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SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549



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FORM 10-Q



Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934



For
Quarter Ended September 30, 2003





Commission file number 1-5313



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POTLATCH CORPORATION

(Exact name of registrant as specified in its charter)



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



(509) 835-1500

Registrants telephone number, including area code



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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 September 30, 2003: 28,749,648 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 nine months ended September 30, 2003 and 2002 |  | 2                                                                                    
|                                                                                                                                  | 
|Consolidated Condensed Balance Sheets at September 30, 2003 and December 31, 2002                                                 |  | 3                                                                                    
|                                                                                                                                  | 
|Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2003 and 2002                             |  | 4                                                                                    
|                                                                                                                                  | 
|Notes to Consolidated Financial Statements                                                                                        |  | 5 - 17                                                                               
|                                                                                                                                  |  |                                                                                      
|Item 2.                                                                                                                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                                                  |  |                                                                                      
|Item 3.                                                                                                                           |  | Quantitative and Qualitative Disclosures About Market Risk                           
|                                                                                                                                  |  |                                                                                      
|Item 4.                                                                                                                           |  | Disclosure Controls and Procedures                                                   
|                                                                                                                                  | 
|PART II. OTHER INFORMATION                                                                                                        |  |                                                                                      
|                                                                                                                                  |  |                                                                                      
|Item 6.                                                                                                                           |  | Exhibits and Reports on Form 8-K                                                     
|                                                                                                                                  | 
|SIGNATURES                                                                                                                        |  | 34                                                                                   
|                                                                                                                                  | 
|EXHIBIT INDEX                                                                                                                     |  | 35                                                                                   



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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 September 30 |         |   | Nine Months Ended September 30 |  
|------------------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------------ | -
|                                                                                           |  | 2003                       |         |   | 2002                           |  
|Net sales                                                                                  |  | $                          | 400,259 |   |                                | $
|                                                                                           |  |                            |         |   |                                |  
|Costs and expenses:                                                                        |  |                            |         |   |                                |  
|Depreciation, amortization and cost of fee timber harvested                                |  |                            | 25,779  |   |                                |  
|Materials, labor and other operating expenses                                              |  |                            | 307,607 |   |                                |  
|Selling, general and administrative expenses                                               |  |                            | 21,221  |   |                                |  
|Restructuring charge                                                                       |  |                            |        |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|                                                                                           |  |                            | 354,607 |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Earnings from operations                                                                   |  |                            | 45,652  |   |                                |  
|                                                                                           |  |                            |         |  
|Interest expense                                                                           |  |                            | (12,234 | ) |                                |  
|Debt retirement costs                                                                      |  |                            |        |   |                                |  
|Interest income                                                                            |  |                            | 515     |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Earnings (loss) before taxes on income                                                     |  |                            | 33,933  |   |                                |  
|Provision (benefit) for taxes on income (Note 3)                                           |  |                            | 11,777  |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Earnings (loss) from continuing operations                                                 |  |                            | 22,156  |   |                                |  
|Discontinued operations (Note 4):                                                          |  |                            |         |   |                                |  
|Loss from discontinued operations (including loss on disposal of $0, $0, $45 and $254,970) |  |                            |        |   |                                |  
|Income tax benefit                                                                         |  |                            |        |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Net earnings (loss)                                                                        |  |                            | 22,156  |   |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Other comprehensive loss, net of tax:                                                      |  |                            |         |   |                                |  
|Cash flow hedges (Note 5):                                                                 |  |                            |         |   |                                |  
|Net derivative losses, net of tax effect of $(220), $0, $(220) and $0                      |  |                            | (427    | ) |                                |  
|                                                                                           |  |                            |         |   |                                |  
|Comprehensive income (loss)                                                                |  | $                          | 21,729  |   |                                | $
|                                                                                           |  |                            |         |   |                                |  
|Net earnings (loss) per common share from continuing operations (Note 6):                  |  |                            |         |   |                                |  
|Basic                                                                                      |  | $                          | .77     |   |                                | $
|Diluted                                                                                    |  | $                          | .77     |   |                                | $
|Net earnings (loss) per common share:                                                      |  |                            |         |   |                                |  
|Basic                                                                                      |  |                            | .77     |   |                                |  
|Diluted                                                                                    |  |                            | .77     |   |                                |  
|Dividends per common share (annual rate)                                                   |  |                            | .60     |   |                                |  
|Average shares outstanding (in thousands):                                                 |  |                            |         |   |                                |  
|Basic                                                                                      |  |                            | 28,734  |   |                                |  
|Diluted                                                                                    |  |                            | 28,760  |   |                                |  
|                                                                                           |  |                            |         |   |                                |  



Certain 2002 amounts have been
conformed to the 2003 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

2003 amounts unaudited (Dollars in thousands - except per-share amounts)



|                                                           |  | September 30, 2003 |           | December 31, 2002
|---------------------------------------------------------- |  | ------------------ | --------- | -----------------
|Assets                                                     |  |                    |           |                  
|Current assets:                                            |  |                    |           |                  
|Cash                                                       |  | $                  | 16,088    |                  
|Restricted cash (Note 8)                                   |  |                    |          |                  
|Short-term investments                                     |  |                    | 12,445    |                  
|Receivables, net (Note 9)                                  |  |                    | 118,927   |                  
|Inventories (Note 10)                                      |  |                    | 131,629   |                  
|Prepaid expenses                                           |  |                    | 31,172    |                  
|Assets held for sale (Note 4)                              |  |                    |          |                  
|                                                           |  |                    |           |                  
|Total current assets                                       |  |                    | 310,261   |                  
|Land, other than timberlands                               |  |                    | 8,831     |                  
|Plant and equipment, at cost less accumulated depreciation |  |                    | 746,261   |                  
|Timber, timberlands and related logging facilities         |  |                    | 400,411   |                  
|Other assets                                               |  |                    | 114,694   |                  
|                                                           |  |                    |           |                  
|                                                           |  | $                  | 1,580,458 |                  
|                                                           |  |                    |           |                  
|Liabilities and Stockholders Equity                       |  |                    |           |                  
|Current liabilities:                                       |  |                    |           |                  
|Notes payable                                              |  | $                  |          |                  
|Current installments on long-term debt                     |  |                    | 507       |                  
|Accounts payable and accrued liabilities                   |  |                    | 172,986   |                  
|Liabilities related to assets held for sale (Note 4)       |  |                    |          |                  
|                                                           |  |                    |           |                  
|Total current liabilities                                  |  |                    | 173,493   |                  
|Long-term debt                                             |  |                    | 621,368   |                  
|Other long-term obligations                                |  |                    | 278,458   |                  
|Deferred taxes                                             |  |                    | 66,345    |                  
|Stockholders equity                                       |  |                    | 440,794   |                  
|                                                           |  |                    |           |                  
|                                                           |  | $                  | 1,580,458 |                  
|                                                           |  |                    |           |                  
|Stockholders equity per common share                      |  | $                  | 15.33     |                  
|Working capital                                            |  | $                  | 136,768   |                  
|Current ratio                                              |  |                    | 1.8:1     |                  
|                                                           |  |                    |           |                  



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)



|                                                                              |  | Nine Months Ended September 30 |        
|----------------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                              |  | 2003                           |        
|Cash Flows From Continuing Operations                                         |  |                                |        
|Net earnings (loss)                                                           |  | $                              | 19,240 
|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                   |  |                                | 77,840 
|Debt retirement costs                                                         |  |                                |       
|Deferred taxes                                                                |  |                                | 9,691  
|Working capital changes                                                       |  |                                | 22,340 
|                                                                              |  |                                |        
|Net cash provided by (used for) operating activities of continuing operations |  |                                | 129,991
|                                                                              |  |                                |        
|Cash Flows From Investing                                                     |  |                                |        
|Decrease in restricted cash                                                   |  |                                | 15,069 
|Decrease (increase) in short-term investments                                 |  |                                | (10,445
|Additions to plant and properties                                             |  |                                | (62,328
|Other, net                                                                    |  |                                | (7,270 
|                                                                              |  |                                |        
|Net cash provided by (used for) investing activities of continuing operations |  |                                | (64,974
|                                                                              |  |                                |        
|Cash Flows From Financing                                                     |  |                                |        
|Change in book overdrafts                                                     |  |                                | (3,311 
|Decrease in notes payable                                                     |  |                                | (40,000
|Retirement of long-term debt                                                  |  |                                | (16,377
|Premiums and fees on debt retirement                                          |  |                                |       
|Issuance of treasury stock                                                    |  |                                | 4,091  
|Dividends                                                                     |  |                                | (12,901
|Other, net                                                                    |  |                                | 6,988  
|                                                                              |  |                                |        
|Net cash used for financing activities of continuing operations               |  |                                | (61,510
|                                                                              |  |                                |        
|Cash from continuing operations                                               |  |                                | 3,507  
|Cash from discontinued operations                                             |  |                                | 3,608  
|                                                                              |  |                                |        
|Increase in cash                                                              |  |                                | 7,115  
|Balance at beginning of period                                                |  |                                | 8,973  
|                                                                              |  |                                |        
|Balance at end of period                                                      |  | $                              | 16,088 
|                                                                              |  |                                |        



Net interest payments (net of amounts
capitalized) for the nine months ended September 30, 2003 and 2002 were $34.9 million and $53.0 million, respectively. Net income tax refunds for the nine months ended September 30, 2003 and 2002 were $12.3 million and $15.9 million, respectively.



Certain 2002 amounts have been conformed to the 2003 presentation.



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



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Potlatch Corporation and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

Unaudited (Dollars in thousands)



NOTE 1. GENERAL - The accompanying condensed balance sheets at September 30, 2003, and December 31, 2002, the statements of operations and comprehensive income for
the quarters and nine months ended September 30, 2003 and 2002, and the condensed statements of cash flows for the nine months ended September 30, 2003 and 2002, 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. On March 18, 2002, we announced that we had signed a definitive agreement to sell a majority of the
assets of our Printing Papers segment to a domestic subsidiary of Sappi Limited, and upon completion of the sale in May 2002, we exited the printing papers business. On June 3, 2002, we announced our intention to close our hardwood lumber mill in
Warren, Arkansas, and exit the hardwood lumber business. We sold the facility in August 2002. As a result, the Printing Papers segment and the hardwood lumber mill operations have been classified as discontinued operations and
assets held for sale in the financial statements presented herein. Except for adjustments to the carrying value of the Printing Papers segment and hardwood lumber mill assets made in conjunction with the announcements, and pursuant to
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, all adjustments were of a normal recurring nature; there were no other material nonrecurring adjustments.



NOTE 2. ACCOUNTING PRONOUNCEMENTS - We adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, effective January 1, 2003. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, with the associated
asset retirement costs capitalized as part of the carrying amount of the long-lived asset. Adoption of this Statement did not have a material effect on our financial condition or results of operations.



We adopted Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities effective January 1, 2003. The Interpretation requires that an enterprises consolidated financial statements include entities in which the enterprise has a controlling financial interest.
Adoption of the Interpretation did not affect our financial condition or results of operations.



In May 2003, the FASB issued and we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. The Statement requires certain financial instruments to be classified as liabilities, rather than equity, in a statement of financial condition. We currently do not have outstanding any financial instruments that fall under the scope
of SFAS No. 150.



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% for 2002. For 2003, the rate used for the first half of the year was 39%, but was revised to 34% in the third
quarter. The rate resulted from a revision in our estimated ability to apply anticipated tax credits to our expected 2003 tax provision. The 34% estimated tax rate may be revised further in the fourth quarter depending upon our actual earnings
results for the year.



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NOTE 4. DISCONTINUED OPERATIONS - On March 18, 2002, we announced that we had signed a definitive agreement
with a domestic subsidiary of Sappi Limited for the sale of our Cloquet, Minnesota, pulp and printing papers facilities and certain associated assets for $485.5 million in cash, after closing adjustments. The sale was completed in May 2002. As a
result of the transaction, we recorded an after-tax charge of $149.8 million in the first quarter of 2002. The charge represented estimated costs associated with the write-down of the carrying value of the assets involved in the sale, the closure of
the Brainerd facility and other costs associated with exiting the coated paper business. The Brainerd facility was sold on February 28, 2003, for $4.44 million in cash, and an additional loss on disposal of less than $.1 million was recorded at that
time.



On June 3, 2002, we announced that we would close our
Bradley hardwood mill in Warren, Arkansas, and exit the hardwood lumber business. We sold the facility in August 2002.



For the third quarter and nine months of 2002, the after-tax charge of $0 million and $155.5 million, respectively, and operating losses of $2.1 million
and $12.5 million, respectively, for the printing papers segment and the hardwood mill are classified as discontinued operations in the Statements of Operations and Comprehensive Income, as required by SFAS No. 144. For the first nine months of
2003, after-tax losses associated with the Brainerd facility, as well as the minor additional loss on disposal of the facility, totaling $.8 million, are classified as discontinued operations.



At December 31, 2002, the assets and liabilities of the Brainerd facility
were presented in the Balance Sheets under the captions Assets held for sale and Liabilities related to assets held for sale. The carrying amounts of the major classes of these assets and liabilities are as follows:



|(Dollars in thousands)                   |  | September 30, 2003 |   | December 31, 2002
|---------------------------------------- |  | ------------------ | - | -----------------
|Assets                                   |  |                    |   |                  
|Land, other than timberlands             |  | $                  |  |                  
|Plant and equipment, net                 |  |                    |  |                  
|                                         |  |                    |   |                  
|Total assets held for sale               |  | $                  |  |                  
|                                         |  |                    |   |                  
|Liabilities                              |  |                    |   |                  
|Accounts payable and accrued liabilities |  | $                  |  |                  
|                                         |  |                    |   |                  



NOTE 5. CASH FLOW HEDGES -
During the third quarter of 2003, we entered into several derivative financial instruments designed as cash flow hedges for a portion of our expected natural gas purchases during the coming winter months (November 2003 through March 2004). The
financial instruments are in the form of collars, with a ceiling of $6.35 per mmBtu and floors ranging from $4.44 to $5.30 per mmBtu, indexed to the NYMEX, Rocky Mountain and Canadian Border indices. The collars apply to 13,200 mmBtu of natural gas
purchased per day for the five month period beginning November 1, which represents approximately 60% of our expected daily usage during that period. As designated cash flow hedges, changes in the fair value of the financial instruments are
recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings.



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NOTE 6. EARNINGS (LOSS) PER COMMON SHARE - 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 September 30 |  | Nine Months Ended September 30
|---------------------------------------------- |  | -------------------------- |  | ------------------------------
|                                               |  | 2003                       |  | 2002                          
|Basic average common shares outstanding        |  | 28,733,600                 |  | 28,497,807                    
|Incremental shares due to common stock options |  | 26,621                     |  |                              
|                                               |  |                            |  |                               
|Diluted average common shares outstanding      |  | 28,760,221                 |  | 28,497,807                    
|                                               |  |                            |  |                               



Incremental shares due
to common stock options were not included in the diluted average common shares outstanding totals for the quarter and nine months ended September 30, 2002 due to their antidilutive effect as a result of our net losses for these periods. The amounts
not included for stock options totaled 19,982 for the quarter ended September 30, 2002, and 25,088 for the nine months ended September 30, 2002. Stock options to purchase 2,331,075, 2,077,715, 2,695,575 and 2,077,715 shares of common stock for the
quarters ended September 30, 2003 and 2002 and nine months ended September 30, 2003 and 2002, 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 apply Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for our stock-based compensation. No compensation cost has been recognized when options are granted under the plans, as all stock
options are granted with an exercise price equal to market value at the grant date. Had compensation costs for the plans been determined based on the fair value (using the Black-Scholes option pricing model) at the grant dates for option awards
under those plans as prescribed by SFAS No. 123, our net earnings (loss) and earnings (loss) per share would have been the pro forma amounts indicated below:



|                                                                            |  | Quarter Ended September 30 |        |   | Nine Months Ended September 30 |  
|--------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------------ | -
|(Dollars in thousands)                                                      |  | 2003                       |        |   | 2002                           |  
|Net earnings (loss), as reported                                            |  | $                          | 22,156 |   |                                | $
|Stock based employee compensation determined under SFAS No. 123, net of tax |  |                            | (496   | ) |                                |  
|                                                                            |  |                            |        |   |                                |  
|Pro forma net earnings (loss)                                               |  | $                          | 21,660 |   |                                | $
|                                                                            |  |                            |        |   |                                |  
|Basic and diluted net earnings (loss) per share, as reported                |  | $                          | .77    |   |                                | $
|Pro forma basic and diluted net earnings (loss) per share                   |  |                            | .76    |   |                                |  
|                                                                            |  |                            |        |   |                                |  



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NOTE 8. RESTRICTED CASH - In September 2002, we placed $15.0 million into an interest-bearing escrow account under
the terms of an amendment to our credit agreement. The escrow accounts use was restricted to the repayment of $15 million of our medium-term notes, bearing an interest rate of 9.42%, which matured and were repaid on April 4, 2003.



NOTE 9. RECEIVABLES, NET - Included in the Receivables, net balance at
December 31, 2002, was approximately $22.3 million due to settlements reached with the Internal Revenue Service for the years 1989 through 1994. The settlements exceeded the threshold amount that required review by the congressional Joint Committee
on Taxation. The review was completed and the settlements were received in June 2003.



NOTE 10. INVENTORIES - Inventories related to continuing operations at the balance sheet dates consist of:



|                |  | September 30,2003 |         | December 31,2002
|--------------- |  | ----------------- | ------- | ----------------
|Raw materials   |  | $                 | 57,978  |                 
|Work in process |  |                   | 579     |                 
|Finished goods  |  |                   | 73,072  |                 
|                |  |                   |         |                 
|                |  | $                 | 131,629 |                 
|                |  |                   |         |                 



NOTE 11. DEBT - In December
2001 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was designed as a fair value hedge and called for the company to pay a variable interest amount, based on London
Interbank Offered Rate (LIBOR) rates, and receive a fixed rate payment from a financial institution, calculated on $165.0 million of our 10% senior subordinated debentures. We assumed there was no ineffectiveness in the hedge and, accordingly, a
fair value increase or decrease in the swap was offset by a corresponding decrease or increase in the value of the underlying debt instrument. In June 2003, we terminated the interest rate swap and received a cash settlement of $12.2 million. This
amount, together with $9.1 million we received in August 2002 for a repricing of the swap agreement, will be accreted to earnings until the 10% senior subordinated debentures are retired. In August 2003, we reinstated the fixed-to-variable interest
rate swap under essentially the same terms as the swap which was terminated in June 2003. The variable interest rate we pay will be determined semi-annually in arrears and will be equal to LIBOR plus 4.80%.



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NOTE 12. SEGMENT INFORMATION -



|                                                                               |  | Quarter Ended September 30 |         |   | Nine Months Ended September 30 |  
|------------------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------------ | -
|(Dollars in thousands)                                                         |  | 2003                       |         |   | 2002                           |  
|Segment Sales                                                                  |  |                            |         |   |                                |  
|Resource*                                                                      |  | $                          | 73,616  |   |                                | $
|                                                                               |  |                            |         |   |                                |  
|Wood products                                                                  |  |                            |         |   |                                |  
|Oriented strand board                                                          |  |                            | 93,085  |   |                                |  
|Lumber                                                                         |  |                            | 74,903  |   |                                |  
|Plywood                                                                        |  |                            | 13,973  |   |                                |  
|Particleboard                                                                  |  |                            | 4,182   |   |                                |  
|Other                                                                          |  |                            | 6,532   |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|                                                                               |  |                            | 192,675 |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|Pulp and paperboard                                                            |  |                            |         |   |                                |  
|Paperboard                                                                     |  |                            | 101,967 |   |                                |  
|Pulp                                                                           |  |                            | 17,381  |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|                                                                               |  |                            | 119,348 |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|Consumer products                                                              |  |                            | 78,974  |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|                                                                               |  |                            | 464,613 |   |                                |  
|Elimination of intersegment sales                                              |  |                            | (64,354 | ) |                                |  
|                                                                               |  |                            |         |   |                                |  
|Total consolidated net sales                                                   |  | $                          | 400,259 |   |                                | $
|                                                                               |  |                            |         |   |                                |  
|Intersegment sales or transfers                                                |  |                            |         |   |                                |  
|Resource*                                                                      |  | $                          | 49,881  |   |                                | $
|Wood products                                                                  |  |                            | 2,936   |   |                                |  
|Pulp and paperboard                                                            |  |                            | 11,517  |   |                                |  
|Consumer products                                                              |  |                            | 20      |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|Total                                                                          |  | $                          | 64,354  |   |                                | $
|                                                                               |  |                            |         |   |                                |  
|Operating Income (Loss)                                                        |  |                            |         |   |                                |  
|Resource                                                                       |  | $                          | 13,578  |   |                                | $
|Wood products                                                                  |  |                            | 43,933  |   |                                |  
|Pulp and paperboard                                                            |  |                            | (3,308  | ) |                                |  
|Consumer products                                                              |  |                            | 108     |   |                                |  
|Eliminations                                                                   |  |                            | 90      |   |                                |  
|                                                                               |  |                            |         |   |                                |  
|                                                                               |  |                            | 54,401  |   |                                |  
|Corporate                                                                      |  |                            | (20,468 | ) |                                |  
|                                                                               |  |                            |         |   |                                |  
|Consolidated earnings (loss) from continuing operations before taxes on income |  | $                          | 33,933  |   |                                | $
|                                                                               |  |                            |         |   |                                |  

---

|* |  | In the second half of 2002, our Wood Products and Pulp and Paperboard operating segments transitioned to a fiber procurement system whereby a portion of fiber purchases from third
parties are made directly by each of these segments rather than from the Resource segment. This change has significantly decreased intersegment sales for the Resource segment.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain 2002 amounts have been conformed to the 2003 presentation.



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NOTE 13. SUBSIDIARY GUARANTORS - A portion of our outstanding debt is unconditionally guaranteed, on a joint and
several basis, by four of our subsidiaries, which are also guarantors, on an unconditional, joint and several basis, of any obligations under our current bank credit facilities.



Consolidating statements of operations and comprehensive income for the quarter and nine months ended September 30, 2003 and
2002 are as follows (unaudited):



|                                                                                      |  | For the quarter ended September 30, 2003 |        
|------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------
|                                                                                      |  | Parent Company                           |        
|                                                                                      |  | (Dollars in thousands)                   |        
|Net sales                                                                             |  | $                                        | 400,259
|                                                                                      |  |                                          |        
|Costs and expenses:                                                                   |  |                                          |        
|Depreciation, amortization and cost of fee timber harvested                           |  |                                          | 25,757 
|Materials, labor and other operating expenses                                         |  |                                          | 307,894
|Selling, general and administrative expenses                                          |  |                                          | 21,116 
|                                                                                      |  |                                          |        
|                                                                                      |  |                                          | 354,767
|                                                                                      |  |                                          |        
|Earnings from operations                                                              |  |                                          | 45,492 
|Interest expense                                                                      |  |                                          | (12,234
|Interest income                                                                       |  |                                          | 515    
|                                                                                      |  |                                          |        
|Earnings before taxes on income and equity in net income of consolidated subsidiaries |  |                                          | 33,773 
|Equity in net income of consolidated subsidiaries                                     |  |                                          | 112    
|Provision for taxes on income                                                         |  |                                          | 11,729 
|                                                                                      |  |                                          |        
|Net earnings                                                                          |  |                                          | 22,156 
|                                                                                      |  |                                          |        
|Other comprehensive loss, net of tax:                                                 |  |                                          |        
|Cash flow hedges:                                                                     |  |                                          |        
|Net derivative losses, net of tax effect                                              |  |                                          | (427   
|                                                                                      |  |                                          |        
|Comprehensive income                                                                  |  | $                                        | 21,729 
|                                                                                      |  |                                          |        



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|                                                                                             |  | For the quarter ended September 30, 2002 |        
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------- | -------
|                                                                                             |  | ParentCompany                            |        
|                                                                                             |  | (Dollars in thousands)                   |        
|Net sales                                                                                    |  | $                                        | 326,544
|                                                                                             |  |                                          |        
|Costs and expenses:                                                                          |  |                                          |        
|Depreciation, amortization and cost of fee timber harvested                                  |  |                                          | 29,048 
|Materials, labor and other operating expenses                                                |  |                                          | 271,503
|Selling, general and administrative expenses                                                 |  |                                          | 20,667 
|                                                                                             |  |                                          |        
|                                                                                             |  |                                          | 321,218
|                                                                                             |  |                                          |        
|Earnings from operations                                                                     |  |                                          | 5,326  
|Interest expense                                                                             |  |                                          | (13,984
|Debt retirement costs                                                                        |  |                                          | (9,256 
|Interest income                                                                              |  |                                          | 772    
|                                                                                             |  |                                          |        
|Earnings (loss) before taxes on income and equity in net income of consolidated subsidiaries |  |                                          | (17,142
|Equity in net income of consolidated subsidiaries                                            |  |                                          | 74     
|Provision (benefit) for taxes on income                                                      |  |                                          | (6,686 
|                                                                                             |  |                                          |        
|Earnings (loss) from continuing operations                                                   |  |                                          | (10,382
|Discontinued operations:                                                                     |  |                                          |        
|Loss from discontinued operations                                                            |  |                                          | (3,361 
|Income tax benefit                                                                           |  |                                          | (1,310 
|                                                                                             |  |                                          |        
|Net earnings (loss)                                                                          |  | $                                        | (12,433
|                                                                                             |  |                                          |        



11



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##### Table of Contents

|                                                                                      |  | For the nine months ended September 30, 2003 |          
|------------------------------------------------------------------------------------- |  | -------------------------------------------- | ---------
|                                                                                      |  | Parent Company                               |          
|                                                                                      |  | (Dollars in thousands)                       |          
|Net sales                                                                             |  | $                                            | 1,103,155
|                                                                                      |  |                                              |          
|Costs and expenses:                                                                   |  |                                              |          
|Depreciation, amortization and cost of fee timber harvested                           |  |                                              | 77,764   
|Materials, labor and other operating expenses                                         |  |                                              | 911,086  
|Selling, general and administrative expenses                                          |  |                                              | 59,852   
|Restructuring charge                                                                  |  |                                              | 227      
|                                                                                      |  |                                              |          
|                                                                                      |  |                                              | 1,048,929
|                                                                                      |  |                                              |          
|Earnings from operations                                                              |  |                                              | 54,226   
|Interest expense                                                                      |  |                                              | (37,124  
|Interest income                                                                       |  |                                              | 13,155   
|                                                                                      |  |                                              |          
|Earnings before taxes on income and equity in net income of consolidated subsidiaries |  |                                              | 30,257   
|Equity in net income of consolidated subsidiaries                                     |  |                                              | 188      
|Provision for taxes on income                                                         |  |                                              | 10,358   
|                                                                                      |  |                                              |          
|Earnings from continuing operations                                                   |  |                                              | 20,087   
|Discontinued operations:                                                              |  |                                              |          
|Loss from discontinued operations                                                     |  |                                              | (1,389   
|Income tax benefit                                                                    |  |                                              | (542     
|                                                                                      |  |                                              |          
|Net earnings                                                                          |  |                                              | 19,240   
|                                                                                      |  |                                              |          
|Other comprehensive loss, net of tax:                                                 |  |                                              |          
|Cash flow hedges:                                                                     |  |                                              |          
|Net derivative losses, net of tax effect                                              |  |                                              | (427     
|                                                                                      |  |                                              |          
|Comprehensive income                                                                  |  | $                                            | 18,813   
|                                                                                      |  |                                              |          



12



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##### Table of Contents

|                                                                                             |  | For the nine months ended September 30, 2002 |         
|-------------------------------------------------------------------------------------------- |  | -------------------------------------------- | --------
|                                                                                             |  | Parent Company                               |         
|                                                                                             |  | (Dollars in thousands)                       |         
|Net sales                                                                                    |  | $                                            | 981,492 
|                                                                                             |  |                                              |         
|Costs and expenses:                                                                          |  |                                              |         
|Depreciation, amortization and cost of fee timber harvested                                  |  |                                              | 86,736  
|Materials, labor and other operating expenses                                                |  |                                              | 822,257 
|Selling, general and administrative expenses                                                 |  |                                              | 63,336  
|                                                                                             |  |                                              |         
|                                                                                             |  |                                              | 972,329 
|                                                                                             |  |                                              |         
|Earnings from operations                                                                     |  |                                              | 9,163   
|Interest expense                                                                             |  |                                              | (48,289 
|Debt retirement costs                                                                        |  |                                              | (15,154 
|Interest income                                                                              |  |                                              | 1,806   
|                                                                                             |  |                                              |         
|Earnings (loss) before taxes on income and equity in net income of consolidated subsidiaries |  |                                              | (52,474 
|Equity in net income of consolidated subsidiaries                                            |  |                                              | 132     
|Provision (benefit) for taxes on income                                                      |  |                                              | (20,465 
|                                                                                             |  |                                              |         
|Earnings (loss) from continuing operations                                                   |  |                                              | (31,877 
|Discontinued operations:                                                                     |  |                                              |         
|Loss from discontinued operations                                                            |  |                                              | (275,451
|Income tax benefit                                                                           |  |                                              | (107,425
|                                                                                             |  |                                              |         
|Net earnings (loss)                                                                          |  | $                                            | (199,903
|                                                                                             |  |                                              |         



13



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##### Table of Contents

Condensed consolidating balance sheets as of September 30, 2003 and December 31, 2002 are as follows
(2003 amounts unaudited):



|                                                           |  | September 30, 2003    
|---------------------------------------------------------- |  | ----------------------
|                                                           |  | ParentCompany         
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                       
|Current assets:                                            |  |                       
|Cash                                                       |  | $                     
|Short-term investments                                     |  |                       
|Receivables, net                                           |  |                       
|Inventories                                                |  |                       
|Prepaid expenses                                           |  |                       
|                                                           |  |                       
|Total current assets                                       |  |                       
|Land, other than timberlands                               |  |                       
|Plant and equipment, at cost less accumulated depreciation |  |                       
|Timber, timberlands and related logging facilities         |  |                       
|Other assets                                               |  |                       
|                                                           |  |                       
|                                                           |  | $                     
|                                                           |  |                       
|Liabilities and Stockholders Equity                       |  |                       
|Current liabilities:                                       |  |                       
|Current installments on long-term debt                     |  | $                     
|Accounts payable and accrued liabilities                   |  |                       
|                                                           |  |                       
|Total current liabilities                                  |  |                       
|Intercompany transfers                                     |  |                       
|Long-term debt                                             |  |                       
|Other long-term obligations                                |  |                       
|Deferred taxes                                             |  |                       
|Stockholders equity                                       |  |                       
|                                                           |  |                       
|                                                           |  | $                     
|                                                           |  |                       



14



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##### Table of Contents

|                                                           |  | December 31, 2002     
|---------------------------------------------------------- |  | ----------------------
|                                                           |  | Parent Company        
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                       
|Current assets:                                            |  |                       
|Cash                                                       |  | $                     
|Restricted cash                                            |  |                       
|Short-term investments                                     |  |                       
|Receivables, net                                           |  |                       
|Inventories                                                |  |                       
|Prepaid expenses                                           |  |                       
|Assets held for sale                                       |  |                       
|                                                           |  |                       
|Total current assets                                       |  |                       
|Land, other than timberlands                               |  |                       
|Plant and equipment, at cost less accumulated depreciation |  |                       
|Timber, timberlands and related logging facilities         |  |                       
|Other assets                                               |  |                       
|                                                           |  |                       
|                                                           |  | $                     
|                                                           |  |                       
|Liabilities and Stockholders Equity                       |  |                       
|Current liabilities:                                       |  |                       
|Notes payable                                              |  | $                     
|Current installments on long-term debt                     |  |                       
|Accounts payable and accrued liabilities                   |  |                       
|Liabilities related to assets held for sale                |  |                       
|                                                           |  |                       
|Total current liabilities                                  |  |                       
|Intercompany transfers                                     |  |                       
|Long-term debt                                             |  |                       
|Other long-term obligations                                |  |                       
|Deferred taxes                                             |  |                       
|Stockholders equity                                       |  |                       
|                                                           |  |                       
|                                                           |  | $                     
|                                                           |  |                       



15



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##### Table of Contents

Condensed consolidating statements of cash flows for the nine months ended September 30, 2003 and 2002
are as follows (unaudited):



|                                                                   |  | For the nine months ended September 30, 2003 |        
|------------------------------------------------------------------ |  | -------------------------------------------- | -------
|                                                                   |  | Parent Company                               |        
|                                                                   |  | (Dollars in thousands)                       |        
|Cash Flows From Continuing Operations                              |  |                                              |        
|Net earnings                                                       |  | $                                            | 19,052 
|Adjustments to reconcile net earnings 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        |  |                                              | 77,764 
|Deferred taxes                                                     |  |                                              | 9,691  
|Working capital changes                                            |  |                                              | 22,462 
|                                                                   |  |                                              |        
|Net cash provided by operating activities of continuing operations |  |                                              | 129,849
|                                                                   |  |                                              |        
|Cash Flows From Investing                                          |  |                                              |        
|Decrease in restricted cash                                        |  |                                              | 15,069 
|Increase in short-term investments                                 |  |                                              | (10,445
|Investments and advances from subsidiaries                         |  |                                              | 211    
|Additions to plant and properties                                  |  |                                              | (62,328
|Other, net                                                         |  |                                              | (7,270 
|                                                                   |  |                                              |        
|Net cash used for investing activities of continuing operations    |  |                                              | (64,763
|                                                                   |  |                                              |        
|Cash Flows From Financing                                          |  |                                              |        
|Change in book overdrafts                                          |  |                                              | (3,311 
|Decrease in notes payable                                          |  |                                              | (40,000
|Retirement of long-term debt                                       |  |                                              | (16,377
|Issuance of treasury stock                                         |  |                                              | 4,091  
|Dividends                                                          |  |                                              | (12,901
|Other, net                                                         |  |                                              | 6,988  
|                                                                   |  |                                              |        
|Net cash used for financing activities of continuing operations    |  |                                              | (61,510
|                                                                   |  |                                              |        
|Cash from continuing operations                                    |  |                                              | 3,576  
|Cash from discontinued operations                                  |  |                                              | 3,608  
|                                                                   |  |                                              |        
|Increase (decrease) in cash                                        |  |                                              | 7,184  
|Balance at beginning of period                                     |  |                                              | 8,811  
|                                                                   |  |                                              |        
|Balance at end of period                                           |  | $                                            | 15,995 
|                                                                   |  |                                              |        



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##### Table of Contents

|                                                                              |  | For the nine months ended September 30, 2002 |         
|----------------------------------------------------------------------------- |  | -------------------------------------------- | --------
|                                                                              |  | Parent Company                               |         
|                                                                              |  | (Dollars in thousands)                       |         
|Cash Flows From Continuing Operations                                         |  |                                              |         
|Net earnings (loss)                                                           |  | $                                            | (199,985
|Adjustments to reconcile net earnings (loss) to net operating cash flows:     |  |                                              |         
|Loss from discontinued operations                                             |  |                                              | 12,443  
|Loss on disposal of discontinued operations                                   |  |                                              | 221,223 
|Depreciation, amortization and cost of fee timber harvested                   |  |                                              | 86,736  
|Debt retirement costs                                                         |  |                                              | 15,154  
|Deferred taxes                                                                |  |                                              | (111,954
|Working capital changes                                                       |  |                                              | (27,633 
|                                                                              |  |                                              |         
|Net cash provided by (used for) operating activities of continuing operations |  |                                              | (4,016  
|                                                                              |  |                                              |         
|Cash Flows From Investing                                                     |  |                                              |         
|Decrease in restricted cash                                                   |  |                                              | 83,187  
|Decrease in short-term investments                                            |  |                                              | 2,876   
|Investments and advances from subsidiaries                                    |  |                                              | 396     
|Additions to plant and properties                                             |  |                                              | (37,258 
|Other, net                                                                    |  |                                              | (12,484 
|                                                                              |  |                                              |         
|Net cash provided by (used for) investing activities of continuing operations |  |                                              | 36,717  
|                                                                              |  |                                              |         
|Cash Flows From Financing                                                     |  |                                              |         
|Change in book overdrafts                                                     |  |                                              | (2,578  
|Retirement of long-term debt                                                  |  |                                              | (494,190
|Premiums and fees on debt retirement                                          |  |                                              | (10,584 
|Issuance of treasury stock                                                    |  |                                              | 6,608   
|Dividends                                                                     |  |                                              | (12,789 
|Other, net                                                                    |  |                                              | 268     
|                                                                              |  |                                              |         
|Net cash used for financing activities of continuing operations               |  |                                              | (513,265
|                                                                              |  |                                              |         
|Cash from continuing operations                                               |  |                                              | (480,564
|Cash from discontinued operations                                             |  |                                              | 481,859 
|                                                                              |  |                                              |         
|Increase (decrease) in cash                                                   |  |                                              | 1,295   
|Balance at beginning of period                                                |  |                                              | 7,391   
|                                                                              |  |                                              |         
|Balance at end of period                                                      |  | $                                            | 8,686   
|                                                                              |  |                                              |         



17



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##### Table of Contents

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



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: (i) Resource, which manages our timberlands and supplies wood fiber to our manufacturing segments and third parties; (ii) Wood
Products, which manufactures oriented strand board (OSB), plywood, lumber and particleboard; (iii) Pulp and Paperboard, which manufactures bleached paperboard and bleached softwood market pulp; and (iv) Consumer Products, which manufactures consumer
tissue products. As a result of management changes effective in January 2003, the Pulp and Paper segment was split into two separate business segments, the Consumer Products segment and the Pulp and Paperboard segment. Segment data for 2002 related
to the two segments has been reclassified to be comparative with 2003 data.



In May 2002, we exited our Printing Papers segment, which produced primarily high grade coated printing papers and bleached hardwood market pulp. We sold our Cloquet, Minnesota, pulp and printing papers facilities and
certain associated assets to a domestic subsidiary of Sappi Limited for $485.5 million in cash, after closing adjustments. We closed our Brainerd, Minnesota, printing papers mill at the same time. That facility was sold on February 28, 2003, for
$4.44 million in cash. The sale of the printing papers business reflects a strategic realignment to focus on our natural resources, wood products and consumer tissue businesses, which we believe have the greatest potential for growth.



In June 2002, we announced that we would close our Bradley hardwood mill in
Warren, Arkansas, and exit the hardwood lumber business. We sold the facility in August 2002.



The Printing Papers segment and the Bradley hardwood mill have been accounted for and reported as discontinued operations. Our consolidated financial statements and this discussion reflect the reclassification of
these operations as discontinued operations for all periods presented.



This report contains, in addition to historical information, certain forward-looking statements, which may include, 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.



18



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##### Table of Contents

Recent Accounting Pronouncements



We adopted SFAS No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003. The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, with the associated asset retirement costs capitalized as
part of the carrying amount of the long-lived asset. Adoption of this Statement did not have a material effect on our financial condition or results of operations.



We adopted Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities effective January 1, 2003. The Interpretation requires that an enterprises consolidated financial statements include entities in which the enterprise has a controlling financial interest. Adoption of the Interpretation did not
affect our financial condition or results of operations.



In
May 2003, the FASB issued and we adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement requires certain financial instruments to be classified as
liabilities, rather than equity, in a statement of financial condition. We currently do not have outstanding any financial instruments that fall under the scope of SFAS No. 150.



Critical Accounting Policies



Our principal accounting policies are discussed on pages 35-38 of our Annual Report on Form 10-K for the year ended December
31, 2002. 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. We account for 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. The test for impairment requires management to estimate future cash flows, which can differ
materially from actual future results based upon many factors, including but not limited to changes in economic conditions, environmental requirements, and capital spending.



Restructuring charges. Over the past several years, we have recorded charges for the restructuring of our salaried
workforce, the closure of a plywood manufacturing plant and the reduction of the hourly workforce at another site. 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 sold in February 2003. In July 2002, we closed a hardwood lumber mill in Warren, Arkansas. The mill was sold in August 2002. These events required us to record estimates of liabilities for employee benefits,
environmental clean-up and other costs at the time of the event, and these estimated liabilities could differ materially from actual costs incurred.



19



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##### Table of Contents

Environmental liabilities. We record accruals for estimated environmental liabilities in accordance with
SFAS No. 5, and where appropriate, SFAS No. 143. These estimates reflect assumptions and judgments as to the probable nature, magnitude and timing of required investigation, remediation and monitoring activities. 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.
Substantially all of our employees are covered by noncontributory defined benefit pension plans, and certain salaried and hourly employees are covered by company-sponsored defined benefit retiree health care and life insurance plans. The cost of
these plans is accounted for in accordance with SFAS Numbers 87, 106 and 132. These Statements require assumptions regarding discount rates and asset returns and, with respect to the postretirement benefits plans, assumptions regarding medical cost
trends. Actual asset returns and medical costs which are more favorable than our assumptions can have the effect of lowering our expense and cash contributions, and conversely, actual results which are less favorable than our assumptions could
increase our expense and cash contributions.



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 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 in the forest products industry. 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 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 consumer tissue is primarily affected by the economy and population growth in North America.



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 markets. Our wood products are subject to competition from manufacturers in North and South America, Europe, Australia and New Zealand. In addition, our pulp-based products, other than tissue products, are
globally-traded commodity products. Because our competitors are located throughout the world, variations in exchange rates between the U.S. dollar and other currencies significantly affect our competitive position compared to our international
competitors. 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 oversupply. 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.



20



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##### Table of Contents

Energy has become one of our most volatile operating expenses over the past several years. Substantial
price increases commenced in late 2000 and continued in the first half of 2001, before moderating in the second half of 2001. Energy prices returned to more normal historical levels in 2002, but have shown regional fluctuations during the first nine
months of 2003. 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 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. We entered into several such contracts in
the third quarter of 2003 covering a portion of our expected natural gas purchases from November 2003 through March 2004.



Another significant expense is the cost of wood fiber needed to supply our manufacturing facilities. Our timberlands provided approximately 52% of the log
requirements for our sawmill and plywood manufacturing facilities in 2002 and an average of approximately 63% over the past five calendar years, after adjustment for our exit from the hardwood lumber business. Including logs used for pulp and OSB,
the percentages of our fiber requirements supplied by our timberlands were approximately 30% in 2002 and an average of approximately 38% over the past five calendar years, adjusted for our exit from the printing papers and hardwood lumber
businesses. 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 May 2002, we sold a majority of our Printing Papers segment assets to a
domestic subsidiary of Sappi Limited, closed our Brainerd printing papers facility, and exited the printing papers business. In August 2002, we sold a hardwood sawmill in Arkansas and exited the hardwood lumber business. We are currently in the
process of constructing a tissue machine in North Las Vegas, Nevada, which we anticipate will increase our tissue-making capacity by 30,000 tons per year when completed in early 2004. 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.



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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 the 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 from both our own timberlands and from outside third parties, intersegment sales represent a significant portion of the Resource segments total net sales. Beginning in the third quarter of 2002, our Wood
Products and Pulp and Paperboard operating segments transitioned to a fiber procurement system where a portion of third party fiber purchases are made directly by each of these segments, rather than from the Resource segment. The change in the fiber
procurement system has significantly decreased intersegment sales for the Resource segment, as well as decreased fiber purchases by the Resource segment from third parties. 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 30 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.



As a result of the sale of our Printing Papers segment assets and the sale of
the Bradley hardwood sawmill, those operations have been classified as discontinued operations and assets held for sale in the financial statements for the quarter and nine months ended September 30, 2003 and 2002. The
discussion below addresses our continuing businesses. In addition, our statements of operations and comprehensive income presentation of the revenues and expenses associated with land sales have been reclassified for periods prior to the second
quarter of 2003. Revenues from land sales are included in net sales and the associated expense is included in materials, labor and other operating expenses, rather than in Other income (expense), net. Revenues and expenses from land
sales are attributable to the Resource segment. The change in presentation reflects the Resource segments ongoing commitment to actively manage timberland assets, which includes land sales for higher and better use, in the normal course of
business. Certain 2002 period amounts presented below have been conformed to 2003 classifications.



Nine Months Ended September 30, 2003, Compared to Nine Months Ended September 30, 2002



Net Sales - Net sales increased 12%, to $1.1 billion for the nine months ended September 30, 2003, from $981.5 million for the same period in 2002.
Increases in Resource, Wood Products and Pulp and Paperboard segment net sales of $9.9 million, $92.7 million and $31.7 million, respectively, more than offset a decline in Consumer Products segment net sales of $12.6 million. Increased land sales
in the Resource segment, increased shipments and higher sales prices for oriented strand board in the Wood Products segment and increased paperboard shipments in the Pulp and Paperboard segment were largely responsible for the increase in net sales.
A decrease in sales prices resulted in lower net sales for the Consumer Products segment.



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Depreciation, amortization and cost of fee timber harvested - For the nine months ended September
30, 2003, depreciation, amortization and cost of fee timber harvested totaled $77.8 million, a decrease compared to the prior year amount of $86.8 million. Lower permit timber harvests in Minnesota and decreased depreciation expense in the Wood
Products and Pulp and Paperboard segments were largely responsible for the decline.



Materials, labor and other operating expenses - Materials, labor and other operating expenses increased to $910.4 million for the nine months ended September 30, 2003, from $821.7 million for the nine months
ended September 30, 2002. The higher costs were due primarily to increased shipments of oriented strand board, lumber, and paperboard.



Selling, general and administrative expenses - Selling, general and administrative expenses were $60.2 million for the first nine months of 2003,
compared to $63.7 million incurred for the same period of 2002, due principally to a decrease in administration expense.



Restructuring charge-As required by SFAS No. 146, during the first quarter of 2003 we recorded $.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. No additional costs were recorded in the second and third quarters of 2003.



Interest expense, net of capitalized interest - Interest expense was
$37.1 million for the nine months ended September 30, 2003, a decrease from $48.3 million in the prior year nine month period. The decrease was due to significantly less debt outstanding during the first nine months of 2003, as well as an increase
in the amount of interest capitalized from major construction projects in 2003, compared to the first nine months of 2002. These factors were partially offset by increased interest expense on our $100 million credit sensitive debentures due to our
debt ratings change in January 2003.



Debt retirement
costs - We incurred one-time, pre-tax costs of $15.2 million for the nine months ended September 30, 2002, related to our early repayment of over $363 million of outstanding debt.



Interest income - For the nine months ended September 30, 2003, interest income was $13.2 million, compared to $1.8
million for the same period in 2002. The increase was due to 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 on income - For the nine months ended
September 30, 2003, we recorded an income tax provision on income from continuing operations of $10.5 million, reflecting our net earnings before taxes, based on an estimated effective tax rate of 34%. During the first half of 2003, an estimated tax
rate of 39% was used, but was revised to 34% in the third quarter. The rate change resulted from a revision in our estimated ability to apply anticipated tax credits to our expected 2003 tax provision. The 34% estimated tax rate may be revised
further in the fourth quarter depending upon our actual earnings results for the year. For the nine months ended September 30, 2002, we recorded a tax benefit from continuing operations of $20.4 million, reflecting a tax rate of 39%.



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Earnings (loss) from continuing operations - We recorded earnings from continuing operations of
$20.1 million for the nine months ended September 30, 2003, compared to a loss from continuing operations of $31.9 million for the same period in 2002. Earnings improvements in the Wood Products and Pulp and Paperboard segments more than offset a
decrease in Consumer Products segment earnings.



Other
comprehensive loss - In September 2003, we recorded a net derivative loss due to cash flow hedges of $.4 million, after tax. The loss was the result of mark-to-market adjustments on several derivative financial instruments we have entered into
for the purpose of reducing our exposure to increases in natural gas costs during the coming winter months.



Discussion of business segments - The Resource segment reported operating income of $48.2 million for the first nine months of 2003, up from $42.3
million earned in the same period of 2002. Gains on land sales were largely responsible for the improved results. In June 2003, we completed the sale of approximately 15,300 acres of hardwood timberland in Arkansas. Segment net sales decreased 44%
to $180.4 million for the first nine months of 2003 compared to $320.1 million for the 2002 period. The decrease in net sales was due to decreased wood fiber sales to our Wood Products and Pulp and Paperboard operating segments in Arkansas, Idaho
and Minnesota, which were partially offset by increased land sales. In the third quarter of 2002, these operating segments began the transition to a fiber procurement system where a portion of third party fiber purchases are made directly by each
segment. The changes in the fiber procurement system have resulted in lower intersegment sales for the Resource segment and, consequently, lower fiber purchases by the Resource segment from third parties. Resource segment expenses were $132.2
million in the first nine months of 2003, compared to $277.8 million in the first nine months of 2002. Decreased outside sawlog and other fiber purchases were largely responsible for the decrease in expenses.



The Wood Products segment reported operating income of $42.7 million for the
first nine months of 2003, compared to a loss of $9.4 million recorded in the first nine months of 2002. Segment net sales were $486.7 million for the first nine months of 2003, 23% higher than the $395.0 million recorded for the 2002 period.
Oriented strand board net sales increased 47% to $207.7 million for the first nine months of 2003, compared to $141.0 million in the 2002 period, due to a 41% increase in sales prices, and a 5% increase in shipments. Lumber net sales were $212.6
million, up from $198.1 million in 2002. A 16% increase in lumber shipments was partially offset by an 8% decrease in sales prices. Plywood net sales were higher at $33.1 million for the first nine months of 2003, compared to $26.9 million in 2002,
due to a 25% increase in shipments. Particleboard net sales were $11.4 million for the first nine months of 2003, compared to $11.8 million for the first nine months of 2002, as a result of a 9% decrease in sales prices, although shipments rose 5%.
Segment expenses were higher for the first nine months of 2003, totaling $444.0 million versus $404.4 million in 2002. Higher product shipments for the segment, combined with higher wood fiber and chemical costs, were primarily responsible for the
increase.



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The Pulp and Paperboard segment reported an operating loss for 2003s first nine months of $13.8
million, compared to a loss of $32.9 million for 2002s first nine months. Segment net sales increased to $366.1 million for the first nine months of 2003 from $328.9 million for the 2002 period. Paperboard shipments increased 12% compared to
the first nine months of 2002, more than offsetting a small decline in sales prices. Pulp sales (including intersegment sales) were higher for the first nine months of 2003, rising to $43.9 million compared to $35.8 million for the same period in
2002. The increase was due largely to an increase in intersegment sales, combined with increases in pulp shipments to external customers of 8%, and a 9% increase in sales prices. Segment expenses were higher for the first nine months of 2003,
totaling $379.9 million, compared to $361.8 million in the first nine months of 2002. The increase reflects greater volumes of product shipments for the first nine months of 2003 compared to 2002. However, increased paperboard and pulp production at
the Lewiston, Idaho, facility has resulted in lower unit production costs compared to 2002.



The Consumer Products segment recorded operating income of $1.9 million for the first nine months of 2003, significantly below 2002 operating income of $35.2 million. Segment net sales were $224.5 million for the
first nine months of 2003, 5% lower than the $237.1 million recorded for the 2002 period. A 7% decline in sales prices was only partially offset by a 2% increase in product shipments. A very competitive consumer tissue market adversely affected
sales prices. Segment expenses were higher for the first nine months of 2003, totaling $222.5 million, versus $201.9 million in 2002. The segment incurred higher per unit costs due to downtime taken on some converting lines as well as higher selling
and administration costs compared to the previous years first nine months.



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



Quarter Ended September 30, 2003, Compared to
Quarter Ended September 30, 2002



Net Sales - Net
sales increased 23%, or $73.7 million, from $326.5 million for the quarter ended September 30, 2002, to $400.3 million for the same period in 2003. Increases in Wood Products, Pulp and Paperboard and Consumer Products segment net sales more than
offset a decline in Resource segment net sales. Increased shipments and substantially higher sales prices for oriented strand board, as well as, increased shipment of lumber, plywood, paperboard and tissue products accounted for most of the
increase. Lower log shipments and sales prices caused a decline in net sales for the Resource segment.



Depreciation, amortization and cost of fee timber harvested - For the quarter ended September 30, 2003, depreciation, amortization and cost of fee
timber harvested totaled $25.8 million, a decrease of $3.3 million from the prior year amount of $29.1 million. Slightly lower depreciation expense in the Wood Products and Pulp and Paperboard segments as well as lower permit timber harvests in
Minnesota and Arkansas were largely responsible for the decline.



Materials, labor and other operating expenses - Materials, labor and other operating expenses increased to $307.6 million for the quarter ended September 30, 2003, from $271.3 million for the quarter ended September 30, 2002. The
higher costs were due to increased shipments of oriented strand board, lumber, plywood, paperboard and tissue products.



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Selling, general and administrative expenses - Selling, general and administrative expenses were
$21.2 million for the third quarter of 2003, slightly higher compared to the $20.8 million recorded for the same period of 2002.



Interest expense, net of capitalized interest - Interest expense was $12.2 million for the quarter ended September 30, 2003, a decrease from $14.0
million in the prior year period. The decrease was due to less debt outstanding during the third quarter of 2003 compared to the third quarter of 2002.



Debt retirement costs - We incurred one-time, pre-tax costs of $9.3 million during the quarter ended September 30, 2002, related to our early
repayment of approximately $118 million of outstanding debt.



Interest income - For the quarter ended September 30, 2003, interest income was $.5 million, compared to $.8 million for the 2002 period.



Provision (benefit) for taxes on income - For the quarter ended September 30, 2003, we recorded a provision for taxes on income from continuing
operations of $11.8 million, based on an estimated annual effective tax rate of 34%. During the first half of 2003, an estimated tax rate of 39% was used, but it was revised to 34% in the third quarter as a result of a revision in our estimated
ability to apply anticipated tax credits to our expected 2003 tax provision. The 34% estimated tax rate may be revised further in the fourth quarter depending upon our actual earnings results for the year. For the quarter ended September 30, 2002,
we recorded an income tax benefit from continuing operations of $6.6 million, reflecting a tax rate of 39%.



Earnings (loss) from continuing operations - We recorded earnings from continuing operations of $22.2 million for the quarter ended September 30,
2003, compared to a loss from continuing operations of $10.4 million for the same period in 2002. Improved earnings in the Wood Products segment were largely responsible for the favorable comparison.



Other comprehensive loss - In September 2003, we recorded a net
derivative loss due to cash flow hedges of $.4 million, after tax. The loss was the result of mark-to-market adjustments on several derivative financial instruments we have entered into for the purpose of reducing our exposure to increases in
natural gas costs during the coming winter months.



Discussion of business segments - The Resource segment reported operating income of $13.6 million for the third quarter of 2003, down from $19.7 million earned in the same period of 2002. Segment net sales decreased 32% to $73.6
million for the third quarter of 2003 compared to $108.8 million for the 2002 period. The decrease in net sales was due to decreased wood fiber sales to our Wood Products and Pulp and Paperboard operating segments in Arkansas, Idaho and Minnesota,
lower log prices in Idaho and decreased log sales in Arkansas. Resource segment expenses decreased to $60.0 million in the third quarter of 2003, from $89.0 million in the third quarter of 2002. Reduced outside sawlog and other fiber purchases were
largely responsible for the decrease in expenses.



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The Wood Products segment reported operating income of $43.9 million for the third quarter of 2003,
compared to a loss of $9.1 million recorded in the third quarter of 2002. Segment net sales were $192.7 million for the third quarter of 2003, 55% higher than the $124.3 million recorded for the 2002 period. Oriented strand board net sales increased
to $93.1 million for the third quarter of 2003, compared to $47.5 million in the 2002 period, due to a 92% increase in sales prices and a 2% increase in shipments. Lumber net sales were $74.9 million, up significantly from $58.9 million in 2002.
Sales prices for lumber decreased 5%, but were more than offset by a 34% increase in shipments. Plywood net sales were $14.0 million for 2003s third quarter, compared to $8.7 million for the same period in 2002, as a result of a 53% increase
in shipments combined with a 5% increase in sales prices. Particleboard net sales were $4.2 million for the third quarter of 2003, up slightly from the $4.1 million recorded in the third quarter of 2002. Segment expenses were $148.7 million for the
third quarter of 2003, versus $133.4 million in 2002. Increased overall product shipments for the segment and higher wood fiber costs were largely responsible for the increase.



The Pulp and Paperboard segment reported an operating loss for 2003s third quarter of $3.3 million, versus a loss of
$6.5 million for 2002s third quarter. Segment net sales increased to $119.3 million for the third quarter of 2003 from $113.7 million for the 2002 period, primarily due to a $3.9 million increase in pulp net sales and a 6% increase in
paperboard shipments. Segment expenses were slightly higher for the third quarter of 2003, totaling $122.7 million compared to $120.2 million in the third quarter of 2002. The increase was due to increased paperboard and pulp shipments during the
quarter, which was partially offset by improved productivity at the Lewiston, Idaho, pulp and paperboard facility, which reduced per unit costs.



The Consumer Products segment operating income totaled $0.1 million for the third quarter of 2003, compared to third quarter 2002 operating income of $9.4
million. Segment net sales were $79.0 million for the third quarter of 2003, 6% higher than the $74.7 million recorded for the 2002 period. A 12% increase in product shipments more than offset a 6% decrease in sales prices. Sales prices declined
over the 2002 levels due to continued competitive consumer tissue markets during the quarter. Expenses for the segment were higher for the third quarter of 2003, totaling $78.9 million, versus $65.3 million in 2002, primarily due to higher shipments
and selling, general and administrative expenses.



Liquidity and Capital Funding



At September
30, 2003, our financial position included long-term debt of $621.9 million, including current installments on long-term debt of $0.5 million. Long-term debt at September 30, 2003 (including current installments) declined $16.4 million from the
December 2002 balance due to normal repayments on maturing debt of $15.5 million and the early retirement of a bond associated with our Brainerd facility totaling $0.9 million. The bond was called as a result of the sale of the facility in February
2003. The majority of the repayments on maturing debt were made using $15.0 million placed in an interest-bearing escrow account in September 2002 that was restricted to the repayment of $15 million of our medium-term notes, which matured on April
4, 2003. Stockholders equity increased $10.0 million, largely due to net earnings of $19.2 million for the first nine months of 2003, which were partially offset by dividend payments of $12.9 million. As a result of these changes, long-term
debt (including current installments) to stockholders equity was 1.41 to 1 at September 30, 2003, compared to 1.48 to 1 at December 31, 2002.



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Scheduled payments due on long-term debt during each of the five years subsequent to December 31, 2003
are as follows:



|(Dollars in thousands) |  |  
|---------------------- |  | -
|2004                   |  | $
|2005                   |  |  
|2006                   |  |  
|2007                   |  |  
|2008                   |  |  



Working capital
totaled $136.8 million at September 30, 2003, an increase of $34.1 million from December 31, 2002. Decreases in current liabilities totaling $71.6 million and increases in short-term investments of $10.4 million positively affected working capital.
Partially offsetting these amounts were decreases in cash and restricted cash of $7.9 million, inventories of $28.2 million, prepaid expenses of $7.8 million and assets held for sale of $5.0 million.



Net cash provided by operations for the first nine months of 2003 totaled
$130.0 million, compared with net cash used for operations of $3.9 million for the same period in 2002. Net earnings from continuing operations, versus a net loss in 2002, combined with cash from working capital changes were largely responsible for
the favorable comparison. The net earnings were generally due to significantly higher sales, lower interest expense and higher interest income from the IRS refund, as previously discussed. The increase in sales was largely attributable to higher
oriented strand board prices.



For the nine months ended
September 30, 2003, net cash used for investing totaled $65.0 million, compared to net cash provided by investing of $36.3 million during the nine months ended September 30, 2002. Cash was used in the first nine months of 2003 primarily for capital
spending projects as well as an increase in short-term investments. These activities were partially offset by the use of $15.1 million of restricted cash to repay debt. Capital spending totaled $62.3 million in the first nine months of 2003, a
majority of which was spent on construction of a new tissue machine in North Las Vegas, Nevada. Spending on this project in 2003 has totaled $35.4 million. The balance of capital spending through September 30, 2003, was focused on forest resources
and various small projects designed to improve product quality and manufacturing efficiency. Cash was provided in 2002 primarily by the use of restricted cash to retire debt, partially offset by spending on capital projects.



Net cash used for financing was $61.5 million for the nine months ended
September 30, 2003, compared to $513.3 million during the same period in 2002. The majority of the cash used in 2003 was to repay borrowings under our bank credit facility totaling $40.0 million and to retire long-term debt in the amount of $16.4
million. Cash was also used to pay dividends totaling $12.9 million. Cash used in 2002 was primarily for the retirement of long-term debt. In 2002, we used restricted cash to repay our $100 million 6.25% Debentures and paid other debt using a
portion of the proceeds from asset sales.



Cash generated from
discontinued operations in the first nine months of 2003 totaled $3.6 million, the net result of the sale of our Brainerd, Minnesota, paper mill to Missota Paper Company LLC in February for $4.44 million. We generated cash in the same period of 2002
totaling $482.1 million, most of which was cash received from the sale of a majority of our Printing Papers segment assets.



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Our current bank credit facility is comprised of a revolving line of credit of up to $150.0 million,
expiring June 28, 2004, which includes a $70.0 million subfacility for letters of credit, usage of which reduces availability under the revolving line of credit. Our obligations under the bank credit facility are secured by our accounts receivable
and inventory. As of September 30, 2003, there were no borrowings outstanding under the revolving line of credit, and approximately $24.3 million of the revolving line of credit was used to support outstanding letters of credit.



Both the agreement governing our 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,
make certain investments or acquisitions, enter into certain transactions with affiliates, make capital expenditures, or change the nature of our business. The 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 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 September 30, 2003, 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 flow from operations and
available borrowings under our revolving credit facility will be sufficient to fund our operations, capital expenditures and debt service obligations for the near term. When our credit facility expires in June 2004, we will either need to extend the
facility or enter into a new credit facility. 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 credit facility so that future
borrowings thereunder will be available to us. This 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.



On January 30, 2003, Standard & Poors Ratings Services (S&P) announced that it had lowered our senior unsecured debt rating to BB+ and affirmed our senior secured bank loan rating at BBB-. The ratings downgrade by S&P
caused the interest rate on our $100 million Credit Sensitive Debentures to increase from 9.425% to 12.5%, effective January 30, 2003. Also during the first quarter of 2003, Fitch Inc., downgraded our senior unsecured debt to BB+ with a negative
outlook and affirmed our senior secured bank loan rating at BBB-. Moodys Investors Service Inc.s rating of our debt has remained unchanged at Baa3 with a negative outlook.



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 September 30 |         |   | Nine Months Ended September 30 |  
|----------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------------ | -
|                                                            |  | 2003                       |         |   | 2002                           |  
|Net sales                                                   |  | $                          | 400,259 |   |                                | $
|Costs and expenses:                                         |  |                            |         |   |                                |  
|Depreciation, amortization and cost of fee timber harvested |  |                            | 25,779  |   |                                |  
|Materials, labor and other operating expenses               |  |                            | 307,607 |   |                                |  
|Selling, general and administrative expenses                |  |                            | 21,221  |   |                                |  
|Restructuring charge                                        |  |                            |        |   |                                |  
|Earnings from operations                                    |  |                            | 45,652  |   |                                |  
|Interest expense                                            |  |                            | (12,234 | ) |                                |  
|Debt retirement costs                                       |  |                            |        |   |                                |  
|Interest income                                             |  |                            | 515     |   |                                |  
|Provision (benefit) for taxes on income                     |  |                            | 11,777  |   |                                |  
|Earnings (loss) from continuing operations                  |  |                            | 22,156  |   |                                |  
|Discontinued operations:                                    |  |                            |         |   |                                |  
|Loss from discontinued operations                           |  |                            |        |   |                                |  
|Income tax benefit                                          |  |                            |        |   |                                |  
|Net earnings (loss)                                         |  | $                          | 22,156  |   |                                | $

---

|* |  | 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, credit rate risk on our credit sensitive
debentures, foreign currency exchange rates that affect the value of our Euro forward purchase contract and commodity price risk on collars we use to hedge a portion of our near-term natural gas purchases.



As of September 30, 2003, we had no borrowings outstanding under our bank
credit facility. The interest rates applied to borrowings under the 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 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 December 2001 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was designed as a fair value hedge and called for the company to pay a variable
interest amount, based on London Interbank Offered Rate (LIBOR) rates, and receive a fixed rate payment from a financial institution, calculated on $165.0 million of our 10% senior subordinated debentures. We assumed there was no ineffectiveness in
the hedge and, accordingly, a fair value increase or decrease in the swap was offset by a corresponding decrease or increase in the value of the underlying debt instrument. In June 2003, we terminated the interest rate swap and received a cash
settlement of $12.2 million. This amount, together with $9.1 million we received in August 2002 for a repricing of the swap agreement, will be accreted to earnings until the 10% senior subordinated debentures are retired. In August 2003, we
reinstated our fixed-to-variable interest rate swap under essentially the same terms as the swap which was terminated in June 2003. The variable interest rate we pay will be determined semi-annually in arrears and will be equal to LIBOR plus 4.80%.



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        
|Aaa         |  | AAA        
|Aa1  Aa3   |  | AA+  AA  
|A1  Baa2   |  | A+  BBB   
|Baa3        |  | BBB       
|Ba1         |  | BB+        
|Ba2         |  | BB         
|Ba3         |  | BB        
|B1 or lower |  | B+ or lower



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.



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In the first half of 2003 we entered into forward purchase contracts to acquire Euros, with the
settlement of these forward contracts timed to coincide with our required Euro payments to the supplier of our new tissue machine under construction in North Las Vegas, Nevada. As of September 30, 2003, we have one forward purchase contract
outstanding to purchase 3.7 million Euro at a price of $1.0666 per Euro. We have recorded an asset representing the fair value of the forward contract at September 30, 2003, and a reciprocal liability representing the fair value of our purchase
commitment, with the corresponding gains and losses recorded in earnings.



During the third quarter of 2003, we entered into several derivative financial instruments designed as cash flow hedges for a portion of our expected natural gas purchases during the coming winter months (November
2003 through March 2004). The financial instruments are in the form of collars, with a ceiling of $6.35 per mmBtu and floors ranging from $4.44 to $5.30 per mmBtu, indexed to the NYMEX, Rocky Mountain and Canadian Border indices. The collars apply
to 13,200 mmBtu of natural gas purchased per day for the five month period beginning November 1, which represents approximately 60% of our expected daily usage during that period. As designated cash flow hedges, changes in the fair value of the
financial instruments are recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings.



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), that 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 were effective to meet the objective for which they were designed.



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 reasonable likely to materially affect, Potlatchs internal control over financial reporting.



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PART II



ITEM 6. Exhibits and Reports on Form 8-K



Exhibits



The exhibit
index is located on page 35 of this Form 10-Q.



Reports on Form 8-K



A current report on Form
8-K was filed on July 8, 2003. Under Item 5, Other Events, we announced the retirement of Ms. Toni Rembe from the Potlatch Corporation Board of Directors, effective July 1, 2003.



A current report on Form 8-K was filed on August 7, 2003. Under Item 5, Other Events, we disclosed that Richard L. Paulson,
company President and Chief Operating Officer, had advised the company that he plans to retire by the end of 2003.



A current report on Form 8-K was filed on August 19, 2003. Under Item 5, Other Events, we reported that effective August 18 we reinstated our
fixed-to-variable interest rate swap, which is used to hedge the fixed interest rate payable on $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, Chief Financial Officer and Treasurer (Duly Authorized; PrincipalFinancial Officer)By

/s/    Terry L. CarterTerry L. CarterController (Duly Authorized; PrincipalAccounting Officer)




Date:  November 13, 2003



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Exhibit Index



Exhibit



PART II



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