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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 March 31, 2004





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 March 31, 2004: 29,463,783 shares of Common Stock, par value $1 per share.



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Index to Form 10-Q



|                                                                                                                  |  |         |  |           
|----------------------------------------------------------------------------------------------------------------- |  | ------- |  | ----------
|                                                                                                                  |  |         |  | PageNumber
|PART I. FINANCIAL INFORMATION                                                                                     |  |        
|                                                                                                                  | 
|Item 1. Financial Statements                                                                                      |  |        
|                                                                                                                  | 
|Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2004 and 2003 |  | 2      
|                                                                                                                  | 
|Consolidated Condensed Balance Sheets at March 31, 2004 and December 31, 2003                                     |  | 3      
|                                                                                                                  | 
|Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2004 and 2003                |  | 4      
|                                                                                                                  | 
|Notes to Consolidated Financial Statements                                                                        |  | 5 - 15 
|                                                                                                                  | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 16 - 27
|                                                                                                                  | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                |  | 28 - 29
|                                                                                                                  | 
|Item 4. Disclosure Controls and Procedures                                                                        |  | 29     
|                                                                                                                  | 
|PART II. OTHER INFORMATION                                                                                        |  |        
|                                                                                                                  | 
|Item 6. Exhibits and Reports on Form 8-K                                                                          |  | 30     
|                                                                                                                  | 
|SIGNATURES                                                                                                        |  | 31     
|                                                                                                                  | 
|EXHIBIT INDEX                                                                                                     |  | 32     



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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)



|                                                                             |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                             |  | Three Months Ended March 31 |        
|                                                                             |  | 2004                        |         |   | 2003 |  
|Net sales                                                                    |  | $                           | 420,422 |   |      | $ | 334,802 |  
|                                                                             |  |                             |         |   |      |   |         |  
|Costs and expenses:                                                          |  |                             |         |   |      |   |         |  
|Depreciation, amortization and cost of fee timber harvested                  |  |                             | 27,083  |   |      |   | 26,859  |  
|Materials, labor and other operating expenses                                |  |                             | 322,105 |   |      |   | 292,344 |  
|Selling, general and administrative expenses                                 |  |                             | 22,455  |   |      |   | 17,252  |  
|Restructuring charge                                                         |  |                             | 1,280   |   |      |   | 227     |  
|                                                                             |  |                             |         |   |      |   |         |  
|                                                                             |  |                             | 372,923 |   |      |   | 336,682 |  
|                                                                             |  |                             |         |   |      |   |         |  
|Earnings (loss) from operations                                              |  |                             | 47,499  |   |      |   | (1,880  | )
|                                                                             |  |                            
|Interest expense                                                             |  |                             | (11,860 | ) |      |   | (12,762 | )
|Interest income                                                              |  |                             | 128     |   |      |   | 67      |  
|                                                                             |  |                             |         |   |      |   |         |  
|Earnings (loss) before taxes                                                 |  |                             | 35,767  |   |      |   | (14,575 | )
|Provision (benefit) for taxes (Note 3)                                       |  |                             | 13,949  |   |      |   | (5,684  | )
|                                                                             |  |                             |         |   |      |   |         |  
|Earnings (loss) from continuing operations                                   |  |                             | 21,818  |   |      |   | (8,891  | )
|Discontinued operations (Note 4):                                            |  |                             |         |   |      |   |         |  
|Loss from discontinued operations (including loss on disposal of $- and $45) |  |                             |        |   |      |   | (1,106  | )
|Income tax benefit                                                           |  |                             |        |   |      |   | (432    | )
|                                                                             |  |                             |         |   |      |   |         |  
|Net earnings (loss)                                                          |  |                             | 21,818  |   |      |   | (9,565  | )
|                                                                             |  |                             |         |   |      |   |         |  
|Other comprehensive loss, net of tax:                                        |  |                             |         |   |      |   |         |  
|Cash flow hedges (Note 5):                                                   |  |                             |         |   |      |   |         |  
|Net derivative losses, net of income tax benefit of $44 and $-               |  |                             | (68     | ) |      |   |        |  
|                                                                             |  |                             |         |   |      |   |         |  
|Comprehensive income (loss)                                                  |  | $                           | 21,750  |   |      | $ | (9,565  | )
|                                                                             |  |                             |         |   |      |   |         |  
|Net earnings (loss) per common share from continuing operations (Note 6):    |  |                             |         |   |      |   |         |  
|Basic                                                                        |  | $                           | .75     |   |      | $ | (.31    | )
|Diluted                                                                      |  |                             | .74     |   |      |   | (.31    | )
|Net earnings (loss) per common share:                                        |  |                             |         |   |      |   |         |  
|Basic                                                                        |  |                             | .75     |   |      |   | (.33    | )
|Diluted                                                                      |  |                             | .74     |   |      |   | (.33    | )
|Dividends per common share (annual rate)                                     |  |                             | .60     |   |      |   | .60     |  
|Average shares outstanding (in thousands):                                   |  |                             |         |   |      |   |         |  
|Basic                                                                        |  |                             | 29,245  |   |      |   | 28,617  |  
|Diluted                                                                      |  |                             | 29,365  |   |      |   | 28,617  |  
|                                                                             |  |                             |         |   |      |   |         |  



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



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



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Potlatch Corporation and Consolidated Subsidiaries

Condensed Balance Sheets

2004 amounts unaudited (Dollars in thousands -

except per-share amounts)



|                                                           |  |                |           |                   |   |          
|---------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|                                                           |  | March 31, 2004 |           | December 31, 2003
|Assets                                                     |  |                |           |                   |   |          
|Current assets:                                            |  |                |           |                   |   |          
|Cash                                                       |  | $              | 7,602     |                   | $ | 7,190    
|Short-term investments                                     |  |                | 79,883    |                   |   | 40,091   
|Receivables, net                                           |  |                | 125,155   |                   |   | 105,345  
|Inventories (Note 8)                                       |  |                | 166,002   |                   |   | 159,678  
|Prepaid expenses                                           |  |                | 17,004    |                   |   | 18,315   
|                                                           |  |                |           |                   |   |          
|Total current assets                                       |  |                | 395,646   |                   |   | 330,619  
|Land, other than timberlands                               |  |                | 8,831     |                   |   | 8,831    
|Plant and equipment, at cost less accumulated depreciation |  |                | 730,655   |                   |   | 740,342  
|Timber, timberlands and related logging facilities         |  |                | 398,086   |                   |   | 398,899  
|Other assets                                               |  |                | 117,709   |                   |   | 118,686  
|                                                           |  |                |           |                   |   |          
|                                                           |  | $              | 1,650,927 |                   | $ | 1,597,377
|                                                           |  |                |           |                   |   |          
|Liabilities and Stockholders Equity                       |  |                |           |                   |   |          
|Current liabilities:                                       |  |                |           |                   |   |          
|Current installments on long-term debt                     |  | $              | 507       |                   | $ | 507      
|Accounts payable and accrued liabilities                   |  |                | 167,684   |                   |   | 169,310  
|                                                           |  |                |           |                   |   |          
|Total current liabilities                                  |  |                | 168,191   |                   |   | 169,817  
|Long-term debt                                             |  |                | 618,288   |                   |   | 618,278  
|Other long-term obligations                                |  |                | 270,511   |                   |   | 266,514  
|Deferred taxes                                             |  |                | 85,672    |                   |   | 71,917   
|Stockholders equity                                       |  |                | 508,265   |                   |   | 470,851  
|                                                           |  |                |           |                   |   |          
|                                                           |  | $              | 1,650,927 |                   | $ | 1,597,377
|                                                           |  |                |           |                   |   |          
|Stockholders equity per common share                      |  | $              | 17.25     |                   | $ | 16.33    
|Working capital                                            |  | $              | 227,455   |                   | $ | 160,802  
|Current ratio                                              |  |                | 2.4:1     |                   |   | 1.9:1    
|                                                           |  |                |           |                   |   |          



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



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Potlatch Corporation and Consolidated Subsidiaries

Condensed Statements of Cash Flows

Unaudited (Dollars in thousands)



|                                                                          |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                          |  | Three Months Ended March 31 |        
|                                                                          |  | 2004                        |         |   | 2003 |  
|Cash Flows From Continuing Operations                                     |  |                             |         |   |      |   |         |  
|Net earnings (loss)                                                       |  | $                           | 21,818  |   |      | $ | (9,565  | )
|Adjustments to reconcile net earnings (loss) to net operating cash flows: |  |                             |         |   |      |   |         |  
|Loss from discontinued operations                                         |  |                             |        |   |      |   | 647     |  
|Loss on disposal of discontinued operations                               |  |                             |        |   |      |   | 60      |  
|Depreciation, amortization and cost of fee timber harvested               |  |                             | 27,083  |   |      |   | 26,859  |  
|Deferred taxes                                                            |  |                             | 13,755  |   |      |   | (6,116  | )
|Working capital changes                                                   |  |                             | (17,343 | ) |      |   | (11,059 | )
|Other, net                                                                |  |                             | 217     |   |      |   |        |  
|                                                                          |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities of continuing operations        |  |                             | 45,530  |   |      |   | 826     |  
|                                                                          |  |                             |         |   |      |   |         |  
|Cash Flows From Investing                                                 |  |                             |         |   |      |   |         |  
|Increase in restricted cash                                               |  |                             |        |   |      |   | (45     | )
|Decrease (increase) in short-term investments                             |  |                             | (39,792 | ) |      |   | 400     |  
|Additions to plant and properties                                         |  |                             | (12,783 | ) |      |   | (13,531 | )
|Other, net                                                                |  |                             | (2,980  | ) |      |   | (3,356  | )
|                                                                          |  |                             |         |   |      |   |         |  
|Net cash used for investing activities of continuing operations           |  |                             | (55,555 | ) |      |   | (16,532 | )
|                                                                          |  |                             |         |   |      |   |         |  
|Cash Flows From Financing                                                 |  |                             |         |   |      |   |         |  
|Change in book overdrafts                                                 |  |                             | (9,106  | ) |      |   | 3,944   |  
|Increase in notes payable                                                 |  |                             |        |   |      |   | 20,000  |  
|Issuance of treasury stock                                                |  |                             | 19,798  |   |      |   | 1,440   |  
|Dividends                                                                 |  |                             | (4,352  | ) |      |   | (4,291  | )
|Other, net                                                                |  |                             | 4,097   |   |      |   | (5,976  | )
|                                                                          |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities of continuing operations        |  |                             | 10,437  |   |      |   | 15,117  |  
|                                                                          |  |                             |         |   |      |   |         |  
|Cash from continuing operations                                           |  |                             | 412     |   |      |   | (589    | )
|Cash from discontinued operations                                         |  |                             |        |   |      |   | 3,781   |  
|                                                                          |  |                             |         |   |      |   |         |  
|Increase in cash                                                          |  |                             | 412     |   |      |   | 3,192   |  
|Cash at beginning of period                                               |  |                             | 7,190   |   |      |   | 8,973   |  
|                                                                          |  |                             |         |   |      |   |         |  
|Cash at end of period                                                     |  | $                           | 7,602   |   |      | $ | 12,165  |  
|                                                                          |  |                             |         |   |      |   |         |  



Net interest payments (net of amounts
capitalized) for the three months ended March 31, 2004 and 2003 were $11.0 million and $10.9 million, respectively. Net income tax payments were $0.1 million for each of the three months ended March 31, 2004 and 2003.



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 March 31, 2004, and December 31, 2003, the statements of operations and comprehensive income for the
three months ended March 31, 2004 and 2003, and the condensed statements of cash flows for the three months ended March 31, 2004 and 2003, have been prepared in conformity with accounting principles generally accepted in the United States of
America. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included. All adjustments were of a normal recurring nature; there were no material nonrecurring adjustments.



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



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



NOTE 3. INCOME TAXES - The income tax provision and benefit presented in the statements of operations have been computed by applying an estimated annual effective
tax rate. This rate was 39% for the quarters ended March 31, 2004 and 2003.



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



NOTE 5. CASH FLOW HEDGES - During the
third quarter of 2003, we entered into several derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. The financial instruments were 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 applied to 13,200 mmBtu of natural gas purchased per day for the five month period
beginning November 1, which represented approximately 60% of our expected daily usage during the period. As designated cash flow hedges, changes in the fair value of the financial instruments are recognized in Other comprehensive loss, net of
tax to the extent the hedges are deemed



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



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



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



|                                               |  |                             |  |           
|---------------------------------------------- |  | --------------------------- |  | ----------
|                                               |  | Three Months Ended March 31
|                                               |  | 2004                        |  | 2003      
|Basic average common shares outstanding        |  | 29,244,642                  |  | 28,617,257
|Incremental shares due to common stock options |  | 120,726                     |  |          
|                                               |  |                             |  |           
|Diluted average common shares outstanding      |  | 29,365,368                  |  | 28,617,257
|                                               |  |                             |  |           



Stock options to
purchase 1,060,175 and 2,715,962 shares of common stock for the three months ended March 31, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share because the exercise prices of the stock options were
greater than the average market price of the common shares.



NOTE 7.
STOCK-BASED COMPENSATION  We currently have three stock incentive plans under which options or performance share awards are outstanding. We apply the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25 and related
Interpretations in accounting for our stock-based compensation. No compensation cost is recognized for options granted under the plans when the exercise price is equal to market value at the grant date. For performance share awards, which were first
granted in December 2003, compensation expense is recorded ratably over the performance period based upon the market value of our stock and the likelihood that performance measures will be met. Compensation expense related to performance shares was
$0.2 million, before taxes, for the quarter ended March 31, 2004.



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



|                                                                                |  |                             |        |   |      |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                |  | Three Months Ended March 31 |       
|(Dollars in thousands - except per-share amounts)                               |  | 2004                        |        |   | 2003 |  
|Net earnings (loss), as reported                                                |  | $                           | 21,818 |   |      | $ | (9,565  | )
|                                                                                |  |                            
|Add: stock based compensation expense recorded under APB No. 25, net of tax     |  |                             | 133    |   |      |   |        |  
|                                                                                |  |                            
|Deduct: stock based compensation determined under Statement No. 123, net of tax |  |                             | (423   | ) |      |   | (502    | )
|                                                                                |  |                             |        |   |      |   |         |  
|Pro forma net earnings (loss)                                                   |  | $                           | 21,528 |   |      | $ | (10,067 | )
|                                                                                |  |                             |        |   |      |   |         |  
|Basic net earnings (loss) per share, as reported                                |  | $                           | .75    |   |      | $ | (.33    | )
|Diluted net earnings (loss) per share, as reported                              |  |                             | .74    |   |      |   | (.33    | )
|Pro forma basic net earnings (loss) per share                                   |  |                             | .74    |   |      |   | (.35    | )
|Pro forma diluted net earnings (loss) per share                                 |  |                             | .73    |   |      |   | (.35    | )
|                                                                                |  |                             |        |   |      |   |         |  



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



|               |  |                |         |                   |   |        
|-------------- |  | -------------- | ------- | ----------------- | - | -------
|               |  | March 31, 2004 |         | December 31, 2003
|Raw materials  |  | $              | 75,375  |                   | $ | 74,999 
|Finished goods |  |                | 90,627  |                   |   | 84,679 
|               |  |                |         |                   |   |        
|               |  | $              | 166,002 |                   | $ | 159,678
|               |  |                |         |                   |   |        



NOTE 9. PENSION AND OTHER
POSTRETIREMENT BENEFIT PLANS - The table below details the components of net periodic costs (benefit):



Three months ended March 31:



|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  
|---------------------------------- |  | --------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                                   |  | Pension Benefit Plans |         |   | OtherPostretirement Benefit Plans |  
|(Dollars in thousands)             |  | 2004                  |         |   | 2003                              |   |         | 2004 |  |   | 2003  |  
|Service cost                       |  | $                     | 2,663   |   |                                   | $ | 2,153   |      |  | $ | 777   |   |  | $ | 452   |  
|Interest cost                      |  |                       | 8,499   |   |                                   |   | 8,100   |      |  |   | 4,654 |   |  |   | 3,071 |  
|Expected return on plan assets     |  |                       | (14,563 | ) |                                   |   | (13,776 | )    |  |   |      |   |  |   | (76   | )
|Amortization of prior service cost |  |                       | 454     |   |                                   |   | 417     |      |  |   | (407  | ) |  |   | (292  | )
|Recognized actuarial loss (gain)   |  |                       | 55      |   |                                   |   | (41     | )    |  |   | 2,237 |   |  |   | 1,069 |  
|Recognized net initial asset       |  |                       |        |   |                                   |   | (10     | )    |  |   |      |   |  |   |      |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  
|Net periodic cost (benefit)        |  | $                     | (2,892  | ) |                                   | $ | (3,157  | )    |  | $ | 7,261 |   |  | $ | 4,224 |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |       |   |  |   |       |  



In the footnotes to
our financial statements for the year ended December 31, 2003, we estimated contributions to our defined benefit pension plans in 2004 would total approximately $1.2 million. As of March 31, 2004, $0.3 million of contributions had been made. No
change to the original estimate is anticipated.



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



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NOTE 10. DEBT - In August 2003 we entered into a fixed-to-variable interest rate swap to hedge a portion of our
10% senior subordinated debentures. The swap was designated as a fair value hedge and called for the company to pay a variable interest amount, determined semi-annually in arrears and equal to the London Interbank Offered Rate (LIBOR) plus 4.80%,
and receive a fixed-rate payment from a financial institution, calculated on $165.0 million of our 10% senior subordinated debentures. The terms of the swap allowed us to assume no ineffectiveness in the hedge. In March 2004, we terminated the swap
and received a cash settlement of $6.0 million. A previous swap, with essentially the same terms, was terminated in June 2003. We received cash settlements totaling $20.0 million under the previous swap, representing the value of the swap at the
time of termination as well as for a repricing of the swap in August 2002. The consideration received at termination for both swaps is being accreted to earnings until the 10% senior subordinated debentures are retired.



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NOTE 11. SEGMENT INFORMATION 



|                                                                     |  |                            |         |   |      |   |         |  
|-------------------------------------------------------------------- |  | -------------------------- | ------- | - | ---- | - | ------- | -
|                                                                     |  | Three Months EndedMarch 31 |        
|(Dollars in thousands)                                               |  | 2004                       |         |   | 2003 |  
|Segment Sales                                                        |  |                            |         |   |      |   |         |  
|Resource                                                             |  | $                          | 61,790  |   |      | $ | 44,971  |  
|                                                                     |  |                            |         |   |      |   |         |  
|Wood products                                                        |  |                            |         |   |      |   |         |  
|Oriented strand board                                                |  |                            | 103,893 |   |      |   | 52,233  |  
|Lumber                                                               |  |                            | 77,659  |   |      |   | 63,651  |  
|Plywood                                                              |  |                            | 15,518  |   |      |   | 9,309   |  
|Particleboard                                                        |  |                            | 4,845   |   |      |   | 3,295   |  
|Other                                                                |  |                            | 7,139   |   |      |   | 8,587   |  
|                                                                     |  |                            |         |   |      |   |         |  
|                                                                     |  |                            | 209,054 |   |      |   | 137,075 |  
|                                                                     |  |                            |         |   |      |   |         |  
|Pulp and paperboard                                                  |  |                            |         |   |      |   |         |  
|Paperboard                                                           |  |                            | 108,529 |   |      |   | 104,921 |  
|Pulp                                                                 |  |                            | 12,381  |   |      |   | 13,140  |  
|                                                                     |  |                            |         |   |      |   |         |  
|                                                                     |  |                            | 120,910 |   |      |   | 118,061 |  
|                                                                     |  |                            |         |   |      |   |         |  
|Consumer products                                                    |  |                            | 73,968  |   |      |   | 78,064  |  
|                                                                     |  |                            |         |   |      |   |         |  
|                                                                     |  |                            | 465,722 |   |      |   | 378,171 |  
|Elimination of intersegment sales                                    |  |                            | (45,300 | ) |      |   | (43,369 | )
|                                                                     |  |                            |         |   |      |   |         |  
|Total consolidated net sales                                         |  | $                          | 420,422 |   |      | $ | 334,802 |  
|                                                                     |  |                            |         |   |      |   |         |  
|Intersegment sales or transfers                                      |  |                            |         |   |      |   |         |  
|Resource                                                             |  | $                          | 33,536  |   |      | $ | 31,847  |  
|Wood products                                                        |  |                            | 3,010   |   |      |   | 3,009   |  
|Pulp and paperboard                                                  |  |                            | 8,733   |   |      |   | 8,492   |  
|Consumer products                                                    |  |                            | 21      |   |      |   | 21      |  
|                                                                     |  |                            |         |   |      |   |         |  
|Total                                                                |  | $                          | 45,300  |   |      | $ | 43,369  |  
|                                                                     |  |                            |         |   |      |   |         |  
|Operating Income (Loss)                                              |  |                            |         |   |      |   |         |  
|Resource                                                             |  | $                          | 12,053  |   |      | $ | 11,121  |  
|Wood products                                                        |  |                            | 57,799  |   |      |   | (3,611  | )
|Pulp and paperboard                                                  |  |                            | (7,761  | ) |      |   | (9,333  | )
|Consumer products                                                    |  |                            | (3,817  | ) |      |   | 6,802   |  
|Eliminations                                                         |  |                            | 435     |   |      |   | 70      |  
|                                                                     |  |                            |         |   |      |   |         |  
|                                                                     |  |                            | 58,709  |   |      |   | 5,049   |  
|Corporate                                                            |  |                            | (22,942 | ) |      |   | (19,624 | )
|                                                                     |  |                            |         |   |      |   |         |  
|Consolidated earnings (loss) from continuing operations before taxes |  | $                          | 35,767  |   |      | $ | (14,575 | )
|                                                                     |  |                            |         |   |      |   |         |  



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



9



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NOTE 12. 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 three months ended March 31, 2004 and 2003 are as
follows (unaudited):



|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | --------------------- | - | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                            |  | For the three months ended March 31, 2004 |        
|                                                                            |  | Parent Company                            |         |   | Subsidiary Guarantors |   | Eliminations |  |   | Consolidated |  
|                                                                            |  | (Dollars in thousands)                    |        
|Net sales                                                                   |  | $                                         | 420,422 |   |                       | $ | 333          |  | $ | (333         | ) |  | $ | 420,422 |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Costs and expenses:                                                         |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested                 |  |                                           | 27,061  |   |                       |   | 22           |  |   |             |   |  |   | 27,083  |  
|Materials, labor and other operating expenses                               |  |                                           | 322,391 |   |                       |   | 47           |  |   | (333         | ) |  |   | 322,105 |  
|Selling, general and administrative expenses                                |  |                                           | 22,348  |   |                       |   | 107          |  |   |             |   |  |   | 22,455  |  
|Restructuring charge                                                        |  |                                           | 1,280   |   |                       |   |             |  |   |             |   |  |   | 1,280   |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|                                                                            |  |                                           | 373,080 |   |                       |   | 176          |  |   | (333         | ) |  |   | 372,923 |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Earnings from operations                                                    |  |                                           | 47,342  |   |                       |   | 157          |  |   |             |   |  |   | 47,499  |  
|Interest expense                                                            |  |                                           | (11,860 | ) |                       |   |             |  |   |             |   |  |   | (11,860 | )
|Interest income                                                             |  |                                           | 128     |   |                       |   |             |  |   |             |   |  |   | 128     |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Earnings before taxes and equity in net income of consolidated subsidiaries |  |                                           | 35,610  |   |                       |   | 157          |  |   |             |   |  |   | 35,767  |  
|Equity in net income of consolidated subsidiaries                           |  |                                           | 96      |   |                       |   |             |  |   | (96          | ) |  |   |        |  
|Provision for taxes                                                         |  |                                           | 13,888  |   |                       |   | 61           |  |   |             |   |  |   | 13,949  |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Net earnings                                                                |  |                                           | 21,818  |   |                       |   | 96           |  |   | (96          | ) |  |   | 21,818  |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Other comprehensive loss, net of tax:                                       |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Cash flow hedges:                                                           |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Net derivative losses, net of income tax benefit                            |  |                                           | (68     | ) |                       |   |             |  |   |             |   |  |   | (68     | )
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  
|Comprehensive income                                                        |  | $                                         | 21,750  |   |                       | $ | 96           |  | $ | (96          | ) |  | $ | 21,750  |  
|                                                                            |  |                                           |         |   |                       |   |              |  |   |              |   |  |   |         |  



10



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|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|--------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | -------------------- | - | --- | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                                      |  | For the three months ended March 31, 2003 |        
|                                                                      |  | ParentCompany                             |         |   | SubsidiaryGuarantors |   |     | Eliminations |  |   | Consolidated |  
|                                                                      |  | (Dollars in thousands)                    |        
|Net sales                                                             |  | $                                         | 334,802 |   |                      | $ | 212 |              |  | $ | (212         | ) |  | $ | 334,802 |  
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Costs and expenses:                                                   |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested           |  |                                           | 26,830  |   |                      |   | 29  |              |  |   |             |   |  |   | 26,859  |  
|Materials, labor and other operating expenses                         |  |                                           | 292,442 |   |                      |   | 114 |              |  |   | (212         | ) |  |   | 292,344 |  
|Selling, general and administrative expenses                          |  |                                           | 17,140  |   |                      |   | 112 |              |  |   |             |   |  |   | 17,252  |  
|Restructuring charge                                                  |  |                                           | 227     |   |                      |   |    |              |  |   |             |   |  |   | 227     |  
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|                                                                      |  |                                           | 336,639 |   |                      |   | 255 |              |  |   | (212         | ) |  |   | 336,682 |  
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Loss from operations                                                  |  |                                           | (1,837  | ) |                      |   | (43 | )            |  |   |             |   |  |   | (1,880  | )
|Interest expense                                                      |  |                                           | (12,762 | ) |                      |   |    |              |  |   |             |   |  |   | (12,762 | )
|Interest income                                                       |  |                                           | 67      |   |                      |   |    |              |  |   |             |   |  |   | 67      |  
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Loss before taxes and equity in net loss of consolidated subsidiaries |  |                                           | (14,532 | ) |                      |   | (43 | )            |  |   |             |   |  |   | (14,575 | )
|Equity in net loss of consolidated subsidiaries                       |  |                                           | (26     | ) |                      |   |    |              |  |   | 26           |   |  |   |        |  
|Provision (benefit) for taxes                                         |  |                                           | (5,667  | ) |                      |   | (17 | )            |  |   |             |   |  |   | (5,684  | )
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Loss from continuing operations                                       |  |                                           | (8,891  | ) |                      |   | (26 | )            |  |   | 26           |   |  |   | (8,891  | )
|Discontinued operations:                                              |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Loss from discontinued operations                                     |  |                                           | (1,106  | ) |                      |   |    |              |  |   |             |   |  |   | (1,106  | )
|Income tax benefit                                                    |  |                                           | (432    | ) |                      |   |    |              |  |   |             |   |  |   | (432    | )
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  
|Net loss                                                              |  | $                                         | (9,565  | ) |                      | $ | (26 | )            |  | $ | 26           |   |  | $ | (9,565  | )
|                                                                      |  |                                           |         |   |                      |   |     |              |  |   |              |   |  |   |         |  



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



11



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Condensed consolidating balance sheets as of March 31, 2004 and December 31, 2003 are as follows (2004
amounts unaudited):



|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|---------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ---------
|                                                           |  | March 31, 2004        
|                                                           |  | ParentCompany          |           | SubsidiaryGuarantors |   |         | Eliminations |  |   | Consolidated
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current assets:                                            |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Cash                                                       |  | $                      | 7,555     |                      | $ | 47      |              |  | $ |             |   |  | $ | 7,602    
|Short-term investments                                     |  |                        | 79,883    |                      |   |        |              |  |   |             |   |  |   | 79,883   
|Receivables, net                                           |  |                        | 124,939   |                      |   | 216     |              |  |   |             |   |  |   | 125,155  
|Inventories                                                |  |                        | 165,874   |                      |   | 128     |              |  |   |             |   |  |   | 166,002  
|Prepaid expenses                                           |  |                        | 17,004    |                      |   |        |              |  |   |             |   |  |   | 17,004   
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current assets                                       |  |                        | 395,255   |                      |   | 391     |              |  |   |             |   |  |   | 395,646  
|Land, other than timberlands                               |  |                        | 8,338     |                      |   | 493     |              |  |   |             |   |  |   | 8,831    
|Plant and equipment, at cost less accumulated depreciation |  |                        | 730,076   |                      |   | 579     |              |  |   |             |   |  |   | 730,655  
|Timber, timberlands and related logging facilities         |  |                        | 398,086   |                      |   |        |              |  |   |             |   |  |   | 398,086  
|Other assets                                               |  |                        | 118,955   |                      |   |        |              |  |   | (1,246       | ) |  |   | 117,709  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,650,710 |                      | $ | 1,463   |              |  | $ | (1,246       | ) |  | $ | 1,650,927
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Liabilities and Stockholders Equity                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current liabilities:                                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current installments on long-term debt                     |  | $                      | 507       |                      | $ |        |              |  | $ |             |   |  | $ | 507      
|Accounts payable and accrued liabilities                   |  |                        | 167,493   |                      |   | 191     |              |  |   |             |   |  |   | 167,684  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current liabilities                                  |  |                        | 168,000   |                      |   | 191     |              |  |   |             |   |  |   | 168,191  
|Intercompany transfers                                     |  |                        | 31,316    |                      |   | (31,316 | )            |  |   |             |   |  |   |         
|Long-term debt                                             |  |                        | 618,288   |                      |   |        |              |  |   |             |   |  |   | 618,288  
|Other long-term obligations                                |  |                        | 270,511   |                      |   |        |              |  |   |             |   |  |   | 270,511  
|Deferred taxes                                             |  |                        | 85,672    |                      |   |        |              |  |   |             |   |  |   | 85,672   
|Stockholders equity                                       |  |                        | 476,923   |                      |   | 32,588  |              |  |   | (1,246       | ) |  |   | 508,265  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,650,710 |                      | $ | 1,463   |              |  | $ | (1,246       | ) |  | $ | 1,650,927
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          



12



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|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|---------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | ------- | ------------ |  | - | ------------ | - |  | - | ---------
|                                                           |  | December 31, 2003     
|                                                           |  | ParentCompany          |           | SubsidiaryGuarantors |   |         | Eliminations |  |   | Consolidated
|                                                           |  | (Dollars in thousands)
|Assets                                                     |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current assets:                                            |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Cash                                                       |  | $                      | 7,149     |                      | $ | 41      |              |  | $ |             |   |  | $ | 7,190    
|Short-term investments                                     |  |                        | 40,091    |                      |   |        |              |  |   |             |   |  |   | 40,091   
|Receivables, net                                           |  |                        | 105,088   |                      |   | 257     |              |  |   |             |   |  |   | 105,345  
|Inventories                                                |  |                        | 159,550   |                      |   | 128     |              |  |   |             |   |  |   | 159,678  
|Prepaid expenses                                           |  |                        | 18,315    |                      |   |        |              |  |   |             |   |  |   | 18,315   
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current assets                                       |  |                        | 330,193   |                      |   | 426     |              |  |   |             |   |  |   | 330,619  
|Land, other than timberlands                               |  |                        | 8,338     |                      |   | 493     |              |  |   |             |   |  |   | 8,831    
|Plant and equipment, at cost less accumulated depreciation |  |                        | 739,741   |                      |   | 601     |              |  |   |             |   |  |   | 740,342  
|Timber, timberlands and related logging facilities         |  |                        | 398,899   |                      |   |        |              |  |   |             |   |  |   | 398,899  
|Other assets                                               |  |                        | 119,932   |                      |   |        |              |  |   | (1,246       | ) |  |   | 118,686  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,597,103 |                      | $ | 1,520   |              |  | $ | (1,246       | ) |  | $ | 1,597,377
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Liabilities and Stockholders Equity                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current liabilities:                                       |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Current installments on long-term debt                     |  | $                      | 507       |                      | $ |        |              |  | $ |             |   |  | $ | 507      
|Accounts payable and accrued liabilities                   |  |                        | 169,165   |                      |   | 145     |              |  |   |             |   |  |   | 169,310  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|Total current liabilities                                  |  |                        | 169,672   |                      |   | 145     |              |  |   |             |   |  |   | 169,817  
|Intercompany transfers                                     |  |                        | 31,197    |                      |   | (31,197 | )            |  |   |             |   |  |   |         
|Long-term debt                                             |  |                        | 618,278   |                      |   |        |              |  |   |             |   |  |   | 618,278  
|Other long-term obligations                                |  |                        | 266,514   |                      |   |        |              |  |   |             |   |  |   | 266,514  
|Deferred taxes                                             |  |                        | 71,917    |                      |   |        |              |  |   |             |   |  |   | 71,917   
|Stockholders equity                                       |  |                        | 439,525   |                      |   | 32,572  |              |  |   | (1,246       | ) |  |   | 470,851  
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          
|                                                           |  | $                      | 1,597,103 |                      | $ | 1,520   |              |  | $ | (1,246       | ) |  | $ | 1,597,377
|                                                           |  |                        |           |                      |   |         |              |  |   |              |   |  |   |          



13



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Condensed consolidating statements of cash flows for the three months ended March 31, 2004 and 2003 are
as follows (unaudited):



|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|------------------------------------------------------------------ |  | ----------------------------------------- | ------- | - | -------------------- | - | ---- | ------------ |  | ------------ | - |  | - | ------- | -
|                                                                   |  | For the three months ended March 31, 2004 |        
|                                                                   |  | ParentCompany                             |         |   | SubsidiaryGuarantors |   |      | Eliminations |  | Consolidated |  
|                                                                   |  | (Dollars in thousands)                    |        
|Cash Flows From Continuing Operations                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net earnings                                                       |  | $                                         | 21,722  |   |                      | $ | 96   |              |  | $            |  |  | $ | 21,918  |  
|Adjustments to reconcile net earnings to net operating cash flows: |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested        |  |                                           | 27,061  |   |                      |   | 22   |              |  |              |  |  |   | 27,083  |  
|Deferred taxes                                                     |  |                                           | 13,755  |   |                      |   |     |              |  |              |  |  |   | 13,755  |  
|Working capital changes                                            |  |                                           | (17,430 | ) |                      |   | 87   |              |  |              |  |  |   | (17,343 | )
|Other, net                                                         |  |                                           | 217     |   |                      |   |     |              |  |              |  |  |   | 217     |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash provided by operating activities of continuing operations |  |                                           | 45,325  |   |                      |   | 205  |              |  |              |  |  |   | 45,530  |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash Flows From Investing                                          |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Increase in short-term investments                                 |  |                                           | (39,792 | ) |                      |   |     |              |  |              |  |  |   | (39,792 | )
|Investments and advances from subsidiaries                         |  |                                           | 199     |   |                      |   | (199 | )            |  |              |  |  |   |        |  
|Additions to plant and properties                                  |  |                                           | (12,783 | ) |                      |   |     |              |  |              |  |  |   | (12,783 | )
|Other, net                                                         |  |                                           | (2,980  | ) |                      |   |     |              |  |              |  |  |   | (2,980  | )
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash used for investing activities of continuing operations    |  |                                           | (55,356 | ) |                      |   | (199 | )            |  |              |  |  |   | (55,555 | )
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash Flows From Financing                                          |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Change in book overdrafts                                          |  |                                           | (9,106  | ) |                      |   |     |              |  |              |  |  |   | (9,106  | )
|Issuance of treasury stock                                         |  |                                           | 19,798  |   |                      |   |     |              |  |              |  |  |   | 19,798  |  
|Dividends                                                          |  |                                           | (4,352  | ) |                      |   |     |              |  |              |  |  |   | (4,352  | )
|Other, net                                                         |  |                                           | 4,097   |   |                      |   |     |              |  |              |  |  |   | 4,097   |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash provided by financing activities of continuing operations |  |                                           | 10,437  |   |                      |   |     |              |  |              |  |  |   | 10,437  |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Increase in cash                                                   |  |                                           | 406     |   |                      |   | 6    |              |  |              |  |  |   | 412     |  
|Cash at beginning of period                                        |  |                                           | 7,149   |   |                      |   | 41   |              |  |              |  |  |   | 7,190   |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash at end of period                                              |  | $                                         | 7,555   |   |                      | $ | 47   |              |  | $            |  |  | $ | 7,602   |  
|                                                                   |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  



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|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | -------------------- | - | ---- | ------------ |  | ------------ | - |  | - | ------- | -
|                                                                              |  | For the three months ended March 31, 2003 |        
|                                                                              |  | ParentCompany                             |         |   | SubsidiaryGuarantors |   |      | Eliminations |  | Consolidated |  
|                                                                              |  | (Dollars in thousands)                    |        
|Cash Flows From Continuing Operations                                         |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net loss                                                                      |  | $                                         | (9,539  | ) |                      | $ | (26  | )            |  | $            |  |  | $ | (9,565  | )
|Adjustments to reconcile net loss to net operating cash flows:                |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Loss from discontinued operations                                             |  |                                           | 647     |   |                      |   |     |              |  |              |  |  |   | 647     |  
|Loss on disposal of discontinued operations                                   |  |                                           | 60      |   |                      |   |     |              |  |              |  |  |   | 60      |  
|Depreciation, amortization and cost of fee timber harvested                   |  |                                           | 26,830  |   |                      |   | 29   |              |  |              |  |  |   | 26,859  |  
|Deferred taxes                                                                |  |                                           | (6,116  | ) |                      |   |     |              |  |              |  |  |   | (6,116  | )
|Working capital changes                                                       |  |                                           | (10,945 | ) |                      |   | (114 | )            |  |              |  |  |   | (11,059 | )
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash provided by (used for) operating activities of continuing operations |  |                                           | 937     |   |                      |   | (111 | )            |  |              |  |  |   | 826     |  
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash Flows From Investing                                                     |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Increase in restricted cash                                                   |  |                                           | (45     | ) |                      |   |     |              |  |              |  |  |   | (45     | )
|Decrease in short-term investments                                            |  |                                           | 400     |   |                      |   |     |              |  |              |  |  |   | 400     |  
|Investments and advances from subsidiaries                                    |  |                                           | 54      |   |                      |   | (54  | )            |  |              |  |  |   |        |  
|Additions to plant and properties                                             |  |                                           | (13,531 | ) |                      |   |     |              |  |              |  |  |   | (13,531 | )
|Other, net                                                                    |  |                                           | (3,356  | ) |                      |   |     |              |  |              |  |  |   | (3,356  | )
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash used for investing activities of continuing operations               |  |                                           | (16,478 | ) |                      |   | (54  | )            |  |              |  |  |   | (16,532 | )
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash Flows From Financing                                                     |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Change in book overdrafts                                                     |  |                                           | 3,944   |   |                      |   |     |              |  |              |  |  |   | 3,944   |  
|Increase in notes payable                                                     |  |                                           | 20,000  |   |                      |   |     |              |  |              |  |  |   | 20,000  |  
|Issuance of treasury stock                                                    |  |                                           | 1,440   |   |                      |   |     |              |  |              |  |  |   | 1,440   |  
|Dividends                                                                     |  |                                           | (4,291  | ) |                      |   |     |              |  |              |  |  |   | (4,291  | )
|Other, net                                                                    |  |                                           | (5,976  | ) |                      |   |     |              |  |              |  |  |   | (5,976  | )
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Net cash provided by financing activities of continuing operations            |  |                                           | 15,117  |   |                      |   |     |              |  |              |  |  |   | 15,117  |  
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash from continuing operations                                               |  |                                           | (424    | ) |                      |   | (165 | )            |  |              |  |  |   | (589    | )
|Cash from discontinued operations                                             |  |                                           | 3,781   |   |                      |   |     |              |  |              |  |  |   | 3,781   |  
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Increase (decrease) in cash                                                   |  |                                           | 3,357   |   |                      |   | (165 | )            |  |              |  |  |   | 3,192   |  
|Cash at beginning of period                                                   |  |                                           | 8,811   |   |                      |   | 162  |              |  |              |  |  |   | 8,973   |  
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  
|Cash at end of period                                                         |  | $                                         | 12,168  |   |                      | $ | (3   | )            |  | $            |  |  | $ | 12,165  |  
|                                                                              |  |                                           |         |   |                      |   |      |              |  |              |   |  |   |         |  



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



Cautionary Statement Regarding Forward-Looking Information



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



Overview



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



| | The Resource segment manages our timberlands, which supply a portion of the logs, wood chips, pulpwood and other fiber to our manufacturing segments, as well as to third parties.
Intersegment sales are based on prevailing market prices for wood fiber. In the first quarter of 2004, Resource segment net sales were $61.8 million, representing approximately 13% of our net sales, before elimination of intersegment sales.
Intersegment sales were $33.5 million for the quarter.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Wood Products segment manufactures oriented strand board (OSB), lumber, plywood, and particleboard at ten mills located in Arkansas, Idaho and Minnesota. These products are
largely commodity products, which are sold to wholesalers primarily for use in home building and other construction activity. Wood Products segment net sales were $209.1 million in the first quarter of 2004, representing approximately 45% of our net
sales, before elimination of intersegment sales. Intersegment sales were $3.0 million for the quarter.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Pulp and Paperboard segment manufactures bleached paperboard used in packaging and bleached softwood market pulp. The Pulp and Paperboard
|- | ---------------------------------------------------------------------------------------------------------------------------------------------



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segment operates two pulp mills and two paperboard mills located in Arkansas and Idaho. Pulp and Paperboard segment net sales were $120.9 million in the
first quarter of 2004, representing approximately 26% of our net sales, before elimination of intersegment sales. Intersegment sales were $8.7 million for the quarter.



| | The Consumer Products segment manufactures tissue products primarily sold on a private label basis by major grocery store chains. The segment operates two tissue mills and three
tissue converting facilities located in Idaho, Michigan and Nevada. Consumer Products segment net sales were $74.0 million in the first quarter of 2004, representing approximately 16% of our net sales before elimination of intersegment sales. The
segment did not have significant intersegment sales during the quarter.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Factors influencing our
results of operations



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



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



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



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



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



Energy has become one of our most volatile operating expenses over the past
several years. Substantial price increases in 2000 and 2001 contributed to the net losses we incurred during those periods. Energy prices returned to more normal historical levels in 2002, but fluctuated by region during 2003 and have generally
trended higher during the first quarter of 2004. In periods of high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases and therefore such increased costs could adversely
affect our operating results. We have taken steps through conservation and electrical production to reduce our exposure to the volatile spot market for electricity. Our energy costs in future periods will depend principally on our ability to
continue to produce internally a substantial portion of our electricity needs and on changes in market prices for natural gas. From time to time we have entered into derivative financial instruments as a hedge against potential increases in the cost
of natural gas.



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



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



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depends largely on our ability to operate our manufacturing facilities efficiently and at or near full capacity. Our
operating results would be adversely affected if market demand does not justify operating at these levels or if our operations are inefficient or suffer significant interruption for any reason.



Critical Accounting Policies



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



Long-lived assets. We account for impairment of long-lived assets in
accordance with FASB Statement 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. If a determination is made, based upon estimated future cash flows, that the carrying amount of the asset is not recoverable, an impairment charge would be recognized for the excess of the assets carrying value over its fair value.



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



There are currently no authoritative accounting rules relating to costs to be capitalized in timber and timberlands. We have used relevant portions of
current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations and judgments could significantly affect the amounts capitalized. Additionally, models and observations used
to estimate the current recoverable timber volume on our lands are subject to judgments that could significantly affect volume estimates. Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon
amounts reported in our statements of operations and financial condition.



Restructuring charges and discontinued operations. In 2001 and 2002 we recorded charges for the reduction of the hourly workforce at a manufacturing site and a reduction of our salaried workforce, respectively. In May
2002 we completed the sale of a majority of the assets of our Printing Papers segment and closed a printing papers facility in Brainerd, Minnesota, which was subsequently sold in 2003. In July 2002, we closed a hardwood lumber mill in Warren,
Arkansas. The mill was sold in August 2002. In January 2004, we recorded a charge for a workforce reduction in our Consumer Products segment. These events required us to record estimates of liabilities for employee benefits, environmental



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clean-up and other costs at the time of the event. These estimated liabilities could differ materially from actual costs
incurred, with resulting adjustments to future period earnings for any differences.



Environmental liabilities. We record accruals for estimated environmental liabilities in accordance with FASB Statement No. 5. 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. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of
actuarial assumptions. Two critical assumptions are the discount rate applied to pension plan obligations and the rate of return on plan assets. For other postretirement employee benefit (OPEB) plans, which provide certain health care and life
insurance benefits to qualified retired employees, critical assumptions in determining OPEB expense are the discount rate applied to benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations.



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



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



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



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



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



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



Periodic pension and OPEB expense are included in Materials, labor and other operating expenses and Selling, general and
administrative expenses in the statements of operations. The expense is allocated to all business segments. Depending upon the funded status of the different plans, either a long-term asset or long-term liability is recorded for plans with
overfunding or underfunding, respectively. Any unfunded accumulated pension benefit obligation in excess of recorded liabilities is accounted for in stockholders equity as accumulated other comprehensive income. See Note 12 to our 2003 Form
10-K financial statements for related balance sheet effects at December 31, 2003 and 2002.



Recent Accounting Pronouncements



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



Results of Operations



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



A summary of period-to-period changes in items included in the statements of operations is presented on page 27 of this Form 10-Q. In the period-to-period discussion of our results of operations below, when we discuss our



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consolidated net sales, contributions by each of the segments to our net sales are reported after elimination of
intersegment sales. In the Discussion of Business Segments sections below, each segments net sales are set forth before elimination of intersegment sales.



Amounts reported for Discontinued operations in the Statements of Operations and Comprehensive Income for the
three months ended March 31, 2003, represent costs related to our former printing papers mill in Brainerd, Minnesota, which was sold in February 2003. The discussion below addresses our continuing businesses. In addition, revenues and expenses
associated with land sales have been reclassified for the first quarter of 2003 in our Statements of Operations and Comprehensive Income. Revenues and expenses from land sales are attributable to the Resource segment. Revenues are included in net
sales and the associated expense is included in materials, labor and other operating expenses. 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 other 2003 amounts discussed below have been conformed to 2004 classifications.



Three Months Ended March 31, 2004, Compared to Three Months Ended March 31, 2003



Net Sales - Net sales increased 26%, to $420.4 million for the three months ended March 31, 2004, from $334.8 million
for the same period in 2003. Resource net sales increased $15.1 million due to increased land sales and log sales to third parties. Wood Products net sales increased $72.0 million as a result of increased shipments and higher selling prices for
lumber and panel products, especially oriented strand board. Pulp and Paperboard segment net sales were $2.6 million higher due to increased paperboard shipments. The results for these segments more than offset a decline in Consumer Products segment
net sales of $4.1 million. The decline was the result of a slight decrease in shipments and lower sales prices.



Depreciation, amortization and cost of fee timber harvested - For the three months ended March 31, 2004, depreciation, amortization and cost of fee
timber harvested totaled $27.1 million, slightly higher compared to the prior year amount of $26.9 million.



Materials, labor and other operating expenses - Materials, labor and other operating expenses increased to $322.1 million for the three months
ended March 31, 2004, from $292.3 million for the three months ended March 31, 2003. The higher costs were due primarily to an increased volume of log sales and increased shipments of panel products, lumber, and paperboard.



Selling, general and administrative expenses - Selling, general and
administrative expenses were $22.5 million for the first three months of 2004, compared to $17.3 million incurred for the same period of 2003, due principally to an increase in corporate administration expense and higher selling expenses for the
Consumer Products segment.



Restructuring charge-A pre-tax charge of $1.3 million was recorded in January 2004 for a workforce reduction at our Consumer Products segment. A total of 60 production and 8 salaried employees were terminated. During the first quarter of 2003 we recorded a pre-tax
charge of $.2 million for costs related to terminated employees whose services had been retained beyond the initial 60-day period following announced job eliminations in 2002.



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Interest expense, net of capitalized interest - Interest expense totaled $11.9 million for the
first quarter of 2004, compared to $12.8 million in the prior year period. Higher interest expense in the first quarter of 2003 was due to borrowings outstanding under our bank credit facility during the quarter and interest on $15.0 million of
medium-term notes, which matured in April 2003.



Interest
income - For the three months ended March 31, 2004, interest income was $0.1 million, equal to interest income for the same period in 2003.



Provision (benefit) for taxes on income - For the three months ended March 31, 2004, we recorded an income tax provision on income from continuing
operations of $13.9 million, reflecting our net earnings before taxes, based on an estimated effective tax rate of 39%. During the first three months of 2003, an estimated tax rate of 39% was used to derive an income tax benefit of $5.7 million,
calculated on our net loss from continuing operations, before taxes, of $14.6 million.



Earnings (loss) from continuing operations - We recorded earnings from continuing operations of $21.8 million for the three months ended March 31, 2004, compared to a loss from continuing operations of $8.9
million for the same period in 2003. Improved earnings in the Wood Products segment more than offset a decline in Consumer Products segment results.



Other comprehensive loss, net of tax - For the three months ended March 31, 2004, we recorded a net derivative loss due to cash flow hedges of $0.1
million, after tax. There were no derivative transactions in the first quarter of 2003.



Discussion of business segments - The Resource segment reported operating income of $12.1 million for the first three months of 2004, up slightly from $11.1 million earned in the same period of 2003. Higher
income on land sales was largely responsible for the improved results. Segment net sales were $61.8 million for the first three months of 2004 compared to $45.0 million for the 2003 period. The increase in net sales was due to a higher volume of
non-fee log sales to third parties in Idaho and increased sales of nonstrategic land (land either unsuited for long-term timber management or of greater value to others for other uses). Revenue from sales of nonstrategic land was $3.9 million in the
first quarter of 2004 compared to $1.2 million in the first quarter of 2003. Resource segment expenses were $49.7 million in the first three months of 2004, compared to $33.9 million in the first three months of 2003, reflecting the higher log sales
volume in Idaho and the corresponding increase in permit timber harvest and log purchases from third parties.



The Wood Products segment reported operating income of $57.8 million for the first quarter of 2004, compared to a loss of $3.6 million recorded in the
first quarter of 2003. Low interest rates have supported continued strong homebuilding activity and demand for wood products, while a weaker U.S. dollar has increased the cost of imported competing materials. Net sales for the segment rose to $209.1
million for the first quarter of 2004, 53% higher than the $137.1 million recorded for the 2003 period. Oriented strand board net sales increased 99% to $103.9 million for the first quarter of 2004, compared to $52.2 million in the 2003 period, due
almost entirely to increased sales prices, as shipments were only modestly higher. Lumber net sales were $77.7 million, up from $63.7 million in 2003. The favorable comparison was due to a 16% increase in lumber selling prices and a 5% increase in
shipments. Plywood net sales increased to $15.5 million for the first quarter of 2004, compared to $9.3 million in 2003. Shipment volume increased 25% and sales prices were 33% higher than in the same period a year ago. Particleboard net sales were
$4.8 million for the first quarter of 2004, compared to $3.3 million for the first quarter of 2003, as a result of



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a 34% increase in sales prices and 10% higher shipments. Segment expenses were higher for the first quarter of 2004,
totaling $151.3 million versus $140.7 million in 2003. Increased product shipments for the segment were primarily responsible for the increase.



The Pulp and Paperboard segment reported an operating loss for 2004s first three months of $7.8 million, compared to a loss of $9.3 million for the
first three months of 2003. Segment net sales were $120.9 million for the first three months of 2004, up from $118.1 million for the 2003 period. Paperboard net sales increased modestly to $108.5 million, compared to $104.9 million in the first
three months of 2003. Shipments increased 7% compared to the prior years first three months; however, the effects were partially offset by a 3% decline in sales prices. Pulp sales (including intersegment sales) were lower for the first three
months of 2004, totaling $12.4 million compared to $13.1 million for the same period in 2003. The decrease in pulp sales for 2004 was due largely to fewer shipments to external customers as a result of lower pulp production during the quarter.
Weather-related fiber supply problems in January and a planned maintenance shutdown in March at the Lewiston, Idaho facility caused pulp production to decline. Higher selling prices for pulp partially offset the decrease in shipments. Segment
expenses were slightly higher for the first three months of 2004, totaling $128.7 million, compared to $127.4 million in the first three months of 2003. The increase reflects greater volumes of paperboard shipments for the first three months of 2004
compared to 2003.



The Consumer Products segment incurred an
operating loss of $3.8 million for the first quarter of 2004, compared to operating income of $6.8 million for the first quarter of 2003. Segment net sales were $74.0 million for the first quarter of 2004, 5% lower than the $78.1 million recorded
for the 2003 period as competitive market conditions for consumer tissue products continued during the quarter. Selling prices declined 3% and product shipments declined slightly compared to the prior year period. Segment expenses were higher for
the first three months of 2004, totaling $77.8 million, versus $71.3 million in 2003. Higher pulp costs as well as start-up costs related to the new tissue machine in Las Vegas contributed to the unfavorable quarter-to-quarter comparison. The
segment also recorded a pre-tax charge of $1.3 million for a workforce reduction, which took place in January 2004.



Our discontinued operations incurred a loss of $1.1 million, before taxes, for the first three months of 2003. The amount includes costs associated with
the sale of the Printing Papers segment assets in Brainerd, Minnesota, in February 2003.



Liquidity and Capital Resources



At March 31, 2004, our financial position included long-term debt of $618.8 million, including current installments on long-term debt of $0.5 million.
Long-term debt at March 31, 2004 (including current installments) was substantially unchanged from the December 2003 balance. Stockholders equity increased $37.4 million, largely due to net earnings of $21.8 million for the first three months
of 2004 and the issuance of treasury stock totaling $19.8 million, partially offset by dividend payments of $4.4 million. The ratio of long-term debt (including current installments) to stockholders equity was 1.22 to 1 at March 31, 2004,
compared to 1.31 to 1 at December 31, 2003.



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



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



Working capital
totaled $227.5 million at March 31, 2004, an increase of $66.7 million from December 31, 2003. The significant changes in the components of working capital are as follows:



| | Short-term investments increased $39.8 million. We invested positive cash flow from increased operating earnings not immediately needed for operations or capital expenditures into
short-term bank instruments.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Receivables increased $19.8 million primarily as a result of increased sales and the corresponding increase in customer receivables.
|- | ------------------------------------------------------------------------------------------------------------------------------------



| | Inventories rose $6.3 million largely as a result of increased consumer tissue product inventories. The Consumer Products segments Las Vegas facility is currently producing
ultra towel inventory to support the products rollout by retailers in the second quarter.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net cash provided by operations for the first three months of 2004 totaled $45.5 million, compared with $.8 million for the same period in 2003. Net
earnings from continuing operations, versus a net loss in 2003, combined with an increase in deferred taxes were largely responsible for the favorable comparison. The net earnings were generally due to higher selling prices for wood products. An
increase in cash used for working capital items in 2004 partially offset the favorable comparison.



For the three months ending March 31, 2004, net cash used for investing was $55.6 million, compared to $16.5 million for the first three months of 2003.
In 2004 we used $39.8 million to increase our short-term investments, as discussed above, and $12.8 million for capital spending. Capital spending in 2004 included $4.9 million towards completion of our new tissue machine in Las Vegas. The balance
of capital spending in 2004 focused on forest resources and various small projects designed to improve product quality and manufacturing efficiency. Cash used for investing in 2003 was largely for capital projects, primarily the new tissue machine
in Las Vegas.



Net cash provided by financing totaled $10.4
million for the first quarter of 2004, compared to $15.1 million during the same period in 2003. The majority of cash provided by financing in 2004s first quarter resulted from the issuance of treasury stock totaling $19.8 million. This amount
was partially offset by a reduction in book overdrafts of $9.1 million and dividend payments of $4.4 million. During 2003, cash provided by an increase in notes payable totaling $20.0 million was partially offset by dividend payments of $4.3
million.



Cash generated from discontinued operations in the
first three months of 2003 totaled $3.8 million, as a result of the sale of the Brainerd facility in February.



Our current bank credit facility, which expires June 28, 2004, is comprised of a revolving line of credit of up to $150.0 million, including a $70.0
million subfacility for letters of credit, usage of which reduces availability under the revolving line of credit. Our obligations under the



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bank credit facility are secured by our accounts receivable and inventory. As of March 31, 2004, there were no borrowings
outstanding under the revolving line of credit; however, approximately $11.2 million of the revolving line of credit was used to support outstanding letters of credit. Prior to the expiration of our current bank credit facility, we expect to either
extend the current credit facility or enter into a new credit facility.



Both the agreement governing our bank credit facility and the indenture governing our $250 million 10% senior subordinated notes contain certain covenants that, among other things, restrict our ability and our subsidiaries ability to
create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates,
make capital expenditures, or change the nature of our business. The bank credit facility also contains financial maintenance covenants establishing a maximum funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement,
and a minimum interest coverage ratio. Events of default under the bank credit facility and the indenture include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain
other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or asserted invalidity of security interests or loan documentation, and certain change of control events involving our company. As
of March 31, 2004, we were in compliance with the covenants of our bank credit facility and the $250 million 10% senior subordinated notes.



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



As of
March 31, 2004, Standard & Poors Ratings Services (S&P) rated our senior unsecured debt at BB+, with a stable outlook, and our senior secured bank loan rating at BBB-. The ratings have remained unchanged since January 30, 2003. Since
the first quarter of 2003, Fitch, Inc. has rated our senior unsecured debt at BB+ and our senior secured bank loan rating at BBB-. In March 2004, Fitch reaffirmed our ratings, but upgraded their outlook on the company from negative to stable.
Moodys Investors Service Inc.s rating of our debt is currently Baa3 with a negative outlook. The interest rate we pay on some of our debt is influenced by our credit ratings. See Item 3 - Quantitative and Qualitative Disclosures About
Market Risk on pages 28-29 for additional information.



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)



|                                                            |  |                             |         |   |      |   |         |                     |  |     |   
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | ------------------- |  | --- | --
|                                                            |  | Three Months Ended March 31 |        
|                                                            |  | 2004                        |         |   | 2003 |   |         | Increase (Decrease) | 
|Net sales                                                   |  | $                           | 420,422 |   |      | $ | 334,802 |                     |  | 26  | % 
|Costs and expenses:                                         |  |                             |         |   |      |   |         |                     |  |     |   
|Depreciation, amortization and cost of fee timber harvested |  |                             | 27,083  |   |      |   | 26,859  |                     |  | 1   | % 
|Materials, labor and other operating expenses               |  |                             | 322,105 |   |      |   | 292,344 |                     |  | 10  | % 
|Selling, general and administrative expenses                |  |                             | 22,455  |   |      |   | 17,252  |                     |  | 30  | % 
|Restructuring charges                                       |  |                             | 1,280   |   |      |   | 227     |                     |  | 464 | % 
|Earnings (loss) from operations                             |  |                             | 47,499  |   |      |   | (1,880  | )                   |  | *   |   
|Interest expense                                            |  |                             | (11,860 | ) |      |   | (12,762 | )                   |  | (7  | )%
|Interest income                                             |  |                             | 128     |   |      |   | 67      |                     |  | 91  | % 
|Provision (benefit) for taxes                               |  |                             | 13,949  |   |      |   | (5,684  | )                   |  | *   |   
|Earnings (loss) from continuing operations                  |  |                             | 21,818  |   |      |   | (8,891  | )                   |  | *   |   
|Discontinued operations:                                    |  |                             |         |   |      |   |         |                     |  |     |   
|Loss from discontinued operations                           |  |                             |        |   |      |   | (1,106  | )                   |  | *   |   
|Income tax benefit                                          |  |                             |        |   |      |   | (432    | )                   |  | *   |   
|Net earnings (loss)                                         |  | $                           | 21,818  |   |      | $ | (9,565  | )                   |  | *   |   

---

|* | 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 and long-term debt, credit rate risk on our
credit sensitive debentures, foreign currency exchange rates that affect the value of our investment in Euro and commodity price risk on collars used to hedge a portion of our short-term natural gas purchases.



During the quarter ended March 31, 2004, we had no borrowings outstanding
under our bank credit facility. The interest rates applied to borrowings under the bank credit facility are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. We do not attempt to mitigate the
effects of short-term interest rate fluctuations on our bank credit facility borrowings through the use of derivative financial instruments.



All of our long-term debt is fixed-rate and therefore changes in market interest rates do not expose us to interest rate risk for these financial
instruments. However, in August 2003 we entered into a fixed-to-variable interest rate swap to hedge a portion of our 10% senior subordinated debentures. The swap was designated as a fair value hedge and called for the company to pay a variable
interest amount, determined semi-annually in arrears and equal to LIBOR plus 4.80%, and receive a fixed rate payment from a financial institution, calculated on $165.0 million of our 10% senior subordinated debentures. The terms of the swap allowed
us to assume there was no ineffectiveness in the hedge. In March 2004, we terminated the interest rate swap and received a cash settlement of $6.0 million. A previous swap, with essentially the same terms, was terminated in June 2003, for which we
received cash settlements totaling $20.0 million. The settlements represented the value of the swap at the time of termination, as well as consideration received for a repricing of the swap in August 2002. The cash settlements for both swaps are
being accreted to earnings until the 10% senior subordinated debentures are retired. In May 2004, we reinstated our fixed-to-variable interest rate swap, with identical terms as the swap we terminated in March 2004.



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



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



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



In the first half of 2003 we entered into forward purchase contracts to
acquire Euro, with the settlement of these forward contracts timed to coincide with our required Euro payments to the supplier of our new tissue



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machine in Las Vegas, Nevada. As of March 31, 2004, we had no forward purchase contracts outstanding. However, we held
0.1 million Euro, which represents the balance remaining after final payments to the supplier upon completion of the project in the first quarter of 2004. The Euro are valued on our Balance Sheet at the exchange rate quoted at March 31, 2004.



During the third quarter of 2003, we entered into several
derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. The financial instruments were 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 applied to 13,200 mmBtu of natural gas purchased per day for the five month period beginning November 1, which represented
approximately 60% of our expected daily usage during the period. As designated cash flow hedges, changes in the fair value of the financial instruments are recognized in Other comprehensive loss, net of tax to the extent the hedges are
deemed effective, until the hedged item is recognized in the statement of operations. As of March 31, 2004, the derivative financial instruments entered into in the third quarter of 2003 had expired, and we had not entered into any additional
instruments to hedge our expected future natural gas purchases.



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 32 of this Form 10-Q.



Reports on Form 8-K



A current report on Form
8-K was filed on February 23, 2004. Under Item 5, Other Events, we reported that Potlatch Chairman and Chief Executive Officer, L. Pendleton Siegel, had informed the Company of his intent to exercise stock options to purchase 66,000 shares of the
Companys common stock. Of the 66,000 shares, Mr. Siegel indicated that he would exercise and sell 56,000 shares and exercise and retain the remaining 10,000 shares.



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



A current report on Form 8-K was filed on March 11, 2004. Under Item 5, Other
Events, we announced that Douglas D. Spedden had been promoted to Treasurer.



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SIGNATURES



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



POTLATCH CORPORATION(Registrant)By

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

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




Date: May 10, 2004



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Exhibit Index



PART II



|        |  |                                                                                                                                        
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                        
|        | 
|(4)     |  | Registrant undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.
|        | 
|(31)    |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                
|        | 
|(32)    |  | Furnished statements of the Chief Executive Officer and Chief Financial Officer under 18 U.S.C. Section 1350                           



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