##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange
Act of 1934



For the Quarterly Period Ended June 30, 2004



Commission file number 1-5313



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POTLATCH CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|A Delaware Corporation                                         |  | 82-0156045                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|601 West Riverside Ave., Suite 1100 Spokane, Washington        |  | 99201                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code (509) 835-1500



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).    Yes  x    No ̈



The number of shares of common stock outstanding as of June 30, 2004: 29,517,405 shares of
Common Stock, par value $1 per share.



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Index to Form 10-Q



|                                                                                              |  |                                                                                                                             |  |        
|--------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------
|                                                                                              |  | Page Number                                                                                                                
|                                                                                              |  |                                                                                                                            
|                                                                                              |  |                                                                                                                             |  |        
|PART I.
FINANCIAL INFORMATION                                                                 |  |                                                                                                                            
|                                                                                              | 
|Item 1.
Financial Statements                                                                  |  |                                                                                                                            
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Statements of Operations and Comprehensive Income for the quarters and six months ended June 30, 2004 and 2003 |  | 2      
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Condensed Balance Sheets at June 30, 2004 and December 31, 2003                                                |  | 3      
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2004 and 2003                             |  | 4      
|                                                                                              |  |                                                                                                                            
|                                                                                              |  | Notes to Consolidated Financial Statements                                                                                  |  | 5    9
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10  25                                                                                                                    
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 26  27                                                                                                                    
|                                                                                              | 
|Item 4.
Disclosure Controls and Procedures                                                    |  | 27                                                                                                                         
|                                                                                              | 
|PART II.
OTHER INFORMATION                                                                    |  |                                                                                                                            
|                                                                                              | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                   |  | 28                                                                                                                         
|                                                                                              | 
|Item 6.
Exhibits and Reports on Form 8-K                                                      |  | 28                                                                                                                         
|                                                                                              | 
|SIGNATURES                                                                                    |  | 29                                                                                                                         
|                                                                                              | 
|EXHIBIT INDEX                                                                                 |  | 30                                                                                                                         



1



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##### Table of Contents

PART I



Item 1. Financial Statements



Potlatch Corporation and Consolidated Subsidiaries

Statements of Operations and Comprehensive Income

Unaudited (Dollars in thousands - except per-share amounts)



|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                     |  | Quarter Ended June 30 |         |   | Six Months Ended June 30 |  
|                                                                                     |  | 2004                  |         |   | 2003                     |   |         | 2004 |  |   | 2003    |  
|Net sales                                                                            |  | $                     | 472,639 |   |                          | $ | 368,094 |      |  | $ | 893,061 |   |  | $ | 702,896 |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Costs and expenses:                                                                  |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested                          |  |                       | 25,041  |   |                          |   | 25,202  |      |  |   | 52,124  |   |  |   | 52,061  |  
|Materials, labor and other operating expenses                                        |  |                       | 330,449 |   |                          |   | 311,915 |      |  |   | 652,554 |   |  |   | 604,259 |  
|Selling, general and administrative expenses                                         |  |                       | 23,022  |   |                          |   | 20,239  |      |  |   | 45,477  |   |  |   | 37,491  |  
|Restructuring charges                                                                |  |                       | (87     | ) |                          |   |        |      |  |   | 1,193   |   |  |   | 227     |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                                     |  |                       | 378,425 |   |                          |   | 357,356 |      |  |   | 751,348 |   |  |   | 694,038 |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings from operations                                                             |  |                       | 94,214  |   |                          |   | 10,738  |      |  |   | 141,713 |   |  |   | 8,858   |  
|                                                                                     |  |                       |         |  
|Interest expense                                                                     |  |                       | (12,478 | ) |                          |   | (12,128 | )    |  |   | (24,338 | ) |  |   | (24,890 | )
|Interest income                                                                      |  |                       | 491     |   |                          |   | 12,573  |      |  |   | 619     |   |  |   | 12,640  |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) before taxes                                                         |  |                       | 82,227  |   |                          |   | 11,183  |      |  |   | 117,994 |   |  |   | (3,392  | )
|Provision (benefit) for taxes (Note 3)                                               |  |                       | 32,659  |   |                          |   | 4,361   |      |  |   | 46,608  |   |  |   | (1,323  | )
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) from continuing operations                                           |  |                       | 49,568  |   |                          |   | 6,822   |      |  |   | 71,386  |   |  |   | (2,069  | )
|Discontinued operations (Note 4):                                                    |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations (including loss on disposal of $-, $-, $- and $45) |  |                       |        |   |                          |   | (283    | )    |  |   |        |   |  |   | (1,389  | )
|Income tax benefit                                                                   |  |                       |        |   |                          |   | (110    | )    |  |   |        |   |  |   | (542    | )
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net earnings (loss)                                                                  |  |                       | 49,568  |   |                          |   | 6,649   |      |  |   | 71,386  |   |  |   | (2,916  | )
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Other comprehensive loss, net of tax:                                                |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Cash flow hedges (Note 5):                                                           |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Net derivative losses, net of income tax benefit of $-, $-, $44 and $-               |  |                       |        |   |                          |   |        |      |  |   | (68     | ) |  |   |        |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income (loss)                                                          |  | $                     | 49,568  |   |                          | $ | 6,649   |      |  | $ | 71,318  |   |  | $ | (2,916  | )
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Earnings (loss) per common share from continuing operations (Note 6):                |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                |  | $                     | 1.68    |   |                          | $ | .24     |      |  | $ | 2.43    |   |  | $ | (.07    | )
|Diluted                                                                              |  |                       | 1.68    |   |                          |   | .24     |      |  |   | 2.42    |   |  |   | (.07    | )
|Net earnings (loss) per common share:                                                |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                |  |                       | 1.68    |   |                          |   | .23     |      |  |   | 2.43    |   |  |   | (.10    | )
|Diluted                                                                              |  |                       | 1.68    |   |                          |   | .23     |      |  |   | 2.42    |   |  |   | (.10    | )
|Dividends per common share (annual rate)                                             |  |                       | .60     |   |                          |   | .60     |      |  |   | .60     |   |  |   | .60     |  
|Average shares outstanding (in thousands):                                           |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                |  |                       | 29,498  |   |                          |   | 28,679  |      |  |   | 29,372  |   |  |   | 28,648  |  
|Diluted                                                                              |  |                       | 29,611  |   |                          |   | 28,679  |      |  |   | 29,487  |   |  |   | 28,648  |  
|                                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



Certain 2003 amounts have been
reclassified to conform to the 2004 presentation.



The accompanying notes are
an integral part of these financial statements.



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##### Table of Contents



Potlatch Corporation and Consolidated Subsidiaries

Condensed Balance Sheets

2004 amounts unaudited (Dollars in thousands -

except per-share amounts)



|                                                           |  |              |            |                  |   |          
|---------------------------------------------------------- |  | ------------ | ---------- | ---------------- | - | ---------
|                                                           |  | June 30,2004 |            | December 31,2003
|Assets                                                     |  |              |            |                  |   |          
|Current assets:                                            |  |              |            |                  |   |          
|Cash                                                       |  | $            | 9,981      |                  | $ | 7,190    
|Short-term investments                                     |  |              | 194,625    |                  |   | 40,091   
|Receivables, net                                           |  |              | 123,027    |                  |   | 105,345  
|Inventories (Note 8)                                       |  |              | 138,219    |                  |   | 159,678  
|Prepaid expenses                                           |  |              | 20,511     |                  |   | 18,315   
|                                                           |  |              |            |                  |   |          
|Total current assets                                       |  |              | 486,363    |                  |   | 330,619  
|Land, other than timberlands                               |  |              | 9,325      |                  |   | 8,831    
|Plant and equipment, at cost less accumulated depreciation |  |              | 718,212    |                  |   | 740,342  
|Timber, timberlands and related logging facilities         |  |              | 401,936    |                  |   | 398,899  
|Other assets                                               |  |              | 119,479    |                  |   | 118,686  
|                                                           |  |              |            |                  |   |          
|                                                           |  | $            | 1,735,315  |                  | $ | 1,597,377
|                                                           |  |              |            |                  |   |          
|Liabilities and Stockholders Equity                       |  |              |            |                  |   |          
|Current liabilities:                                       |  |              |            |                  |   |          
|Current installments on long-term debt                     |  | $            | 1,106      |                  | $ | 507      
|Accounts payable and accrued liabilities                   |  |              | 171,127    |                  |   | 169,310  
|                                                           |  |              |            |                  |   |          
|Total current liabilities                                  |  |              | 172,233    |                  |   | 169,817  
|Long-term debt                                             |  |              | 617,194    |                  |   | 618,278  
|Other long-term obligations                                |  |              | 271,999    |                  |   | 266,514  
|Deferred taxes                                             |  |              | 118,331    |                  |   | 71,917   
|Stockholders equity                                       |  |              | 555,558    |                  |   | 470,851  
|                                                           |  |              |            |                  |   |          
|                                                           |  |              | $1,735,315 |                  | $ | 1,597,377
|                                                           |  |              |            |                  |   |          
|Stockholders equity per common share                      |  | $            | 18.82      |                  | $ | 16.33    
|Working capital                                            |  | $            | 314,130    |                  | $ | 160,802  
|Current ratio                                              |  |              | 2.8:1      |                  |   | 1.9:1    
|                                                           |  |              |            |                  |   |          



The accompanying notes are an integral
part of these financial statements.



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Potlatch Corporation and Consolidated Subsidiaries

Condensed Statements of Cash Flows

Unaudited (Dollars in thousands)



|                                                                              |  |                          |          |   |      |   |         |  
|----------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ---- | - | ------- | -
|                                                                              |  | Six Months Ended June 30 |         
|                                                                              |  | 2004                     |          |   | 2003 |  
|Cash Flows From Continuing Operations                                         |  |                          |          |   |      |   |         |  
|Net earnings (loss)                                                           |  | $                        | 71,386   |   |      | $ | (2,916  | )
|Adjustments to reconcile net earnings (loss) to net operating cash flows:     |  |                          |          |   |      |   |         |  
|Loss from discontinued operations                                             |  |                          |         |   |      |   | 820     |  
|Loss on disposal of discontinued operations                                   |  |                          |         |   |      |   | 60      |  
|Depreciation, amortization and cost of fee timber harvested                   |  |                          | 52,124   |   |      |   | 52,061  |  
|Deferred taxes                                                                |  |                          | 46,414   |   |      |   | (1,865  | )
|Working capital changes                                                       |  |                          | 13,418   |   |      |   | 21,072  |  
|Other, net                                                                    |  |                          | 428      |   |      |   |        |  
|                                                                              |  |                          |          |   |      |   |         |  
|Net cash provided by operating activities of continuing operations            |  |                          | 183,770  |   |      |   | 69,232  |  
|                                                                              |  |                          |          |   |      |   |         |  
|Cash Flows From Investing                                                     |  |                          |          |   |      |   |         |  
|Decrease in restricted cash                                                   |  |                          |         |   |      |   | 15,069  |  
|Increase in short-term investments                                            |  |                          | (154,534 | ) |      |   | (24,924 | )
|Additions to plant and properties                                             |  |                          | (25,475  | ) |      |   | (29,450 | )
|Other, net                                                                    |  |                          | (4,935   | ) |      |   | (4,804  | )
|                                                                              |  |                          |          |   |      |   |         |  
|Net cash used for investing activities of continuing operations               |  |                          | (184,944 | ) |      |   | (44,109 | )
|                                                                              |  |                          |          |   |      |   |         |  
|Cash Flows From Financing                                                     |  |                          |          |   |      |   |         |  
|Change in book overdrafts                                                     |  |                          | (10,019  | ) |      |   | 757     |  
|Decrease in notes payable                                                     |  |                          |         |   |      |   | (5,000  | )
|Retirement of long-term debt                                                  |  |                          | (485     | ) |      |   | (16,385 | )
|Issuance of treasury stock                                                    |  |                          | 21,737   |   |      |   | 2,747   |  
|Dividends                                                                     |  |                          | (8,777   | ) |      |   | (8,592  | )
|Other, net                                                                    |  |                          | 1,509    |   |      |   | 4,841   |  
|                                                                              |  |                          |          |   |      |   |         |  
|Net cash provided by (used for) financing activities of continuing operations |  |                          | 3,965    |   |      |   | (21,632 | )
|                                                                              |  |                          |          |   |      |   |         |  
|Cash from continuing operations                                               |  |                          | 2,791    |   |      |   | 3,491   |  
|Cash from discontinued operations                                             |  |                          |         |   |      |   | 3,608   |  
|                                                                              |  |                          |          |   |      |   |         |  
|Increase in cash                                                              |  |                          | 2,791    |   |      |   | 7,099   |  
|Cash at beginning of period                                                   |  |                          | 7,190    |   |      |   | 8,973   |  
|                                                                              |  |                          |          |   |      |   |         |  
|Cash at end of period                                                         |  | $                        | 9,981    |   |      | $ | 16,072  |  
|                                                                              |  |                          |          |   |      |   |         |  



Net interest payments (net of amounts
capitalized) for the six months ended June 30, 2004 and 2003 were $24.3 million and $22.8 million, respectively. Net income tax payments (refunds) for the six months ended June 30, 2004 and 2003 were $1.1 million and ($11.8) million, respectively.



The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

Potlatch Corporation and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

Unaudited (Dollars in thousands)



NOTE 1. GENERAL  The accompanying condensed balance sheets at June 30, 2004, and December 31, 2003, the statements of operations and comprehensive income for
the quarters and six months ended June 30, 2004 and 2003, and the condensed statements of cash flows for the six months ended June 30, 2004 and 2003, have been prepared in conformity with accounting principles generally accepted in the United States
of America. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included. All adjustments were of a normal recurring nature; there were no material nonrecurring adjustments.



This Form 10-Q should be read in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.



NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS  In December 2003, the Financial Accounting Standards Board issued a revision of Statement of Financial Accounting Standards (SFAS) No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits. The revised statement was effective for financial statements with fiscal years ending after December 15, 2003. It requires annual disclosures in addition to those required by the
original Statement No. 132 regarding assets, obligations, cash flows and the net periodic benefit cost of defined pension plans and other postretirement benefit plans. The revised statement also adds new disclosure requirements for interim financial
reports. The required disclosures are contained in Note 9, Pension and Other Postretirement Benefit Plans, on pages 7-8 of this Form 10-Q.



NOTE 3. INCOME TAXES  The income tax provision and benefit presented in the statements of operations have been computed by applying an estimated annual
effective tax rate. This rate was 39.5% for the six months ended June 30, 2004. The rate was 39% for the quarter and six months ended June 30, 2003. The second quarter provision for 2004 reflects the adjustment of the rate to 39.5% from 39% used for
the first quarter of the year.



NOTE 4. DISCONTINUED OPERATIONS 
Amounts reported for Discontinued operations in the Statements of Operations and Comprehensive Income represent costs related to our former printing papers mill in Brainerd, Minnesota, which was sold in February 2003.



NOTE 5. CASH FLOW HEDGES  During the third quarter of 2003, we entered into
several derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. As designated cash flow hedges, changes in the fair value of the financial instruments are
recognized in Other comprehensive loss, net of tax to the extent the hedges are deemed effective, until the hedged item is recognized in the statement of operations. As of March 31, 2004, the derivative financial instruments entered into
in the third quarter 2003 had expired, and we have not entered into any additional instruments to hedge our expected future natural gas purchases.



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NOTE 6. NET EARNINGS (LOSS) PER COMMON SHARE  Net earnings (loss) per common share are computed by dividing
the net earnings (loss) and earnings (loss) from continuing operations by the weighted average number of common shares outstanding in accordance with SFAS No. 128, Earnings Per Share.



The following table reconciles the number of common shares used in the basic
and diluted earnings per share calculations:



|                                               |  |                       |  |                          |  |            |  |           
|---------------------------------------------- |  | --------------------- |  | ------------------------ |  | ---------- |  | ----------
|                                               |  | Quarter Ended June 30 |  | Six Months Ended June 30
|                                               |  | 2004                  |  | 2003                     |  | 2004       |  | 2003      
|Basic average common shares outstanding        |  | 29,498,469            |  | 28,679,129               |  | 29,371,556 |  | 28,648,193
|                                               |  |                       |  |                         
|Incremental shares due to common stock options |  | 112,417               |  | 5                        |  | 115,126    |  |          
|                                               |  |                       |  |                          |  |            |  |           
|Diluted average common shares outstanding      |  | 29,610,886            |  | 28,679,134               |  | 29,486,682 |  | 28,648,193
|                                               |  |                       |  |                          |  |            |  |           



Stock options to
purchase 1,058,275, 2,698,675, 1,058,275 and 2,703,675 shares of common stock for the quarters ended June 30, 2004 and 2003 and six months ended June 30, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share
because the exercise prices of the stock options were greater than the average market price of the common shares.



NOTE 7. STOCK-BASED COMPENSATION  We currently have three stock incentive plans under which options or performance share awards are outstanding. We apply the
intrinsic value method under Accounting Principles Board (APB) Opinion No. 25 and related Interpretations in accounting for our stock-based compensation. No compensation cost is recognized for options granted under the plans when the exercise price
is equal to market value at the grant date. For performance share awards, which were first granted in December 2003, compensation expense is recorded ratably over the performance period based upon the market value of our stock and the likelihood
that performance measures will be met. Compensation expense related to performance shares was $0.2 million and $0.4 million, before taxes, for the quarter and six months ended June 30, 2004, respectively.



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Had compensation costs been determined based on the fair value at the grant dates for option and
performance share awards under those plans as prescribed by SFAS No. 123, our net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts indicated below:



|                                                                            |  |                      |        |   |                         |   |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | -------------------- | ------ | - | ----------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|(Dollars in thousands  except pershare amounts)                           |  | Quarter EndedJune 30 |        |   | Six Months EndedJune 30 |  
|                                                                            |  | 2004                 |        |   | 2003                    |   |       | 2004 |  |   | 2003   |  
|Net earnings (loss), as reported                                            |  | $                    | 49,568 |   |                         | $ | 6,649 |      |  | $ | 71,386 |   |  | $ | (2,916 | )
|                                                                            |  |                      |        |  
|Add: stock based compensation expense recorded under APB No. 25, net of tax |  |                      | 126    |   |                         |   |      |      |  |   | 259    |   |  |   |       |  
|                                                                            |  |                      |        |  
|Deduct: stock based compensation determined under SFAS No. 123, net of tax  |  |                      | (409   | ) |                         |   | (494  | )    |  |   | (832   | ) |  |   | (996   | )
|                                                                            |  |                      |        |   |                         |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net earnings (loss)                                               |  | $                    | 49,285 |   |                         | $ | 6,155 |      |  | $ | 70,813 |   |  | $ | (3,912 | )
|                                                                            |  |                      |        |   |                         |   |       |      |  |   |        |   |  |   |        |  
|Basic net earnings (loss) per share, as reported                            |  | $                    | 1.68   |   |                         | $ | .23   |      |  | $ | 2.43   |   |  | $ | (.10   | )
|Diluted net earnings (loss) per share, as reported                          |  |                      | 1.68   |   |                         |   | .23   |      |  |   | 2.42   |   |  |   | (.10   | )
|Pro forma basic net earnings (loss) per share                               |  |                      | 1.67   |   |                         |   | .21   |      |  |   | 2.41   |   |  |   | (.14   | )
|Pro forma diluted net earnings (loss) per share                             |  |                      | 1.67   |   |                         |   | .21   |      |  |   | 2.40   |   |  |   | (.14   | )
|                                                                            |  |                      |        |   |                         |   |       |      |  |   |        |   |  |   |        |  



NOTE 8. INVENTORIES 
Inventories at the balance sheet dates consist of:



|               |  |               |         |                   |   |        
|-------------- |  | ------------- | ------- | ----------------- | - | -------
|               |  | June 30, 2004 |         | December 31, 2003
|Raw materials  |  | $             | 61,614  |                   | $ | 74,999 
|Finished goods |  |               | 76,605  |                   |   | 84,679 
|               |  |               |         |                   |   |        
|               |  | $             | 138,219 |                   | $ | 159,678
|               |  |               |         |                   |   |        



NOTE 9. PENSION AND OTHER
POSTRETIREMENT BENEFIT PLANS  The tables below detail the components of net periodic costs (benefit):



Quarters ended June 30:



|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  
|---------------------------------- |  | --------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                                   |  | Pension Benefit Plans |         |   | Other PostretirementBenefit Plans |  
|(Dollars in thousands)             |  | 2004                  |         |   | 2003                              |   |         | 2004 |  |   | 2003  |  
|Service cost                       |  | $                     | 2,651   |   |                                   | $ | 2,301   |      |  | $ | 777   |   |  | $ | 452   |  
|Interest cost                      |  |                       | 8,458   |   |                                   |   | 8,656   |      |  |   | 4,654 |   |  |   | 3,071 |  
|Expected return on plan assets     |  |                       | (14,494 | ) |                                   |   | (14,721 | )    |  |   |      |   |  |   | (76   | )
|Amortization of prior service cost |  |                       | 452     |   |                                   |   | 445     |      |  |   | (406  | ) |  |   | (291  | )
|Recognized actuarial loss (gain)   |  |                       | 55      |   |                                   |   | (44     | )    |  |   | 2,236 |   |  |   | 1,069 |  
|Recognized net initial asset       |  |                       |        |   |                                   |   | (10     | )    |  |   |      |   |  |   |      |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  
|Net periodic cost (benefit)        |  | $                     | (2,878  | ) |                                   | $ | (3,373  | )    |  | $ | 7,261 |   |  | $ | 4,225 |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  



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Six months ended June 30:



|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |       |  
|---------------------------------- |  | --------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ----- | -
|                                   |  | Pension Benefit Plans |         |   | Other PostretirementBenefit Plans |  
|(Dollars in thousands)             |  | 2004                  |         |   | 2003                              |   |         | 2004 |  |   | 2003   |  
|Service cost                       |  | $                     | 5,314   |   |                                   | $ | 4,454   |      |  | $ | 1,554  |   |  | $ | 904   |  
|Interest cost                      |  |                       | 16,957  |   |                                   |   | 16,756  |      |  |   | 9,308  |   |  |   | 6,142 |  
|Expected return on plan assets     |  |                       | (29,057 | ) |                                   |   | (28,497 | )    |  |   |       |   |  |   | (152  | )
|Amortization of prior service cost |  |                       | 906     |   |                                   |   | 862     |      |  |   | (813   | ) |  |   | (583  | )
|Recognized actuarial loss (gain)   |  |                       | 110     |   |                                   |   | (85     | )    |  |   | 4,473  |   |  |   | 2,138 |  
|Recognized net initial asset       |  |                       |        |   |                                   |   | (20     | )    |  |   |       |   |  |   |      |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |       |  
|Net periodic cost (benefit)        |  | $                     | (5,770  | ) |                                   | $ | (6,530  | )    |  | $ | 14,522 |   |  | $ | 8,449 |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |       |  



In the footnotes to
our financial statements for the year ended December 31, 2003, we estimated contributions to our defined benefit pension plans in 2004 would total approximately $1.2 million. As of June 30, 2004, $0.6 million of contributions had been made. No
change to the original estimate is anticipated.



In December
2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans
that provide an equivalent benefit. We are currently in the process of determining whether the benefits provided under our plans are actuarially equivalent to Medicare Part D under the Act and therefore the net periodic benefit costs presented above
do not reflect the effects of the Act on our postretirement benefit plans.



NOTE 10. DEBT - In August 2003 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was designated as a fair value hedge and called for the company to pay a
variable interest amount, determined semi-annually in arrears and equal to the London Interbank Offered Rate (LIBOR) plus 4.80%, and receive a fixed-rate payment from a financial institution, calculated on $165.0 million of our 10% senior
subordinated debentures. The terms of the swap allowed us to assume no ineffectiveness in the hedge. In March 2004, we terminated the swap and received a cash settlement of $6.0 million. The consideration received at termination of the swap is being
accreted to earnings until the 10% senior subordinated debentures are retired. In May 2004, we reinstated the fixed-to-variable interest rate swap under the same terms as the swap that was terminated in March.



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NOTE 11. SEGMENT INFORMATION 



|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|(Dollars in thousands)                                               |  | Quarter Ended June 30 |         |   | Six Months Ended June 30 |  
|                                                                     |  | 2004                  |         |   | 2003                     |   |         | 2004 |  |   | 2003    |  
|Segment Sales                                                        |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Resource                                                             |  | $                     | 44,784  |   |                          | $ | 61,829  |      |  | $ | 106,574 |   |  | $ | 106,800 |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Wood products                                                        |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Oriented strand board                                                |  |                       | 129,394 |   |                          |   | 62,410  |      |  |   | 233,287 |   |  |   | 114,643 |  
|Lumber                                                               |  |                       | 94,268  |   |                          |   | 74,068  |      |  |   | 171,927 |   |  |   | 137,719 |  
|Plywood                                                              |  |                       | 16,099  |   |                          |   | 9,808   |      |  |   | 31,617  |   |  |   | 19,117  |  
|Particleboard                                                        |  |                       | 5,244   |   |                          |   | 3,901   |      |  |   | 10,089  |   |  |   | 7,196   |  
|Other                                                                |  |                       | 6,701   |   |                          |   | 6,716   |      |  |   | 13,840  |   |  |   | 15,303  |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                     |  |                       | 251,706 |   |                          |   | 156,903 |      |  |   | 460,760 |   |  |   | 293,978 |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Pulp and paperboard                                                  |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Paperboard                                                           |  |                       | 119,864 |   |                          |   | 115,300 |      |  |   | 228,393 |   |  |   | 220,221 |  
|Pulp                                                                 |  |                       | 18,160  |   |                          |   | 13,382  |      |  |   | 30,541  |   |  |   | 26,522  |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                     |  |                       | 138,024 |   |                          |   | 128,682 |      |  |   | 258,934 |   |  |   | 246,743 |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Consumer products                                                    |  |                       | 83,145  |   |                          |   | 67,414  |      |  |   | 157,113 |   |  |   | 145,478 |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                     |  |                       | 517,659 |   |                          |   | 414,828 |      |  |   | 983,381 |   |  |   | 792,999 |  
|Elimination of intersegment sales                                    |  |                       | (45,020 | ) |                          |   | (46,734 | )    |  |   | (90,320 | ) |  |   | (90,103 | )
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total consolidated net sales                                         |  | $                     | 472,639 |   |                          | $ | 368,094 |      |  | $ | 893,061 |   |  | $ | 702,896 |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Intersegment sales or transfers                                      |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Resource                                                             |  | $                     | 28,810  |   |                          | $ | 32,759  |      |  | $ | 62,346  |   |  | $ | 64,606  |  
|Wood products                                                        |  |                       | 2,805   |   |                          |   | 2,919   |      |  |   | 5,815   |   |  |   | 5,928   |  
|Pulp and paperboard                                                  |  |                       | 13,387  |   |                          |   | 11,033  |      |  |   | 22,120  |   |  |   | 19,525  |  
|Consumer products                                                    |  |                       | 18      |   |                          |   | 23      |      |  |   | 39      |   |  |   | 44      |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total                                                                |  | $                     | 45,020  |   |                          | $ | 46,734  |      |  | $ | 90,320  |   |  | $ | 90,103  |  
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Operating Income (Loss)                                              |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Resource                                                             |  | $                     | 6,756   |   |                          | $ | 23,534  |      |  | $ | 18,809  |   |  | $ | 34,655  |  
|Wood products                                                        |  |                       | 94,447  |   |                          |   | 2,343   |      |  |   | 152,246 |   |  |   | (1,268  | )
|Pulp and paperboard                                                  |  |                       | 5,872   |   |                          |   | (1,159  | )    |  |   | (1,889  | ) |  |   | (10,492 | )
|Consumer products                                                    |  |                       | (1,238  | ) |                          |   | (4,974  | )    |  |   | (5,055  | ) |  |   | 1,828   |  
|Eliminations                                                         |  |                       | 1,669   |   |                          |   | (1,400  | )    |  |   | 2,104   |   |  |   | (1,330  | )
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                     |  |                       | 107,506 |   |                          |   | 18,344  |      |  |   | 166,215 |   |  |   | 23,393  |  
|Corporate                                                            |  |                       | (25,279 | ) |                          |   | (7,161  | )    |  |   | (48,221 | ) |  |   | (26,785 | )
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Consolidated earnings (loss) from continuing operations before taxes |  | $                     | 82,227  |   |                          | $ | 11,183  |      |  | $ | 117,994 |   |  | $ | (3,392  | )
|                                                                     |  |                       |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Cautionary Statement Regarding Forward-Looking Information



This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, including without limitation, statements regarding future revenues, costs, manufacturing output, capital expenditures and timber supply issues. These forward-looking statements reflect managements current views regarding
future events based on estimates and assumptions, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from those expressed or
implied by forward-looking statements contained in this report. Factors that could cause or contribute to such differences include, but are not limited to, changes in the United States and international economies; changes in exchange rates between
the U.S. dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures
for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; and changes in raw material, energy,
and other costs. Forward-looking statements contained in this report present managements views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of
managements views to reflect events or circumstances occurring after the date of this report.



Overview



We are a
vertically integrated and diversified forest products company. We own approximately 1.5 million acres of timberland and operate 15 manufacturing facilities, located primarily in Arkansas, Idaho, Minnesota and Nevada. Our business is organized into
four segments:



| | The Resource segment manages our timberlands, which supply a portion of the logs, wood chips, pulpwood and other fiber to our manufacturing segments, as well as to third parties.
Intersegment sales are based on prevailing market prices for wood fiber. In the first half of 2004, Resource segment net sales were $106.6 million, representing approximately 11% of our net sales, before elimination of intersegment sales.
Intersegment sales were $62.3 million for the period.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Wood Products segment manufactures oriented strand board (OSB), lumber, plywood, and particleboard at ten mills located in Arkansas, Idaho and Minnesota. These products are
largely commodity products, which are sold to wholesalers primarily for use in home building and other construction activity. Wood Products segment net sales were $460.8 million in the first six months of 2004, representing approximately 47% of our
net sales, before elimination of intersegment sales. Intersegment sales were $5.8 million for the period.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Pulp and Paperboard segment manufactures bleached paperboard used in packaging and bleached softwood market pulp. The Pulp and Paperboard segment operates two pulp mills and two
paperboard mills located in Arkansas and Idaho. Pulp and Paperboard segment net sales were $258.9
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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million in the first half of 2004, representing approximately 26% of our net sales, before elimination of intersegment
sales. Intersegment sales were $22.1 million for the period.



| | The Consumer Products segment manufactures tissue products primarily sold on a private label basis by major grocery store chains. The segment operates two tissue mills and three
tissue converting facilities located in Idaho, Michigan and Nevada. A fourth tissue converting facility, located in Elwood, Illinois, began operations in June 2004. Consumer Products segment net sales were $157.1 million in the first six months of
2004, representing approximately 16% of our net sales before elimination of intersegment sales. The segment did not have significant intersegment sales during the period.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Amounts reported for Discontinued operations in the Statements of Operations and Comprehensive Income represent
costs related to our former printing papers mill in Brainerd, Minnesota, which was sold in February 2003.



Factors influencing our results of operations



Our operating results have been and will continue to be influenced by a variety of factors, including the cyclical nature of the forest products industry, competition, the efficiency and level of capacity utilization
of our manufacturing operations, changes in our principal expenses, such as wood fiber and energy costs, changes in the production capacity of our manufacturing operations as a result of major capital spending projects, asset dispositions or
acquisitions and other factors.



Our operating results
generally reflect the cyclical pattern of the forest products industry. Historical prices for our products have been volatile, and we, like other manufacturers in the forest products industry, have limited direct influence over the timing and extent
of price changes for our products. Product pricing is significantly affected by the relationship between supply and demand. Product supply is influenced primarily by fluctuations in available manufacturing capacity. Demand is affected by the state
of the economy in general and a variety of other factors. The demand for our timber resources and wood products is affected by the level of new residential construction activity and, to a lesser extent, home repair and remodeling activity, which are
subject to fluctuations due to changes in economic conditions, interest rates, population growth, weather conditions and other factors. The demand for most of our pulp and paperboard products is primarily affected by the general state of the global
economy, and the economies in North America and east Asia in particular. The demand for our tissue products is primarily affected by the state of the United States economy.



The markets for our products are highly competitive and companies that have substantially greater financial resources than
we do compete with us in each of our lines of business. Logs and other fiber from our timberlands, as well as our wood products, are subject to competition from timberland owners and wood products manufacturers in North America and to a lesser
extent in South America, Europe, Australia and New Zealand. Our pulp-based products, other than tissue products, are globally-traded commodity products. Because our competitors in these segments are located throughout the world, variations in
exchange rates between the U.S. dollar and other currencies can significantly affect our competitive position compared to our international competitors. As it is generally not profitable to sell tissue products overseas due to high transportation
costs, currency exchange rates do not have a major effect on our ability to compete in our tissue business.



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Tariffs, quotas or trade agreements can also affect the markets for our products, particularly our
softwood lumber products. In 2002, the United States imposed duties on imported lumber from Canada in response to a dispute over the stumpage policies of some provincial governments. The two countries are currently in negotiations to resolve the
dispute, and any resulting agreement could have a significant effect on lumber markets in the United States.



In addition, our industry is capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are
sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors are currently lower-cost producers in some of the businesses in which we
operate, and accordingly these competitors may be less adversely affected than we are by price decreases. For the periods presented in this Form 10-Q, we did not suspend or cease production at any of our facilities due to a situation where prices
were not sufficient to cover variable costs.



Energy has become
one of our most volatile operating expenses over the past several years. In periods of high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases and therefore such increased
costs could adversely affect our operating results. We have taken steps through conservation and electrical production to reduce our exposure to the volatile spot market for electricity. Our energy costs in future periods will depend principally on
our ability to continue to produce internally a substantial portion of our electricity needs and on changes in market prices for natural gas. From time to time we have entered into derivative financial instruments as a hedge against potential
increases in the cost of natural gas.



Another significant
expense is the cost of wood fiber needed to supply our manufacturing facilities. Our overall results of operations are favorably affected to the extent we can supply wood fiber to our manufacturing operations from our own timberlands, due to its low
cost basis relative to wood fiber purchased on the open market. The percentage of our wood fiber requirements supplied by our timberlands will fluctuate based on a variety of factors, including changes in our timber harvest levels, changes in our
manufacturing capacity and changes in the amount of timber sales to third parties. The cost of various types of wood fiber that we purchase in the market has at times fluctuated greatly because of economic or industry conditions. Selling prices of
our products have not always increased in response to wood fiber price increases nor have wood fiber prices always decreased in conjunction with declining product prices. On occasion, our results of operations have been and may in the future be
adversely affected if we are unable to pass cost increases through to our customers.



Finally, changes in our manufacturing capacity, primarily as a result of capital spending programs or asset dispositions, have significantly affected our results of operations in recent periods. In January 2001, we
completed a modernization and expansion of our OSB mill in Cook, Minnesota, which resulted in an increase in annual production capacity from 250 million square feet to 440 million square feet. In May 2002, we sold a majority of our Printing Papers
segment assets to a domestic subsidiary of Sappi Limited and exited the printing papers business. In August 2002, we sold a hardwood sawmill in Arkansas. We are currently in the process of bringing a newly constructed tissue machine in Las Vegas,
Nevada, up to full operating production, which we anticipate will produce 30,000 tons a year. In June



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2004, we began operating a tissue converting facility in Elwood, Illinois. Each of these changes has affected or will
affect our levels of net sales and expenses, as well as the comparability of our operating results from period to period. Additionally, the profitability of our manufacturing segments depends largely on our ability to operate our manufacturing
facilities efficiently and at or near full capacity. Our operating results would be adversely affected if market demand does not justify operating at these levels or if our operations are inefficient or suffer significant interruption for any
reason.



Critical Accounting Policies



Our principal accounting policies are discussed on pages 40-43 of our Annual
Report on Form 10-K for the year ended December 31, 2003. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported financial position and operating results of the company. Management believes the accounting policies discussed below represent the most complex, difficult and subjective judgments it makes in this regard.



Long-lived assets. Due to the capital-intensive nature of our industry, a
significant portion of our total assets are invested in our manufacturing facilities. Also, the cyclical patterns of our businesses cause cash flows to fluctuate by varying degrees from period to period. As a result, long-lived assets are a material
component of our financial position with the potential for material change in valuation if assets are determined to be impaired. We account for impairment of long-lived assets in accordance with SFAS No. 144. The Statement requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, as measured by its undiscounted estimated future cash flows. We use our operational budgets to
estimate future cash flows. Budgets are inherently uncertain estimates of future performance due to the fact that all inputs (revenues, costs, capital spending) are subject to frequent change for many different reasons, as previously described in
Factors Affecting Our Results of Operations. Because of the number of variables involved, the interrelationship between the variables, and the long-term nature of the impairment measurement, sensitivity analysis of individual variables
is not practical. Budget estimates are adjusted periodically to reflect changing business conditions and operations are reviewed, as appropriate, for impairment using the most current data available. To date, this process has not resulted in an
impairment charge for any of our assets.



Timber and
timberlands. Timber and timberlands are recorded at cost, net of fee timber harvested. Expenditures for reforestation, including all costs related to stand establishment, such as site preparation, costs of seeds or seedlings and tree planting, are
capitalized. Expenditures for forest management, consisting of regularly recurring items necessary to the ownership and administration of our timber and timberlands, are accounted for as current operating expense. Our cost of timber harvested is
determined based on costs capitalized and the related current estimated recoverable timber volume. Recoverable volume does not include anticipated future growth, nor are anticipated future costs considered.



There are currently no authoritative accounting rules relating to costs to be
capitalized in timber and timberlands. We have used relevant portions of current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations



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and judgments could significantly affect the amounts capitalized. Additionally, models and observations used to estimate
the current recoverable timber volume on our lands are subject to judgments that could significantly affect volume estimates. For example, harvest cycles can vary by geographic region and by species of timber, weather patterns can affect harvest
cycles, environmental regulations and restrictions may limit the companys ability to harvest certain timberlands, changes in harvest plans may occur, or scientific advancement in seedlings and timber growing technology may affect future
harvests. Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon amounts reported in our statements of operations and financial condition. Because of the number of variables involved and the
interrelationship between the variables, sensitivity analysis of individual variables is not practical.



Restructuring charges and discontinued operations. In 2001 and 2002 we recorded charges for the reduction of the hourly workforce at a manufacturing site
and a reduction of our salaried workforce, respectively. In May 2002 we completed the sale of a majority of the assets of our Printing Papers segment and closed a printing papers facility in Brainerd, Minnesota, which was subsequently sold in 2003.
In July 2002, we closed a hardwood lumber mill in Warren, Arkansas. The mill was sold in August 2002. In January 2004, we recorded a charge for a workforce reduction in our Consumer Products segment. These events required us to record estimates of
liabilities for employee benefits, environmental clean-up and other costs at the time of the event. In making these judgements, we considered contractual obligations, legal liabilities, and possible incremental costs incurred as a result of
restructuring plans to determine the liability. Our estimated liabilities could differ materially from actual costs incurred, with resulting adjustments to future period earnings for any differences, although no material adjustments to our original
estimates have occurred for the events described above.



Environmental liabilities. We record accruals for estimated environmental liabilities in accordance with SFAS No. 5, Accounting for Commitments and Contingencies. These estimates reflect assumptions and judgments as to the
probable nature, magnitude and timing of required investigation, remediation and monitoring activities. In making these estimates, we consider, among other things, the activities we have conducted at any particular site, information obtained through
consultation with applicable regulatory authorities and third-parties, and our historical experience at other sites that are judged to be comparable. We must also consider the likelihood of changes in governmental regulations, advancements in
environmental technologies, and changing legal standards regarding liability. Due to the numerous uncertainties and variables associated with these assumptions and judgments, and changes in governmental regulations and environmental technologies,
our accruals are subject to substantial uncertainties and our actual costs could be materially more or less than the estimated amounts.



Pension and postretirement benefits. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of
actuarial assumptions. Two critical assumptions are the discount rate applied to pension plan obligations and the rate of return on plan assets. For other postretirement employee benefit (OPEB) plans, which provide certain health care and life
insurance benefits to qualified retired employees, critical assumptions in determining OPEB expense are the discount rate applied to benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations.



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Note 12 to our 2003 Form 10-K consolidated financial statements includes information for the three years
ended December 31, 2003, on the components of pension and OPEB expense, the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2003 and 2002. Note 9,
Pension and Other Postretirement Benefit Plans, on pages 7-8 of this Form 10-Q, includes information on the components of pension and OPEB expense for the quarters and six months ended June 30, 2004 and 2003.



The discount rate used in the determination of pension benefit obligations
and pension expense is based on high-quality fixed income investment interest rates. At December 31, 2003, we calculated obligations using a 6.25% discount rate. The discount rates used at December 31, 2002 and 2001 were 6.75% and 7.25%,
respectively. To determine the expected long-term rate of return on pension assets, we employ a process that analyzes historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted
based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return. The assumed long-term rate of return on pension plan assets used for 2003-2001 was 9.5%.



An increase in the discount rate or the expected return on
plan assets, all other assumptions remaining the same, would reduce pension plan expense, and conversely, a decrease in either of these measures would increase plan expense. Total periodic pension plan income in 2003 was $13.3 million. As an
indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect plan expense by approximately $1.1 million. A 25 basis point change in the assumption for expected
return on plan assets would affect plan expense by approximately $1.5 million. The actual rates on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.



We estimate contributions to our pension plans will total approximately $1.2
million in 2004.



For our OPEB plans, expense for 2003 was
$23.4 million. The discount rate used to calculate OPEB obligations was also 6.25% at December 31, 2003, and 6.75% and 7.25% at December 31, 2002 and 2001, respectively. The assumed health care cost trend rate used to calculate OPEB obligations and
expense at December 31, 2003, was an 8% increase over the previous year, declining 1 percent annually to a long-term ultimate rate increase assumption of 6% for 2005 and thereafter.



As an indication of the sensitivity that OPEB expense has to the discount rate assumption, a 25 basis point change in the
discount rate would affect plan expense by approximately $0.8 million. A 1% change in the assumption for health care cost trend rates would have affected 2003 plan expense by approximately $2.2-$2.6 million and the total postretirement obligation by
approximately $27.0-$31.7 million. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.



Periodic pension and OPEB expense are included in Materials, labor and other operating expenses and
Selling, general and administrative expenses in the statements of operations. The expense is allocated to all business segments. Depending upon the funded status of the different plans, either a long-term asset or long-term liability is
recorded for plans with overfunding or underfunding, respectively. Any unfunded accumulated pension benefit



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obligation in excess of recorded liabilities is accounted for in stockholders equity as accumulated other
comprehensive income. See Note 12 to our 2003 Form 10-K financial statements for related balance sheet effects at December 31, 2003 and 2002.



Recent Accounting Pronouncements



In December 2003, the FASB issued a revision of SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits.
The revised statement was effective for financial statements with fiscal years ending after December 15, 2003. It requires disclosures in addition to those contained in the original Statement No. 132 about assets, obligations, cash flows and the net
periodic benefit cost of defined pension plans and other postretirement benefit plans. The information contained in Note 12 to our 2003 Form 10-K financial statements incorporates the additional annual disclosure requirements. The revised statement
also added new disclosure requirements for interim financial reports. The information contained in Note 9, Pension and Other Postretirement Benefit Plans, on pages 7-8 of this Form 10-Q, incorporates the additional interim disclosure
items required by the revised Statement No. 132.



Results of Operations



As noted above, our business is organized into four reporting
segments: Resource; Wood Products; Pulp and Paperboard; and Consumer Products. Sales or transfers between segments are recorded as intersegment sales based on prevailing market prices. Because of the role of the Resource segment in supplying our
manufacturing segments with wood fiber, intersegment sales represent a significant portion of the Resource segments total net sales. Intersegment sales represent a substantially smaller percentage of net sales for our other segments.



A summary of period-to-period changes in items included in the
statements of operations is presented on page 25 of this Form 10-Q. In the period-to-period discussion of our results of operations below, when we discuss our consolidated net sales, contributions by each of the segments to our net sales are
reported after elimination of intersegment sales. In the Discussion of Business Segments sections below, each segments net sales are set forth before elimination of intersegment sales.



Amounts reported for Discontinued operations in the Statements of
Operations and Comprehensive Income for the quarter and six months ended June 30, 2003, represent costs related to our former printing papers mill in Brainerd, Minnesota, which was sold in February 2003. The discussion below addresses our continuing
businesses. Certain 2003 amounts discussed below have been conformed to 2004 classifications.



Quarter Ended June 30, 2004, Compared to Quarter Ended June 30, 2003



Net Sales - Net sales increased 28%, to $472.6 million for the quarter ended June 30, 2004, from $368.1 million for the same period in 2003. Wood
Products net sales increased $94.9 million as a result of higher selling prices for lumber and panel products, especially oriented strand board. Pulp and Paperboard segment net sales were $7.0 million higher due to increased paperboard and pulp
shipments, combined with higher pulp prices. Consumer Products segment net sales increased $15.7 million due to increased shipments of consumer tissue products. The results for these segments more than offset a decline in Resource segment net sales
of $13.1 million. The decline was the result of lower land sales revenue and lower fiber sales in Arkansas.



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Depreciation, amortization and cost of fee timber harvested  For the quarter ended June 30,
2004, depreciation, amortization and cost of fee timber harvested totaled $25.0 million, essentially unchanged from the prior year amount of $25.2 million.



Materials, labor and other operating expenses  Materials, labor and other operating expenses increased 6% to $330.4 million for the quarter
ended June 30, 2004, from $311.9 million for the second quarter of 2003. The higher costs were due primarily to an increase in shipments of plywood, paperboard, pulp and consumer tissue products.



Selling, general and administrative expenses  Selling, general
and administrative expenses were $23.0 million for the second quarter of 2004, compared to $20.2 million incurred for the same period of 2003, due principally to an increase in corporate administration and research expense.



Restructuring charge  A pre-tax charge of $1.3 million was
recorded in January 2004 for a workforce reduction at our Consumer Products segment. A total of 60 production and 8 salaried employees were terminated. By June 30, 2004, all costs had been incurred for the workforce reduction, resulting in a second
quarter reversal of less than $0.1 million to the initial charge recorded in January.



Interest expense, net of capitalized interest  Interest expense totaled $12.5 million for the quarter ended June 30, 2004, compared to $12.1 million in the prior year period. An interest rate swap on $165
million of our 10% senior subordinated notes was outstanding for the entire second quarter of 2003, but was only outstanding for a portion of the second quarter of 2004. The absence of the swap caused an increase in interest expense for the current
period. The comparison is also affected by borrowings outstanding under our bank credit facility in the first half of 2003. We had no borrowings outstanding under our bank credit facility in the first half of 2004.



Interest income  For the quarter ended June 30, 2004, interest
income was $0.5 million, compared to $12.6 million for the 2003 period. In June 2003, we received a tax settlement from the Internal Revenue Service for the tax years 1989 through 1994 totaling $24.9 million. Of this amount, $12.5 million was
recognized as interest income.



Provision (benefit) for
taxes  For the quarter ended June 30, 2004, we recorded an income tax provision of $32.7 million on earnings from continuing operations of $82.2 million, based on an estimated annual effective tax rate of 39.5%. The second quarter
provision reflects the adjustment of the rate to 39.5% from 39% used for the first quarter of the year. During the second quarter of 2003, an estimated tax rate of 39% was used to derive an income tax provision of $4.4 million, calculated on our
earnings from continuing operations, before taxes, of $11.2 million.



Earnings (loss) from continuing operations  We recorded earnings from continuing operations of $49.6 million for the quarter ended June 30, 2004, compared to earnings of $6.8 million for the same period in 2003. Improved
earnings in the Wood Products segment were largely responsible for the favorable comparison.



Discussion of business segments  The Resource segment reported operating income of $6.8 million for the second quarter of 2004, down from $23.5 million earned in the same period of 2003. Segment net sales
were $44.8



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million for the second quarter of 2004 compared to $61.8 million for the 2003 period. The decreases in operating income
and net sales were primarily due to lower sales of nonstrategic land (land either unsuited for long-term timber management or of greater value to others for non-timber uses), which totaled $1.1 million in 2004 versus $14.1 million in 2003. The June
2003 sale of approximately 15,300 acres of hardwood timberland was the primary reason for the unfavorable comparison. Land sale revenue amounts can and usually do vary, sometimes significantly, from period to period due to the unique characteristics
of each transaction. Lower fiber sales in Arkansas due to weather conditions also negatively affected operating income and sales for 2004s second quarter. Resource segment expenses were $38.0 million in the second quarter of 2004 compared to
$38.3 million in the second quarter of 2003, reflecting the slightly lower fiber sales volume in Arkansas. Land sales generally do not have a material effect on segment expenses due to the low cost basis on most of our timberland.



The Wood Products segment reported operating income of $94.4 million for the
second quarter of 2004, compared to $2.3 million recorded in the second quarter of 2003. Strong homebuilding activity and demand for wood products, which began in the third quarter of 2003, has continued through the first half of 2004. Net sales for
the segment rose to $251.7 million for the second quarter of 2004, 60% higher than the $156.9 million recorded for the 2003 period. Oriented strand board net sales increased 107% to $129.4 million for the second quarter of 2004, compared to $62.4
million in the 2003 period, due to a 110% increase in sales prices. Shipments were slightly lower than the second quarter of 2003. Lumber net sales were $94.3 million, up from $74.1 million in 2003. The favorable comparison was due to a 35% increase
in lumber selling prices, which was partially offset by a 5% decrease in shipments. Plywood net sales increased to $16.1 million for the second quarter of 2004, compared to $9.8 million in 2003. Sales prices were 41% higher and shipment volume
increased 17% compared to the same period a year ago. Particleboard net sales were $5.2 million for the second quarter of 2004, compared to $3.9 million for the second quarter of 2003, as a result of a 43% increase in sales prices, partially offset
by a 6% decline in shipments. Segment expenses were slightly higher for the second quarter of 2004, totaling $157.3 million versus $154.6 million in 2003. Increased product shipments for the segment were primarily responsible for the higher expense
amount.



The Pulp and Paperboard segment reported operating
income for 2004s second quarter of $5.9 million, compared to a loss of $1.2 million for the same period of 2003. Segment net sales were $138.0 million for the second quarter of 2004, up from $128.7 million for the 2003 period. Paperboard net
sales increased to $119.9 million, compared to $115.3 million in the second quarter of 2003. Shipments increased 4% and selling prices were slightly higher compared to the prior years second quarter. Pulp sales (including intersegment sales)
were $18.2 million for the second quarter of 2004, compared to $13.4 million for the same period in 2003. The increase in pulp sales for 2004 was due largely to higher selling prices and increased shipments to external customers and the Consumer
Products segment. The increased pulp shipments were made possible by higher pulp production compared to the second quarter of 2003. Segment expenses were slightly higher for the second quarter of 2004, totaling $132.2 million, compared to $129.8
million in the second quarter of 2003. The increase reflects greater volumes of pulp and paperboard shipments for the second quarter of 2004 compared to 2003, although costs per ton of shipments were less due to production improvements.



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The Consumer Products segment incurred an operating loss of $1.2 million for the second quarter of 2004,
compared to the operating loss of $5.0 million recorded in the second quarter of 2003. Competitive market conditions for consumer tissue products continued during the quarter. Segment net sales improved 23% to $83.1 million versus the $67.4 million
recorded for the 2003 period. Selling prices increased 4% while product shipments grew by 18% compared to the prior year period. Shipment and selling prices were positively affected by the rollout of our ultra towel product manufactured at the new
Las Vegas tissue facility. Segment expenses were higher for the second quarter of 2004, totaling $84.4 million, versus $72.4 million in 2003. Higher product shipments and higher production costs due to higher pulp, freight, energy and labor costs
contributed to the increase in the quarter-to-quarter comparison.



Our discontinued operations incurred a loss of $0.3 million, before taxes, for the second quarter of 2003. The amount included costs associated with the sale of the Printing Papers segment assets in Brainerd, Minnesota, in February 2003.



Six Months Ended June 30, 2004, Compared to Six Months Ended June 30, 2003



Net Sales  Net sales increased 27%, to
$893.1 million for the six months ended June 30, 2004, from $702.9 million for the same period in 2003. Resource net sales increased $2.0 million over the first half of 2003, as increased log sales to third parties were largely offset by reduced
land sales. Wood Products net sales increased 58% to $454.9 million as a result of higher selling prices for lumber and panel products, especially oriented strand board, and higher plywood shipments. Pulp and Paperboard segment net sales were $9.6
million higher due to increased paperboard shipments. Consumer Products segment net sales increased to $157.1 million from $145.4 million due to an 8% increase in shipments over the first half of 2003.



Depreciation, amortization and cost of fee timber harvested  For
the six months ended June 30, 2004, depreciation, amortization and cost of fee timber harvested totaled $52.1 million, unchanged from the prior year.



Materials, labor and other operating expenses  Materials, labor and other operating expenses increased to $652.6 million for the six months
ended June 30, 2004, from $604.3 million for the six months ended June 30, 2003. The higher costs were due primarily to an increased volume of log sales and increased shipments of plywood, paperboard and consumer tissue products.



Selling, general and administrative expenses  Selling, general
and administrative expenses were $45.5 million for the first half of 2004, compared to $37.5 million incurred for the same period of 2003. The higher expense was due principally to an increase in corporate administration expense, higher research
expense and slightly higher selling expenses for the Consumer Products and Pulp and Paperboard segments.



Restructuring charge A pre-tax charge of $1.3 million was recorded in January 2004 for a workforce reduction at our Consumer Products
segment. A total of 60 production and 8 salaried employees were terminated. By June 2004, all costs had been incurred for the workforce reduction, resulting in a reversal of less than $0.1 million to the initial charge. During the first quarter of
2003 we recorded a pre-tax charge of $0.2 million for costs related to terminated employees whose services had been retained beyond the initial 60-day period following announced job eliminations in 2002.



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Interest expense, net of capitalized interest  Interest expense totaled $24.3 million for
the six months ended June 30, 2004, compared to $24.9 million in the prior year period. Higher interest expense in the first six months of 2003 was due to borrowings outstanding under our bank credit facility during the period and interest on $15.0
million of medium-term notes, which matured in April 2003.



Interest income  For the six months ended June 30, 2004, interest income was $0.6 million, compared to $12.6 million for the same period in 2003. The 2003 amount consisted primarily of the receipt of $12.5 million of interest
income in conjunction with a settlement with the Internal Revenue Service for tax years 1989 through 1994.



Provision (benefit) for taxes  For the six months ended June 30, 2004, we recorded an income tax provision of $46.6 million on earnings from
continuing operations of $118.0 million, based on an estimated effective tax rate of 39.5%. During the first half of 2003, an estimated tax rate of 39% was used to derive an income tax benefit of $1.3 million, calculated on our loss from continuing
operations, before taxes, of $3.4 million.



Earnings (loss)
from continuing operations  We recorded earnings from continuing operations of $71.4 million for the six months ended June 30, 2004, compared to a loss from continuing operations of $2.1 million for the same period in 2003. During the
first six months of 2004, improved earnings in the Wood Products and Pulp and Paperboard segments more than offset declines in Resource and Consumer Products segment results.



Other comprehensive loss, net of tax  For the six months ended June 30, 2004, we recorded a net derivative loss
due to cash flow hedges of $0.1 million, after tax. There were no derivative transactions in the first half of 2003.



Discussion of business segments  The Resource segment reported operating income of $18.8 million for the first six months of 2004, down from
$34.7 million earned in the same period of 2003. Higher income from nonstrategic land sales in 2003 was largely responsible for the unfavorable comparison. Segment net sales were $106.6 million for the first six months of 2004, comparable to the
$106.8 million recorded for the 2003 period. Higher log sales to third parties in Idaho during the first half of 2004 partially offset lower revenues from sales of nonstrategic land in the first half of 2004 compared to 2003. Revenue from sales of
nonstrategic land was $5.1 million in the first half of 2004 compared to $15.3 million in the first half of 2003. The June 2003 sale of approximately 15,300 acres in Arkansas was largely responsible for the difference between the two periods.
Resource segment expenses were $87.8 million in the first six months of 2004, compared to $72.1 million in the first six months of 2003, reflecting the higher log sales volume in Idaho and a corresponding increase in log purchases from third
parties. Land sales generally do not have a material effect on segment expenses due to the low cost basis on most of our timberland.



The Wood Products segment reported operating income of $152.2 million for the first six months of 2004, compared to a loss of $1.3 million recorded in the
first six months of 2003. The first half of 2004 has benefited from low interest rates, which have supported continued strong homebuilding activity and demand for wood products, while a weaker U.S. dollar has increased the cost of imported
materials. Net sales for the segment rose to $460.8 million for the first six months of 2004, 57% higher than the $294.0 million recorded for the 2003 period. Oriented strand board net sales increased 103% to $233.3 million for the first half of
2004, compared to $114.6 million in the



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2003 period, due to increased selling prices. Shipments were comparable to the prior year period. Lumber net sales were
$171.9 million, up from $137.7 million in 2003. The favorable comparison was due to a 26% increase in lumber selling prices. Shipments of lumber products were also comparable to the prior year. Plywood net sales increased to $31.6 million for the
first six months of 2004, compared to $19.1 million in 2003. Shipment volume increased 21% and sales prices were 37% higher than in the same period a year ago. Particleboard net sales were $10.1 million for the first half of 2004, compared to $7.2
million for the first half of 2003, as a result of a 38% increase in sales prices and slightly higher shipments. Segment expenses were higher for the first half of 2004, totaling $308.5 million versus $295.2 million in 2003. Increased plywood
shipments and higher oriented strand board production costs accounted for the increase over 2003s first half.



The Pulp and Paperboard segment reported an operating loss for 2004s first six months of $1.9 million, compared to a loss of $10.5 million for the
first six months of 2003. Segment net sales were $258.9 million for the first six months of 2004, up from $246.7 million for the 2003 period. Paperboard net sales increased to $228.4 million, compared to $220.2 million in the first six months of
2003. Shipments increased 5% compared to the prior years first six months; however, the effects were partially offset by a 1% decline in sales prices. Pulp sales (including intersegment sales) were higher for the first half of 2004, totaling
$30.5 million compared to $26.5 million for the same period in 2003. The increase in pulp sales for 2004 was due to 22% higher selling prices, partially offset by a slight decrease in shipments. Segment expenses were slightly higher for the first
six months of 2004, totaling $260.8 million, compared to $257.2 million in the first six months of 2003. The increase reflects greater volumes of paperboard shipments for the first six months of 2004 compared to 2003, partially offset by lower per
ton costs resulting from improved production.



The Consumer
Products segment incurred an operating loss of $5.1 million for the first half of 2004, compared to operating income of $1.8 million for the first half of 2003. Market conditions remained very competitive for consumer tissue products during the
first half of 2004. Segment net sales were $157.1 million for the first half of 2004, 8% higher than the $145.5 million recorded for the 2003 period. The increase in net sales was due to an 8% increase in product shipments compared to the prior year
period. Shipments were positively affected by the rollout of our ultra towel product. Segment expenses were higher for the first six months of 2004, totaling $162.2 million, versus $143.7 million in the first six months of 2003. Increased product
shipments as well as start-up costs related to the new tissue machine in Las Vegas contributed to the unfavorable comparison. Higher production costs due to higher pulp, freight, energy and labor costs incurred in the first half of 2004 also
adversely affected segment expenses. The segment also recorded a pre-tax charge of $1.2 million for a workforce reduction.



Our discontinued operations incurred a loss of $1.4 million, before taxes, for the first six months of 2003. The amount included costs associated with the
sale of the Printing Papers segment assets in Brainerd, Minnesota, in February 2003.



Liquidity and Capital Resources



At June 30,
2004, our financial position included long-term debt of $618.3 million, including current installments on long-term debt of $1.1 million. Long-term debt at June 30, 2004 (including current installments) declined slightly from the December 2003
balance due to normal repayments on



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maturing debt of $0.5 million. Stockholders equity increased $84.7 million, largely due to net earnings of $71.4
million for the first half of 2004 and the issuance of treasury stock totaling $21.7 million, which were partially offset by dividend payments of $8.8 million. The ratio of long-term debt (including current installments) to stockholders equity
was 1.11 to 1 at June 30, 2004, compared to 1.31 to 1 at December 31, 2003.



Scheduled payments due on long-term debt during each of the five years subsequent to December 31, 2004, are as follows:



|                       |  |   |        
|---------------------- |  | - | -------
|(Dollars in thousands) |  |  
|                       | 
|2005                   |  | $ | 1,508  
|2006                   |  |   | 2,758  
|2007                   |  |   | 6,559  
|2008                   |  |   | 609    
|2009                   |  |   | 100,810



Working capital
totaled $314.1 million at June 30, 2004, an increase of $153.3 million from December 31, 2003. The significant changes in the components of working capital are as follows:



| | Short-term investments increased $154.5 million. Positive cash flow from increased operating earnings not immediately needed for operations or capital expenditures were invested in
short-term bank instruments.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Receivables increased $17.7 million primarily as a result of increased sales and the corresponding increase in customer receivables.
|- | ------------------------------------------------------------------------------------------------------------------------------------



| | Inventories declined $21.5 million largely as a result of seasonal decreases in log inventories.
|- | ------------------------------------------------------------------------------------------------



Net cash provided by operations for the first half of 2004 totaled $183.8 million, compared with $69.2 million for the same
period in 2003. Net earnings from continuing operations, versus a net loss in 2003, combined with an increase in deferred taxes were largely responsible for the favorable comparison. The net earnings were generally due to higher selling prices for
wood products and pulp.



For the six months ended June 30,
2004, net cash used for investing was $184.9 million, compared to $44.1 million for the first six months of 2003. In 2004 we used $154.5 million to increase our short-term investments, as discussed above, and $25.5 million for capital spending.
Capital spending in 2004 included $4.9 million towards completion of our new tissue machine in Las Vegas. The balance of capital spending in 2004 focused on forest resources and various small projects designed to improve product quality and
manufacturing efficiency. Cash was used in the first half of 2003 primarily for increasing short-term investments and for capital spending projects, while the use of restricted cash to repay debt partially offset these activities.



Net cash provided by financing totaled $4.0 million for the six months ended
June 30, 2004, compared with cash used for financing of $21.6 million during the same period in 2003. The majority of cash provided by financing in 2004s first six months resulted from the issuance of treasury stock totaling $21.7 million.
This amount was partially offset by a reduction in book overdrafts of $10.0 million and dividend payments of $8.8 million. The majority of the cash used in 2003 was for the retirement of long-term debt and for the payment of dividends.



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Cash generated from discontinued operations in the first half of 2003 totaled $3.6 million, the net
result of the sale of our Brainerd facility in February.



On
June 29, 2004, we entered into a new three-year unsecured bank credit facility, which replaced a secured bank credit facility that expired on June 28, 2004. The new credit facility provides a revolving line of credit of up to $125 million, including
a $35 million subfacility for letters of credit and a $10 million subfacility for swing line loans. Usage under either or both subfacilities reduces availability under the revolving line of credit. As of June 30, 2004, there were no borrowings
outstanding under the new credit facility; however, approximately $11.6 million of the letter of credit subfacility is being used to support several outstanding letters of credit.



Both the agreement governing our bank credit facility and the indenture governing our $250 million 10% senior subordinated
notes contain certain covenants that, among other things, restrict our ability and our subsidiaries ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem
capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures, or change the nature of our business. The bank credit facility also contains financial maintenance
covenants establishing a maximum funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the bank credit facility and the indenture include, but are
not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or
asserted invalidity of security interests or loan documentation, and certain change of control events involving our company. As of June 30, 2004, we were in compliance with the covenants of our bank credit facility and the $250 million 10% senior
subordinated notes.



We believe that our cash, cash flows from
operations and available borrowings under our current bank credit facility will be sufficient to fund our operations, capital expenditures and debt service obligations for the next twelve months. We cannot assure, however, that our business will
generate sufficient cash flow from operations or that we will be in compliance with the financial covenants in our bank credit facility so that future borrowings thereunder will be available to us. Thus, our ability to fund our operations will be
dependent upon our future financial performance, which will be affected by general economic, competitive and other factors, including those discussed above under Factors Influencing Our Results of Operations, many of which are beyond our
control.



As of June 30, 2004, Standard & Poors
Ratings Services (S&P) rated our senior unsecured debt at BB+, with a stable outlook, and our senior secured bank loan rating at BBB-. The ratings have remained unchanged since January 30, 2003. Since the first quarter of 2003, Fitch, Inc. has
rated our senior unsecured debt at BB+ and our senior secured bank loan rating at BBB-. In March 2004, Fitch reaffirmed our ratings, but upgraded its outlook on the company from negative to stable. Moodys Investors Service Inc.s rating
of our debt is currently Baa3 with a negative outlook. The interest rate we pay on some of our debt is influenced by our credit ratings. See Item 3  Quantitative and Qualitative Disclosures About Market Risk on pages 26-27 for additional
information.



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It is our practice to periodically review strategic and operational alternatives to improve our operating
results and financial position. In this regard, we consider and plan to continue to consider, among other things, adjustments to our capital expenditures and overall spending, the restructuring of our operations to achieve greater efficiencies, and
the disposition of assets that may have greater value to others. There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our
operating results and financial position.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES

Changes in Statements of Operations

(Dollars in thousands)



|                                                            |  |                       |         |   |                          |   |         |                     |  |     |      |  |   |         |   |  |                     |         |   |  |       |   
|----------------------------------------------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------- | ------------------- |  | --- | ---- |  | - | ------- | - |  | ------------------- | ------- | - |  | ----- | --
|                                                            |  | Quarter Ended June 30 |         |   | Six Months Ended June 30 |  
|                                                            |  | 2004                  |         |   | 2003                     |   |         | Increase (Decrease) |  |     | 2004 |  |   | 2003    |   |  | Increase (Decrease) |        
|Net sales                                                   |  | $                     | 472,639 |   |                          | $ | 368,094 |                     |  | 28  | %    |  | $ | 893,061 |   |  | $                   | 702,896 |   |  | 27    | % 
|Costs and expenses:                                         |  |                       |         |   |                          |   |         |                     |  |     |      |  |   |         |   |  |                     |         |   |  |       |   
|Depreciation, amortization and cost of fee timber harvested |  |                       | 25,041  |   |                          |   | 25,202  |                     |  | (1  | )%   |  |   | 52,124  |   |  |                     | 52,061  |   |  |      |   
|Materials, labor and other operating expenses               |  |                       | 330,449 |   |                          |   | 311,915 |                     |  | 6   | %    |  |   | 652,554 |   |  |                     | 604,259 |   |  | 8     | % 
|Selling, general and administrative expenses                |  |                       | 23,022  |   |                          |   | 20,239  |                     |  | 14  | %    |  |   | 45,477  |   |  |                     | 37,491  |   |  | 21    | % 
|Restructuring charges                                       |  |                       | (87     | ) |                          |   |        |                     |  | *   |      |  |   | 1,193   |   |  |                     | 227     |   |  | 426   | % 
|Earnings from operations                                    |  |                       | 94,214  |   |                          |   | 10,738  |                     |  | 777 | %    |  |   | 141,713 |   |  |                     | 8,858   |   |  | 1,500 | % 
|Interest expense                                            |  |                       | (12,478 | ) |                          |   | (12,128 | )                   |  | 3   | %    |  |   | (24,338 | ) |  |                     | (24,890 | ) |  | (2    | )%
|Interest income                                             |  |                       | 491     |   |                          |   | 12,573  |                     |  | (96 | )%   |  |   | 619     |   |  |                     | 12,640  |   |  | (95   | )%
|Provision (benefit) for taxes                               |  |                       | 32,659  |   |                          |   | 4,361   |                     |  | 649 | %    |  |   | 46,608  |   |  |                     | (1,323  | ) |  | *     |   
|Earnings (loss) from continuing operations                  |  |                       | 49,568  |   |                          |   | 6,822   |                     |  | 627 | %    |  |   | 71,386  |   |  |                     | (2,069  | ) |  | *     |   
|Discontinued operations:                                    |  |                       |         |   |                          |   |         |                     |  |     |      |  |   |         |   |  |                     |         |   |  |       |   
|Loss from discontinued operations                           |  |                       |        |   |                          |   | (283    | )                   |  | *   |      |  |   |        |   |  |                     | (1,389  | ) |  | *     |   
|Income tax benefit                                          |  |                       |        |   |                          |   | (110    | )                   |  | *   |      |  |   |        |   |  |                     | (542    | ) |  | *     |   
|Net earnings (loss)                                         |  | $                     | 49,568  |   |                          | $ | 6,649   |                     |  | 645 | %    |  | $ | 71,386  |   |  | $                   | (2,916  | ) |  | *     |   

---

|* | Not a meaningful figure.
|- | ------------------------



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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk



Our exposure to market risks on financial instruments includes interest rate risk on our bank credit facility, long-term debt and interest rate swap, and
credit rate risk on our credit sensitive debentures.



During
the quarter ended June 30, 2004, we had no borrowings outstanding under our bank credit facility. The interest rates applied to borrowings under the bank credit facility are adjusted often and therefore react quickly to any movement in the general
trend of market interest rates. We do not attempt to mitigate the effects of short-term interest rate fluctuations on our bank credit facility borrowings through the use of derivative financial instruments.



All of our long-term debt is fixed-rate and therefore changes in market
interest rates do not expose us to interest rate risk for these financial instruments. However, in August 2003 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was
designated as a fair value hedge and called for the company to pay a variable interest amount, determined semi-annually in arrears and equal to LIBOR plus 4.80%, and receive a fixed rate payment from a financial institution, calculated on $165.0
million of our 10% senior subordinated debentures. The terms of the swap allowed us to assume there was no ineffectiveness in the hedge. In March 2004, we terminated the interest rate swap and received a cash settlement of $6.0 million. The
settlement represented the value of the swap at the time of termination. The cash settlement for the swap is being accreted to earnings until the 10% senior subordinated debentures are retired in 2011. In May 2004, we reinstated our
fixed-to-variable interest rate swap, with identical terms as the swap we terminated in March 2004.



We currently have $100 million of credit sensitive debentures outstanding which pay interest to the debt holder based upon our credit ratings as
established by Standard & Poors Ratings Services (S&P) or Moodys Investors Services, Inc. The following table denotes the interest rate applicable based on various credit ratings:



|            |  |             |  |                    
|----------- |  | ----------- |  | -------------------
|Ratings     |  |            
|Moodys     |  | S&P         |  | Applicable Rate (%)
|Aaa         |  | AAA         |  | 8.825              
|Aa1  Aa3   |  | AA+ AA    |  | 8.925              
|A1  Baa2   |  | A+  BBB    |  | 9.125              
|Baa3        |  | BBB        |  | 9.425              
|Ba1         |  | BB+         |  | 12.500             
|Ba2         |  | BB          |  | 13.000             
|Ba3         |  | BB         |  | 13.500             
|B1 or lower |  | B+ or lower |  | 14.000             



On January 30, 2003,
S&P announced that it had lowered our senior unsecured debt rating to BB+ from BBB-. The ratings downgrade caused the interest rate on our credit sensitive debentures to increase from 9.425% to 12.5%, effective January 30, 2003.



During the third quarter of 2003, we entered into several derivative
financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. As designated cash flow hedges, changes in the fair value of the financial instruments are recognized in
Other comprehensive loss, net of tax to the extent the hedges are deemed effective, until the hedged item is recognized in the statement of



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operations. As of March 31, 2004, the derivative financial instruments entered into in the third quarter of 2003 had
expired, and we have not entered into any additional instruments to hedge our expected future natural gas purchases.



The following table discloses quantitative information about market risks:



|                       |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  |   |         |  
|---------------------- |  | ------------------------------------------------ | --- | - | ----- | - | ----- | ---- |  | - | ----- | - |  | ---- | ------------------------------- | - | ---------- | - | --- | - |  | - | ------- | - |  | - | ------- | -
|                       |  | Expected Maturity Date (as of December 31, 2003) |     |   | Total |  
|                       |  | 2004                                             |     |   | 2005  |   |       | 2006 |  |   | 2007  |   |  | 2008 |                                 |   | Thereafter |   |    
|(Dollars in thousands) |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  |   |         |  
|Long-term debt:        |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  |   |         |  
|Fixed rate             |  | $                                                | 507 |   |       | $ | 1,508 |      |  | $ | 2,758 |   |  | $    | 6,559                           |   |            | $ | 609 |   |  | $ | 606,844 |   |  | $ | 618,785 |  
|Average interest rate  |  |                                                  | 6.0 | % |       |   | 6.2   | %    |  |   | 6.4   | % |  |      | 6.1                             | % |            |   | 6.8 | % |  |   | 8.0     | % |  |   | 8.0     | %
|Fair value at 06/30/04 |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  | $ | 651,401 |  
|                       |  |                                                  |     |   |       |   |      
|Interest rate swap:    |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  |   |         |  
|Fixed to variable      |  |                                                  |    |   |       |   |      |      |  |   |      |   |  |      |                                |   |            |   |    |   |  | $ | 165,000 |   |  | $ | 165,000 |  
|Average pay rate       |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      | 6-month LIBOR in arrears + 4.8% |  
|Average receive rate   |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   | 10.0    | % |  |   | 10.0    | %
|Fair value at 06/30/04 |  |                                                  |     |   |       |   |       |      |  |   |       |   |  |      |                                 |   |            |   |     |   |  |   |         |   |  | $ | (1,029  | )



ITEM 4. Disclosure Controls and Procedures



Potlatch maintains disclosure controls and procedures, as such term is defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934 (the Exchange Act), which are designed to ensure that
information required to be disclosed by Potlatch in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to Potlatchs management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating Potlatchs disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, Potlatchs management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.



Subject to the limitations noted above, our management, with the participation of our CEO and CFO, has evaluated the effectiveness of the design and operation of Potlatchs disclosure controls and procedures as of the end of the fiscal
quarter covered by the quarterly report on this Form 10-Q. Based on that evaluation, the CEO and CFO have concluded that Potlatchs disclosure controls and procedures are effective to meet the objective for which they were designed and operate
at the reasonable assurance level.



There were no changes in
Potlatchs internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, Potlatchs internal control over financial reporting.



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PART II



ITEM 4. Submission of Matters to a Vote of Security Holders



At the annual meeting of stockholders of the company held on May 3, 2004, the companys stockholders voted on three proposals as follows:



|           |  |                                                                   |  |                     |  |            |  |               
|---------- |  | ----------------------------------------------------------------- |  | ------------------- |  | ---------- |  | --------------
|Proposal 1 |  |                                                                   |  |                    
|           |  |                                                                  
|           |  | Election of Three Directors                                       |  |                    
|           |  |                                                                   |  |                     |  | Votes For  |  | Votes Withheld
|           |  |                                                                   |  | Gregory L. Quesnel  |  | 44,654,458 |  | 5,743,047     
|           |  |                                                                   |  | Michael T. Riordan  |  | 47,288,358 |  | 3,109,148     
|           |  |                                                                   |  | L. Pendleton Siegel |  | 46,702,514 |  | 3,694,991     
|           | 
|Proposal 2 |  |                                                                  
|           |  |                                                                  
|           |  | Stockholder Proposal Urging Preparation of Dividend Policy Report |  |                    
|           |  |                                                                   |  |                    
|           |  |                                                                   |  | Votes For           |  | 3,014,067  |  |               
|           |  |                                                                   |  | Votes Against       |  | 43,491,191 |  |               
|           |  |                                                                   |  | Abstentions         |  | 745,649    |  |               
|           |  |                                                                   |  | Broker Non-Votes    |  | 3,146,597  |  |               
|           | 
|Proposal 3 |  |                                                                  
|           |  |                                                                  
|           |  | Stockholder Proposal Urging Elimination of Time-Phased Voting     |  |                    
|           |  |                                                                   |  |                    
|           |  |                                                                   |  | Votes For           |  | 16,140,281 |  |               
|           |  |                                                                   |  | Votes Against       |  | 30,810,684 |  |               
|           |  |                                                                   |  | Abstentions         |  | 299,943    |  |               
|           |  |                                                                   |  | Broker Non-Votes    |  | 3,146,597  |  |               



ITEM 6. Exhibits and Reports on Form 8-K



Exhibits



The exhibit index is located on page 30 of this Form
10-Q.



Reports on Form 8-K



A current report on Form 8-K was filed on April 20, 2004. Under Item 7,
Financial Statements and Exhibits, we furnished our first quarter earnings release.



A current report on Form 8-K was filed on May 7, 2004. Under Item 5, Other Events, we reported that effective May 5 we reinstated our fixed-to-variable interest rate swap, which is used to hedge $165 million of our
$250 million principal amount 10% senior subordinated debentures due 2011.



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SIGNATURES



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



POTLATCH CORPORATION(Registrant)By

/S/ Gerald L. ZuehlkeGerald L. ZuehlkeVice President, Finance, ChiefFinancial Officer(Duly Authorized; Principal Financial
Officer)By

/S/ Terry L. CarterTerry L. CarterController(Duly Authorized; Principal Accounting
Officer)




Date: August 6, 2004



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Exhibit Index



Exhibit



PART II



|           |  |                                                                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|(4)        |  | Registrant undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.
|           | 
|(10) (i)   |  | Compensation of Directors, dated May 20, 2004.                                                                                         
|           | 
|(10) (r) * |  | Credit Agreement, dated as of June 29, 2004, filed as Exhibit 1 to the current report on Form 8-K filed July 7, 2004.                  
|           | 
|(31)       |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                
|           | 
|(32)       |  | Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350                           

---

|* | Incorporated by reference.
|- | --------------------------



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