in theLiquidity and Capital Resources section of this Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

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

At September 30,2006, and December 31, 2005, we had no off-balance-sheet arrangements withunconsolidated entities.

***Guarantees***

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under Financial Accounting Standards Board (FASB) InterpretationNo. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers*. Note 17, Commitments and Guarantees, of “Item8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K describes the natureof our guarantees, including the approximate terms of the guarantees, how theguarantees arose, the events or circumstances that would require us to performunder the guarantees, and the maximum potential undiscounted amounts of futurepayments we could be required to make. Except as disclosed in Note 19, Commitmentsand Guarantees, of “Item 1. Consolidated Financial Statements,” of this Form 10-Q, there have beenno material changes to the guarantees disclosed in our 2005 Annual Report onForm 10-K.

***Inflationary and Seasonal Influences***

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

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***Environmental***

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

***Collective Bargaining Agreements***

Approximately 5,020, or 49%, of ouremployees work pursuant to collective bargaining agreements. In March 2005, theagreements covering approximately 510 workers at our paper facilities inSalem, Oregon; St. Helens, Oregon; and Vancouver, Washington, expired. InFebruary 2006, we reached a five-year agreement at the Salem facility, and inMarch 2006, we reached a five-year agreement at our St. Helens facility. InJune 2005, we announced the permanent closure of our Vancouver, Washington, facility.In May 2006, we reached a closure agreement with the union. Hourly employees atour DeRidder, Louisiana, paper mill approved a new four-year labor contract onJuly 10, 2006. The collective bargaining agreement covers approximately440 employees and replaces an agreement which expired February 15,2006. In June 2006, we entered into a one-year extension for the Nampa, Idaho,container plant covering approximately 100 employees. Our Jackson, Alabama,paper mill contract expired at the end of July, and the parties are continuingto meet. The agreement will carry over if no new agreement is reached. Thecontract at our St. Jacques, New Brunswick, Canada, I-joist plant willexpire in the fourth quarter of 2006. We are currently in negotiations for anew contract at our veneer and plywood facility in Brazil. We do not currentlyexpect material work interruptions or increases in our costs during the courseof the negotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

***Critical Accounting Estimates***

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

***ITEM3.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISKS***

We are exposed to risks such as changes in interest rates, energyprices, and foreign currency exchange rates. We employ a variety of practicesto manage these risks, including operating and financing activities and, wheredeemed appropriate, the use of derivative instruments. Derivative instrumentsare used only 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 aneconomic hedge or we designate the derivative as a cash flow or fair valuehedge. We formally document all relationships between hedging instruments andthe hedged item, as well as our risk management objectives and strategy forundertaking various hedged transactions. For those derivatives designated ascash flow or fair value hedges, we formally assess, both at the hedge’sinception and on 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).

In accordance with Statement of Financial AccountingStandards (SFAS) No. 133, *Accounting forDerivative Instruments and Hedging Activities*, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. The fair value of these instruments is determined bythird parties. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income,” as appropriate. The gain orloss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). 

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The gain orloss on derivatives designated as fair value hedges and the offsetting gain orloss on the 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.

*InterestRate Risk*

Ourdebt is predominantly variable-rate. We manage interest rate risk on ourvariable-rate debt by entering into interest rate swaps. At September 30,2006, the estimated current market value of our fixed-rate debt, including ournote payable to related party, based on then-current interest rates for similarobligations with like maturities, was approximately $45.6 million lessthan the amount reported on our Consolidated Balance Sheet.

*Swaps onour Facilities. *Ourobligations under our senior secured credit facilities and senior notes exposeus to changes in short-term interest rates since interest rates on this debtare variable. In November 2004, we entered into four interest rate swapswith a total notional amount of $550 million to hedge the exposure tointerest rate fluctuations associated with our Tranche B term loan (whichwas paid in full in April 2005). The swaps on $300 million of ourTranche B term loan were fixed at an average pay rate of 3.3% and wouldhave expired in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche B termloan, these interest rate swaps were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or $15.2 million,in “Change in fair value of interest rate swaps” in our Consolidated Statementof Income. In second quarter 2005, we redesignated the $550 million ofinterest rate swaps as hedges of the cash flow from the LIBOR-basedvariable interest payments on amounts borrowed under the Facilities, and priorto the redesignation, we recognized $5.3 million of noncash expense in “Changein fair value of interest rate swaps” in our Consolidated Statementof Loss. The net $9.9 million of value that was recorded in “Otherassets” on our Consolidated Balance Sheet results in higher interest expenseover the remaining life of the interest rate swaps. Changes in the fair valueof the interest rate swaps were recorded in “Other comprehensive income.”Amounts realized during the period were reclassified to “Interest expense” asinterest expense was recognized on the LIBOR-based debt. Ineffectivenessrelated to the redesignated hedges was not significant. The four interest rateswaps with a total notional amount of $550 million gave us an effectiveinterest rate of 4.9% at December 31, 2005. At December 31, 2005, thefair market value of these instruments was $16.9 million, which werecorded in “Other assets” on our Consolidated Balance Sheet.

In April 2006, weterminated our 3.3% $300 million interest rate swap agreements that hedgedour exposure to interest rate fluctuations associated with our Facilities. Inaddition, we reset the fixed interest rate we pay on the remaining$250 million of interest rate swap agreements under our Facilities from3.5% to 4.75%. The reset interest rate swaps with a total notionalamount of $250 million gave us an effective interest rate of 6.8% on theFacilities at September 30, 2006. At September 30, 2006, the fairmarket value of these instruments was $1.3 million, which we recorded in “Otherassets” on our Consolidated Balance Sheet. There was no ineffectiveness relatedto the hedges.

In October 2006, we entered into two 5.0%interest rate swaps with an aggregate notional amount of $250 million tohedge our exposure to interest rate fluctuations associated with our Facilitiesfor the period of December 2008 through December 2010. These swaps weredesignated as cash flow hedges. Accordingly, changes in the fair value of theinterest rate swaps will be recorded in “Other comprehensive income.”

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

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andDecember 31, 2005, the fair market values of these instruments were $1.8 millionand $9.3 million, which we recorded in “Other assets” on our ConsolidatedBalance Sheets.

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

Forthe three and nine months ended September 30, 2006, amounts reclassifiedto “Interest expense” for all of our cash flow hedges decreased interest expense $2.7 million and $6.7 million,compared with $0.7 million and $4.8 million increases in interestexpense for the same periods in 2005. At September 30, 2006, assuming nochange in interest rates, $2.2 million would be reclassified as a decreasein interest expense during the remainder of 2006.

*Energy Risk*

We enter into natural gasswaps to hedge the variable cash flow risk of natural gas purchases to a fixedprice. As of September 30, 2006, we had entered into swap agreements tohedge the variable cash flow risk of natural gas purchases for the period of October2006 through February 2007. We designated all of the swaps as cashflow hedges. Accordingly, changes in the fair value of these swaps wererecorded in “Other comprehensive income.” Amounts realized during the periodwere reclassified to “Materials, labor, and other operating expenses” in ourConsolidated Statements of Income (Loss) as natural gas was consumed. Amountsreclassified in the three months ended September 30, 2006, increased “Materials,labor, and other operating expenses” $5.7 million, and amountsreclassified in the nine months ended September 30, 2006, increased theseexpenses $10.3 million. Assuming natural gas prices follow the futures curvein effect at September 30, 2006, $12.9 million would be reclassifiedas an increase in “Materials,labor, and other operating expenses” during the remainder of 2006. At September 30,2006, and December 31, 2005, the fair market values of these instrumentswere a negative $18.1 million and $0.1 million, which we recorded in “Accruedliabilities, Other” on our Consolidated Balance Sheets. There was no ineffectivenessrelated to these hedges.

In addition, as ofSeptember 30, 2006, we had sold written call options on a portion of the naturalgas swaps discussed above. These written call options do not qualify for hedgeaccounting under SFAS No. 133. We sold the options to lower the cost ofthe natural gas swaps (described above) that are designated as hedges. AtSeptember 30, 2006, we recognized an unrealized gain of $1.2 millionbased on the fair market value of the options we sold, which we recorded in “Receivables,other” on our Consolidated Balance Sheet with the offset as a reduction to “Materials,labor, and other operating expenses” in our Consolidated Statement of Income.

*Foreign Currency Risk*

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

In second quarter 2006, we entered into aseries of forward foreign exchange contracts to hedge our commitment topurchase capital equipment denominated in euros. These contracts are for atotal amount of 12.4 million euros with settlement dates which began inApril 2006 and extend through April 2007. We are accounting for these as fairvalue hedges and recognize any gains or losses from remeasuring the forwardcontracts at fair value in the Consolidated Statements of Income (Loss). Wealso adjust the commitment for the capital equipment purchase for any gains orlosses attributable to fluctuations in foreign currency exchange rates. At September 30,2006, the fair market value of these contracts was $0.1 million, which werecorded in “Receivables, Other,” and we recorded the same amount for theincrease in the purchase commitment in “Accounts payable” on our ConsolidatedBalance Sheet.

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***ITEM4.          CONTROLS AND PROCEDURES***

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

*Evaluation of Disclosure Controls and Procedures*

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

We evaluate the effectiveness of ourdisclosure controls and procedures on at least a quarterly basis. A number ofkey components in our internal control system assist us in these evaluations.Since the company’s inception, we have had a disclosure committee. Thecommittee meets regularly and includes input from our senior management,general counsel, internal audit staff, and independent accountants. Thiscommittee is charged with considering and evaluating the materiality ofinformation and reviewing the company’s disclosure obligations on a timelybasis. Our internal audit department also evaluates components of our internalcontrols on an ongoing basis. Our intent is to maintain disclosure controls andprocedures as dynamic processes that change as our business and workingenvironments change.

Our management, with the participation ofour CEO and CFO, has evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the fiscal quartercovered by the quarterly report on this Form 10-Q. Based on thatevaluation, the CEO and CFO have concluded that, as of such date, ourdisclosure controls and procedures were effective in meeting the objectives forwhich they were designed and were operating at a reasonable assurance level.Furthermore, the company’s management noted that as a result of theirevaluation of changes in internal control over financial reporting, theyidentified no changes during the third quarter of fiscal 2006 that materiallyaffected, or would be reasonably likely to materially affect, the company’sinternal control over financial reporting.

*Limitations on the Effectiveness of Controls andProcedures*

In designing and evaluating our disclosurecontrols and procedures, we recognized that disclosure controls and procedures,no matter how well-conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the disclosure controls andprocedures are met. Additionally, in designing disclosure controls andprocedures, our management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. We have also designed our disclosure controls and procedures basedin part upon assumptions about the likelihood of future events, and there canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions.

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**PART II—OTHER INFORMATION**

***ITEM1.          LEGAL PROCEEDINGS***

*Legal Proceedings*

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

*Environmental Matters*

We are not currentlyinvolved in any material environmental proceedings. OfficeMax retainedresponsibility for environmental claims and liabilities related to businesses,facilities, and other assets not purchased by us in the Forest Products Acquisition.In addition, OfficeMax indemnifies us for hazardous substance releases andother environmental regulatory violations that relate to the businesses wepurchased and that occurred before the Forest Products Acquisition or arosefrom pre-Forest Products Acquisition operations. OfficeMax, however, may nothave sufficient funds to satisfy in full its indemnification obligations, andin some cases, we may not be entitled to indemnification. Management does notbelieve that the potential exposure to the company for environmental matterswould have a material adverse effect on our financial position, results ofoperations, or cash flows even if OfficeMax failed to fulfill itsindemnification responsibilities.

***ITEM1A.       RISK FACTORS***

ThisQuarterly Report on Form 10-Q contains forward-looking statements.Statements that are not historical or current facts, including statements aboutour expectations, anticipated financial results, projected capital expenditures,and future business prospects, are forward-looking statements. You can identifythese statements by our use of words such as “may,” “will,” “expect,” “believe,”“should,” “plan,” “anticipate,” and other similar expressions. You can findexamples of these statements throughout this report, including the OperationalOutlook section of Management’s Discussion and Analysis of Financial Conditionand Results of Operations. We cannot guarantee that our actual results will beconsistent with the forward-looking statements we make in this report. Youshould review carefully the risk factors listed in “Item 1A.  Risk Factors” of our 2005 Annual Report onForm 10-K, as well as those factors listed in other documents we file withthe Securities and Exchange Commission (SEC). There have been no materialchanges to our risk factors for the nine months ended September 30, 2006,from those listed in our 2005 Annual Report on Form 10-K.

***ITEM1B.       UNRESOLVED STAFF COMMENTS***

None.

***ITEM2.          UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS***

None.

***ITEM3.          DEFAULTS UPON SENIORSECURITIES***

None.

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***ITEM4.          SUBMISSION OF MATTERS TO AVOTE OF SECURITYHOLDERS***

Notapplicable.

***ITEM5.          OTHER INFORMATION***

None.

***ITEM6.          EXHIBITS***

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

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                   |   | BOISE CASCADE HOLDINGS, L.L.C.                             |
|-----------------------------------|--------|------------------------------------------------------------|
|                              |   |                                                       |
|                              |   | /s/ Samuel K. Cotterell                                    |
|                              |   | Samuel K. Cotterell  Vice President and Controller         |
|                              |   | (As Duly Authorized Officer and Chief  Accounting Officer) |
|                              |   |                                                       |
| Date:  November 1, 2006 |   |                                                       |

 

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**BOISE CASCADE HOLDINGS, L.L.C.**

**INDEX TO EXHIBITS**

Filed With the Quarterly Report on Form 10-Q for theQuarter Ended September 30, 2006
| Number | ** ** | **Description**                                                              | ** ** | ** ** |
|--------|------------|------------------------------------------------------------------------------|------------|------------|
|   |       |                                                                         |       |       |
| 12     |       | Ratio of Earnings to Fixed Charges                                           |       |       |
|   |       |                                                                         |       |       |
| 31.1   |       | CEO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |       |       |
|   |       |                                                                         |       |       |
| 31.2   |       | CFO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |       |       |
|   |       |                                                                         |       |       |
| 99     |       | Financial Statements of Boise Land & Timber  Holdings Corp.              |       |       |

 

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