##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For the Quarterly Period Ended June 30, 2005



Commission file number 1-5313



POTLATCH CORPORATION

(Exact name of registrant as specified in its charter)



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



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



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



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



The number of shares of common stock outstanding as of June 30, 2005: 29,065,688 shares of Common Stock, par value $1 per share.



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##### Table of Contents

POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Index to Form 10-Q



|                                                                                                                           |  |        |  |                                                                                       |  |            
|-------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                           |  |        |  |                                                                                       |  | Page Number
|PART I.                                                                                                                    |  |        |  | FINANCIAL INFORMATION                                                                 |  |            
|                                                                                                                           |  |        | 
|Item 1.                                                                                                                    |  |        |  | Financial Statements                                                                  |  |            
|                                                                                                                           | 
|Consolidated Statements of Operations and Comprehensive Income for the quarters and six months endedJune 30, 2005 and 2004 |  | 2     
|                                                                                                                           | 
|Consolidated Condensed Balance Sheets at June 30, 2005 and December 31, 2004                                               |  | 3     
|                                                                                                                           | 
|Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2005 and 2004                            |  | 4     
|                                                                                                                           | 
|Notes to Consolidated Financial Statements                                                                                 |  | 5 - 11
|                                                                                                                           |  |        | 
|Item 2.                                                                                                                    |  |        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11 - 26    
|                                                                                                                           |  |        | 
|Item 3.                                                                                                                    |  |        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 27 - 28    
|                                                                                                                           |  |        | 
|Item 4.                                                                                                                    |  |        |  | Controls and Procedures                                                               |  | 28 - 29    
|                                                                                                                           |  |        | 
|PART II.                                                                                                                   |  |        |  | OTHER INFORMATION                                                                     |  |            
|                                                                                                                           |  |        | 
|Item 1.                                                                                                                    |  |        |  | Legal Proceedings                                                                     |  | 29         
|                                                                                                                           |  |        | 
|Item 4.                                                                                                                    |  |        |  | Submission of Matters to a Vote of Security Holders                                   |  | 29 - 30    
|                                                                                                                           |  |        | 
|Item 6.                                                                                                                    |  |        |  | Exhibits                                                                              |  | 30         
|                                                                                                                           | 
|SIGNATURES                                                                                                                 |  | 31    
|                                                                                                                           | 
|EXHIBIT INDEX                                                                                                              |  | 32    



1



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##### Table of Contents

PART I



|Item 1. | Financial Statements
|------- | --------------------



Potlatch Corporation and Consolidated Subsidiaries

Statements of Operations and Comprehensive Income

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



|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------- | ------- | - | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                          |  | Quarter EndedJune 30 |         |   | Six Months EndedJune 30 |  
|                                                                          |  | 2005                 |         |   | 2004                    |   |         | 2005 |  |   | 2004    |  
|Net sales                                                                 |  | $                    | 367,649 |   |                         | $ | 343,245 |      |  | $ | 703,843 |   |  | $ | 659,774 |  
|Costs and expenses:                                                       |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Depreciation, amortization and cost of fee timber harvested               |  |                      | 20,689  |   |                         |   | 21,158  |      |  |   | 40,702  |   |  |   | 44,331  |  
|Materials, labor and other operating expenses                             |  |                      | 305,325 |   |                         |   | 276,718 |      |  |   | 587,368 |   |  |   | 546,174 |  
|Selling, general and administrative expenses                              |  |                      | 21,707  |   |                         |   | 21,775  |      |  |   | 43,160  |   |  |   | 42,986  |  
|Restructuring charge                                                      |  |                      |        |   |                         |   | (87     | )    |  |   |        |   |  |   | 1,193   |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|                                                                          |  |                      | 347,721 |   |                         |   | 319,564 |      |  |   | 671,230 |   |  |   | 634,684 |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings from operations                                                  |  |                      | 19,928  |   |                         |   | 23,681  |      |  |   | 32,613  |   |  |   | 25,090  |  
|Interest expense                                                          |  |                      | (7,235  | ) |                         |   | (12,478 | )    |  |   | (14,486 | ) |  |   | (24,338 | )
|Interest income                                                           |  |                      | 598     |   |                         |   | 491     |      |  |   | 1,313   |   |  |   | 619     |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings before taxes                                                     |  |                      | 13,291  |   |                         |   | 11,694  |      |  |   | 19,440  |   |  |   | 1,371   |  
|Provision for taxes (Note 3)                                              |  |                      | 5,117   |   |                         |   | 4,568   |      |  |   | 7,484   |   |  |   | 542     |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings from continuing operations                                       |  |                      | 8,174   |   |                         |   | 7,126   |      |  |   | 11,956  |   |  |   | 829     |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations (Note 4):                                         |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings from discontinued operations                                     |  |                      |        |   |                         |   | 70,533  |      |  |   |        |   |  |   | 116,623 |  
|Income tax provision                                                      |  |                      |        |   |                         |   | 28,091  |      |  |   |        |   |  |   | 46,066  |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|                                                                          |  |                      |        |   |                         |   | 42,442  |      |  |   |        |   |  |   | 70,557  |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Net earnings                                                              |  |                      | 8,174   |   |                         |   | 49,568  |      |  |   | 11,956  |   |  |   | 71,386  |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Other comprehensive loss, net of tax:                                     |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Cash flow hedges (Note 5):                                                |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Net derivative losses, net of income tax benefit of $ -, $ -, $ - and $44 |  |                      |        |   |                         |   |        |      |  |   |        |   |  |   | (68     | )
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income                                                      |  | $                    | 8,174   |   |                         | $ | 49,568  |      |  | $ | 11,956  |   |  | $ | 71,318  |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Earnings per common share from continuing operations (Note 6):            |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                     |  | $                    | .28     |   |                         | $ | .24     |      |  | $ | .41     |   |  | $ | .03     |  
|Diluted                                                                   |  |                      | .28     |   |                         |   | .24     |      |  |   | .41     |   |  |   | .03     |  
|Earnings per common share from discontinued operations:                   |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                     |  |                      |        |   |                         |   | 1.44    |      |  |   |        |   |  |   | 2.40    |  
|Diluted                                                                   |  |                      |        |   |                         |   | 1.44    |      |  |   |        |   |  |   | 2.39    |  
|Net earnings per common share:                                            |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                     |  |                      | .28     |   |                         |   | 1.68    |      |  |   | .41     |   |  |   | 2.43    |  
|Diluted                                                                   |  |                      | .28     |   |                         |   | 1.68    |      |  |   | .41     |   |  |   | 2.42    |  
|Dividends per common share (annual rate)(1)                               |  |                      | .60     |   |                         |   | 3.10    |      |  |   | .60     |   |  |   | 3.10    |  
|Average shares outstanding (in thousands):                                |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                     |  |                      | 29,020  |   |                         |   | 29,498  |      |  |   | 28,993  |   |  |   | 29,372  |  
|Diluted                                                                   |  |                      | 29,209  |   |                         |   | 29,611  |      |  |   | 29,167  |   |  |   | 29,487  |  
|                                                                          |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  



|(1) | Cash dividends for 2004 included a special dividend of $2.50 per common share.
|--- | ------------------------------------------------------------------------------



Certain 2004 amounts have been reclassified for presentation as
discontinued operations.



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



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Potlatch Corporation and Consolidated Subsidiaries

Condensed Balance Sheets

2005 amounts unaudited (Dollars in thousands  except per-share amounts)



|                                                           |  |              |           |                  |   |          
|---------------------------------------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                                                           |  | June 30,2005 |           | December 31,2004
|Assets                                                     |  |              |           |                  |   |          
|Current assets:                                            |  |              |           |                  |   |          
|Cash                                                       |  | $            | 8,644     |                  | $ | 8,646    
|Short-term investments (Note 8)                            |  |              | 54,950    |                  |   | 111,975  
|Receivables, net                                           |  |              | 106,618   |                  |   | 103,474  
|Inventories (Note 9)                                       |  |              | 195,188   |                  |   | 167,015  
|Prepaid expenses                                           |  |              | 18,954    |                  |   | 16,260   
|                                                           |  |              |           |                  |   |          
|Total current assets                                       |  |              | 384,354   |                  |   | 407,370  
|Land, other than timberlands                               |  |              | 8,544     |                  |   | 8,351    
|Plant and equipment, at cost less accumulated depreciation |  |              | 595,882   |                  |   | 567,471  
|Timber, timberlands and related logging facilities         |  |              | 404,845   |                  |   | 401,078  
|Other assets                                               |  |              | 218,783   |                  |   | 210,402  
|                                                           |  |              |           |                  |   |          
|                                                           |  | $            | 1,612,408 |                  | $ | 1,594,672
|                                                           |  |              |           |                  |   |          
|Liabilities and Stockholders Equity                       |  |              |           |                  |   |          
|Current liabilities:                                       |  |              |           |                  |   |          
|Current installments on long-term debt                     |  | $            | 2,356     |                  | $ | 1,107    
|Accounts payable and accrued liabilities                   |  |              | 155,591   |                  |   | 151,198  
|                                                           |  |              |           |                  |   |          
|Total current liabilities                                  |  |              | 157,947   |                  |   | 152,305  
|Long-term debt                                             |  |              | 333,080   |                  |   | 335,415  
|Other long-term obligations                                |  |              | 241,890   |                  |   | 234,311  
|Deferred taxes                                             |  |              | 198,252   |                  |   | 201,252  
|Stockholders equity                                       |  |              | 681,239   |                  |   | 671,389  
|                                                           |  |              |           |                  |   |          
|                                                           |  | $            | 1,612,408 |                  | $ | 1,594,672
|                                                           |  |              |           |                  |   |          
|Stockholders equity per common share                      |  | $            | 23.44     |                  | $ | 23.22    
|Working capital                                            |  | $            | 226,407   |                  | $ | 255,065  
|Current ratio                                              |  |              | 2.4:1     |                  |   | 2.7:1    
|                                                           |  |              |           |                  |   |          



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



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Potlatch Corporation and Consolidated Subsidiaries

Condensed Statements of Cash Flows

Unaudited (Dollars in thousands)



|                                                                   |  |                          |         |   |      |   |          |  
|------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                   |  | Six Months Ended June 30 |        
|                                                                   |  | 2005                     |         |   | 2004 |  
|Cash Flows From Continuing Operations                              |  |                          |         |   |      |   |          |  
|Net earnings                                                       |  | $                        | 11,956  |   |      | $ | 71,386   |  
|Adjustments to reconcile net earnings to net operating cash flows: |  |                          |         |   |      |   |          |  
|Earnings from discontinued operations                              |  |                          |        |   |      |   | (70,557  | )
|Depreciation, amortization and cost of fee timber harvested        |  |                          | 40,702  |   |      |   | 44,331   |  
|Deferred taxes                                                     |  |                          | (3,000  | ) |      |   | 348      |  
|Working capital changes                                            |  |                          | (38,322 | ) |      |   | 23,511   |  
|Employee benefit plans                                             |  |                          | 736     |   |      |   | (1,465   | )
|                                                                   |  |                          |         |   |      |   |          |  
|Net cash provided by operating activities of continuing operations |  |                          | 12,072  |   |      |   | 67,554   |  
|                                                                   |  |                          |         |   |      |   |          |  
|Cash Flows From Investing                                          |  |                          |         |   |      |   |          |  
|Decrease (increase) in short-term investments                      |  |                          | 57,025  |   |      |   | (154,534 | )
|Additions to plant and properties                                  |  |                          | (68,581 | ) |      |   | (22,937  | )
|Other, net                                                         |  |                          | (5,201  | ) |      |   | (4,873   | )
|                                                                   |  |                          |         |   |      |   |          |  
|Net cash used for investing activities of continuing operations    |  |                          | (16,757 | ) |      |   | (182,344 | )
|                                                                   |  |                          |         |   |      |   |          |  
|Cash Flows From Financing                                          |  |                          |         |   |      |   |          |  
|Change in book overdrafts                                          |  |                          | 8,704   |   |      |   | (10,019  | )
|Repayment of long-term debt                                        |  |                          | (1,086  | ) |      |   | (485     | )
|Issuance of treasury stock                                         |  |                          | 5,492   |   |      |   | 21,737   |  
|Dividends                                                          |  |                          | (8,725  | ) |      |   | (8,777   | )
|Other, net                                                         |  |                          | 298     |   |      |   | 3,420    |  
|                                                                   |  |                          |         |   |      |   |          |  
|Net cash provided by financing activities of continuing operations |  |                          | 4,683   |   |      |   | 5,876    |  
|                                                                   |  |                          |         |   |      |   |          |  
|Cash from continuing operations                                    |  |                          | (2      | ) |      |   | (108,914 | )
|Cash from discontinued operations                                  |  |                          |        |   |      |   | 111,705  |  
|                                                                   |  |                          |         |   |      |   |          |  
|Increase (decrease) in cash                                        |  |                          | (2      | ) |      |   | 2,791    |  
|Cash at beginning of period                                        |  |                          | 8,646   |   |      |   | 7,190    |  
|                                                                   |  |                          |         |   |      |   |          |  
|Cash at end of period                                              |  | $                        | 8,644   |   |      | $ | 9,981    |  
|                                                                   |  |                          |         |   |      |   |          |  



Net interest payments (net of amounts
capitalized) for the six months ended June 30, 2005 and 2004 were $14.5 million and $24.3 million, respectively. Net income tax payments for the six months ended June 30, 2005 and 2004 were $8.9 million and $1.1 million, respectively.



Certain 2004 amounts have been reclassified to conform to the 2005 presentation.



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



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Potlatch Corporation and Consolidated Subsidiaries

Notes to Consolidated Financial Statements

Unaudited (Dollars in thousands)



NOTE 1. GENERAL  The accompanying Condensed Balance Sheets at June 30, 2005, and December 31, 2004, the Statements of Operations and Comprehensive Income for
the quarters and six months ended June 30, 2005 and 2004, and the Condensed Statements of Cash Flows for the six months ended June 30, 2005 and 2004, 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. In September
2004, we completed the sale of our oriented strand board (OSB) facilities and associated assets to Ainsworth Lumber Co. Ltd. As a result, the OSB operations have been classified as discontinued operations in the financial statements
presented herein.



This Form 10-Q should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.



NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS  In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of Statement of Financial
Accounting Standards (SFAS) No. 123, Share-Based Payment. The revised Statement requires the recognition of compensation cost in the Statement of Operations for equity instruments awarded to employees, based on the grant date fair value
of the award. The revised Statement was to become effective for interim or annual periods beginning after June 15, 2005. However, in April 2005, the effective date was amended by the Securities and Exchange Commission to allow companies to implement
the revised Statement in the next fiscal year beginning after June 15, 2005. We will therefore use the modified prospective method to implement the revised Statement on January 1, 2006, and we believe the effect of adoption on our results of
operations will be comparable to the pro forma disclosures contained in Note 7, Equity-Based Compensation.



In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), which states that a
company must recognize a liability for the fair value of a legal obligation to perform asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. FIN 47 clarifies that conditional obligations meet
the definition of an asset retirement obligation in SFAS No. 143, Accounting for Asset Retirement Obligations, and therefore should be recognized if their fair value is reasonably estimable. Companies must adopt FIN 47 no later than the
end of the fiscal year ending after December 15, 2005. We are currently reviewing FIN 47 to determine what effect, if any, it may have on our financial condition or results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB
Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. This Statements retrospective-



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application requirement replaces Accounting Principles Board (APB) Opinion No. 20s requirement to recognize most
voluntary changes in an accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The requirements of SFAS No. 154 become effective for voluntary changes in an
accounting principle made in fiscal years beginning after December 15, 2005.



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 38.5% for the quarter and six months
ended June 30, 2005 and 39.5% for the six months ended June 30, 2004. A tax rate of 39.5% was also applied to income from discontinued operations for the six months ended June 30, 2004. The second quarter provision for 2004 reflected the adjustment
of the rate to 39.5% from 39% used for the first quarter of the year. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect of the Qualified Domestic Production Activity Credit.



NOTE 4. DISCONTINUED OPERATIONS  In September 2004, we sold our OSB facilities
and associated assets to Ainsworth Lumber Co. Ltd. for approximately $452 million in cash, after closing adjustments. For the quarter and six months ended June 30, 2004, these facilities generated pre-tax operating income of $70.5 million and $116.6
million, respectively, which amounts are classified as discontinued operations in the Statements of Operations, as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



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



NOTE 6. EARNINGS (LOSS) PER COMMON SHARE  Earnings (loss) per common share are computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding in accordance with SFAS No. 128, Earnings Per Share. The following table reconciles the number of common shares used in the basic and diluted earnings per share calculations:



|                                          |  |                      |  |                         |  |            |  |           
|----------------------------------------- |  | -------------------- |  | ----------------------- |  | ---------- |  | ----------
|                                          |  | Quarter EndedJune 30 |  | Six Months EndedJune 30
|                                          |  | 2005                 |  | 2004                    |  | 2005       |  | 2004      
|Basic average common shares outstanding   |  | 29,020,195           |  | 29,498,469              |  | 28,993,104 |  | 29,371,556
|Incremental shares due to:                |  |                      |  |                         |  |            |  |           
|Common stock options                      |  | 180,772              |  | 112,417                 |  | 168,667    |  | 115,126   
|Accelerated stock repurchase program      |  | 7,931                |  |                        |  | 5,652      |  |          
|                                          |  |                      |  |                         |  |            |  |           
|Diluted average common shares outstanding |  | 29,208,898           |  | 29,610,886              |  | 29,167,423 |  | 29,486,682
|                                          |  |                      |  |                         |  |            |  |           



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Stock options to purchase 118,850, 1,058,275, 118,850 and 1,058,275 shares of common stock for the
quarters ended June 30, 2005 and 2004 and six months ended June 30, 2005 and 2004, 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.



The computation of diluted average
common shares outstanding is affected by our accelerated stock repurchase program to the extent that the volume weighted average price of the shares purchased by the counterparty under the program exceeds the price per share initially paid at the
programs inception. It is assumed that any additional amounts payable to the counterparty will be settled by shares of the companys stock, and thus any such differential that exists at the end of each reporting period is included in the
computation of diluted average common shares outstanding. The reverse treasury stock method is used to calculate the additional number of shares to be included in the diluted share total.



NOTE 7. EQUITY-BASED COMPENSATION  We currently have three stock incentive plans, the 1989, 1995 and 2000 plans, under which
stock options or performance share grants are issued and outstanding. In addition, at the May 2, 2005 Annual Meeting of Stockholders, our shareholders approved the adoption of the Potlatch 2005 Stock Incentive Plan (the 2005 Plan). Under
the 2005 Plan, we are authorized to issue up to 1,600,000 shares, none of which are currently issued and outstanding. Currently, we apply the intrinsic value method under APB Opinion No. 25 and related Interpretations in accounting for our
equity-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 measurements will be met. Compensation expense related to performance shares was $0.7 million, $0.2
million, $1.1 million and $0.4 million, before taxes, for the quarters ended June 30, 2005 and 2004 and six months ended June 30, 2005 and 2004, respectively.



Had equity-based compensation costs been determined based on the fair value at the grant dates, as prescribed by SFAS No. 123 (as amended by SFAS No.
148), our net earnings and earnings per share would have been the pro forma amounts indicated below:



|                                                                             |  |                       |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------- |  | --------------------- | ----- | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                             |  | Quarter Ended June 30 |       |   | Six Months Ended June 30 |  
|(Dollars in thousands - except per-share amounts)                            |  | 2005                  |       |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Net earnings, as reported                                                    |  | $                     | 8,174 |   |                          | $ | 49,568 |      |  | $ | 11,956 |   |  | $ | 71,386 |  
|Add: equity-based compensation expense recorded under APB No. 25, net of tax |  |                       | 434   |   |                          |   | 126    |      |  |   | 693    |   |  |   | 259    |  
|Deduct: equity-based compensation determined under SFAS No. 123, net of tax  |  |                       | (459  | ) |                          |   | (409   | )    |  |   | (925   | ) |  |   | (832   | )
|                                                                             |  |                       |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net earnings                                                       |  | $                     | 8,149 |   |                          | $ | 49,285 |      |  | $ | 11,724 |   |  | $ | 70,813 |  
|                                                                             |  |                       |       |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Basic net earnings per share, as reported                                    |  | $                     | .28   |   |                          | $ | 1.68   |      |  | $ | .41    |   |  | $ | 2.43   |  
|Diluted net earnings per share, as reported                                  |  |                       | .28   |   |                          |   | 1.68   |      |  |   | .41    |   |  |   | 2.42   |  
|Pro forma basic net earnings per share                                       |  |                       | .28   |   |                          |   | 1.67   |      |  |   | .40    |   |  |   | 2.41   |  
|Pro forma diluted net earnings per share                                     |  |                       | .28   |   |                          |   | 1.67   |      |  |   | .40    |   |  |   | 2.40   |  
|                                                                             |  |                       |       |   |                          |   |        |      |  |   |        |   |  |   |        |  



As previously
discussed in Note 2, beginning in 2006, we will recognize equity-based compensation costs in the Statements of Operations as required by SFAS No. 123R.



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NOTE 8. SHORT-TERM INVESTMENTS  Short-term investments consist of such instruments as money market funds,
commercial paper, and corporate and municipal bonds. Investments are selected based upon issuers with excellent credit ratings; therefore, there is minimal investment risk. These investments have maturity periods of less than one year. Short-term
investments are managed to provide the necessary liquidity throughout the year for working capital needs, capital expenditures or other uses by management, as considered appropriate.



NOTE 9. INVENTORIES  Inventories at the balance sheet dates consist of:



|                       |  |               |         |                   |   |        
|---------------------- |  | ------------- | ------- | ----------------- | - | -------
|(Dollars in thousands) |  | June 30, 2005 |         | December 31, 2004
|Raw materials          |  | $             | 81,817  |                   | $ | 79,670 
|Finished goods         |  |               | 113,371 |                   |   | 87,345 
|                       |  |               |         |                   |   |        
|                       |  | $             | 195,188 |                   | $ | 167,015
|                       |  |               |         |                   |   |        



NOTE 10. PENSION AND OTHER
POSTRETIREMENT BENEFIT PLANS  The tables below detail the components of net periodic costs (benefit):



Quarters ended June 30:



|                                   |  |                       |         |   |                                  |   |         |      |  |   |       |   |  |   |       |  
|---------------------------------- |  | --------------------- | ------- | - | -------------------------------- | - | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                                   |  | Pension Benefit Plans |         |   | OtherPostretirementBenefit Plans |  
|(Dollars in thousands)             |  | 2005                  |         |   | 2004                             |   |         | 2005 |  |   | 2004  |  
|Service cost                       |  | $                     | 2,627   |   |                                  | $ | 2,651   |      |  | $ | 905   |   |  | $ | 777   |  
|Interest cost                      |  |                       | 8,341   |   |                                  |   | 8,458   |      |  |   | 5,127 |   |  |   | 4,654 |  
|Expected return on plan assets     |  |                       | (15,389 | ) |                                  |   | (14,494 | )    |  |   |      |   |  |   |      |  
|Amortization of prior service cost |  |                       | 523     |   |                                  |   | 452     |      |  |   | (691  | ) |  |   | (406  | )
|Recognized actuarial loss          |  |                       | 338     |   |                                  |   | 55      |      |  |   | 3,190 |   |  |   | 2,236 |  
|                                   |  |                       |         |   |                                  |   |         |      |  |   |       |   |  |   |       |  
|Net periodic cost (benefit)        |  | $                     | (3,560  | ) |                                  | $ | (2,878  | )    |  | $ | 8,531 |   |  | $ | 7,261 |  
|                                   |  |                       |         |   |                                  |   |         |      |  |   |       |   |  |   |       |  



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Six months ended June 30:



|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |        |  
|---------------------------------- |  | --------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                   |  | Pension Benefit Plans |         |   | Other PostretirementBenefit Plans |  
|(Dollars in thousands)             |  | 2005                  |         |   | 2004                              |   |         | 2005 |  |   | 2004   |  
|Service cost                       |  | $                     | 5,274   |   |                                   | $ | 5,314   |      |  | $ | 1,809  |   |  | $ | 1,554  |  
|Interest cost                      |  |                       | 16,743  |   |                                   |   | 16,957  |      |  |   | 10,254 |   |  |   | 9,308  |  
|Expected return on plan assets     |  |                       | (30,892 | ) |                                   |   | (29,057 | )    |  |   |       |   |  |   |       |  
|Amortization of prior service cost |  |                       | 1,050   |   |                                   |   | 906     |      |  |   | (1,382 | ) |  |   | (813   | )
|Recognized actuarial loss          |  |                       | 679     |   |                                   |   | 110     |      |  |   | 6,381  |   |  |   | 4,473  |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |        |  
|Net periodic cost (benefit)        |  | $                     | (7,146  | ) |                                   | $ | (5,770  | )    |  | $ | 17,062 |   |  | $ | 14,522 |  
|                                   |  |                       |         |   |                                   |   |         |      |  |   |        |   |  |   |        |  



Due to the funded
status of our qualified pension plans at December 31, 2004, no minimum pension contributions are required for 2005. In the notes to our financial statements for the year ended December 31, 2004, we estimated contributions to our non-qualified
pension plan in 2005 would total approximately $1.4 million. As of June 30, 2005, $0.7 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, which goes into effect on January 1, 2006, introduces a drug benefit under Medicare Part D and a federal subsidy to sponsors of retiree health care benefit plans that provide an equivalent benefit. Pursuant to FASB Staff Position (FSP) No.
106-2, we determined in 2004, with the assistance of consulting actuaries, that certain benefits provided under our plans were actuarially equivalent to the Medicare Part D standard plan and were eligible for the employer subsidy. In the notes to
our financial statements for the year ended December 31, 2004, we stated that we had chosen the prospective application option for adoption of the FSP as of July 1, 2004, and that the effects of the Act on the accumulated postretirement benefit
obligation (APBO) were measured at July 1, 2004 and were determined to reduce the APBO by $25.9 million. After receiving further guidance from the Centers for Medicare and Medicaid Services in 2005, our consulting actuaries have determined that the
effects of the Act will reduce the APBO by an additional $21.5 million. The aggregate effect in 2005 of this $21.5 million change on service cost, interest cost and amortization of (gain)/loss is approximately $1.8 million and will be reflected in
the second half of the year.



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NOTE 11. SEGMENT INFORMATION 



|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|--------------------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                  |  | Quarter Ended June 30 |         |   | Six Months Ended June 30 |  
|(Dollars in thousands)            |  | 2005                  |         |   | 2004                     |   |         | 2005 |  |   | 2004     |  
|Segment Sales                     |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Resource                          |  | $                     | 61,068  |   |                          | $ | 44,784  |      |  | $ | 119,949  |   |  | $ | 106,574 |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Wood products                     |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Lumber                            |  |                       | 102,429 |   |                          |   | 94,268  |      |  |   | 185,807  |   |  |   | 171,927 |  
|Plywood                           |  |                       | 14,918  |   |                          |   | 16,099  |      |  |   | 27,254   |   |  |   | 31,617  |  
|Particleboard                     |  |                       | 4,494   |   |                          |   | 5,244   |      |  |   | 9,250    |   |  |   | 10,089  |  
|Other                             |  |                       | 9,038   |   |                          |   | 6,701   |      |  |   | 15,420   |   |  |   | 13,840  |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|                                  |  |                       | 130,879 |   |                          |   | 122,312 |      |  |   | 237,731  |   |  |   | 227,473 |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Pulp and paperboard               |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Paperboard                        |  |                       | 126,176 |   |                          |   | 119,791 |      |  |   | 239,504  |   |  |   | 228,320 |  
|Pulp                              |  |                       | 13,959  |   |                          |   | 18,160  |      |  |   | 27,218   |   |  |   | 30,541  |  
|Other                             |  |                       | 265     |   |                          |   | 73      |      |  |   | 475      |   |  |   | 73      |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|                                  |  |                       | 140,400 |   |                          |   | 138,024 |      |  |   | 267,197  |   |  |   | 258,934 |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Consumer products                 |  |                       | 91,526  |   |                          |   | 83,145  |      |  |   | 185,662  |   |  |   | 157,113 |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|                                  |  |                       | 423,873 |   |                          |   | 388,265 |      |  |   | 810,539  |   |  |   | 750,094 |  
|Elimination of intersegment sales |  |                       | (56,224 | ) |                          |   | (45,020 | )    |  |   | (106,696 | ) |  |   | (90,320 | )
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  
|Total consolidated net sales      |  | $                     | 367,649 |   |                          | $ | 343,245 |      |  | $ | 703,843  |   |  | $ | 659,774 |  
|                                  |  |                       |         |   |                          |   |         |      |  |   |          |   |  |   |         |  



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|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------- |  | -------------------- | ------- | - | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                              |  | Quarter EndedJune 30 |         |   | Six MonthsEnded June 30 |  
|(Dollars in thousands)                                        |  | 2005                 |         |   | 2004                    |   |         | 2005 |  |   | 2004    |  
|Intersegment sales or transfers                               |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Resource                                                      |  | $                    | 41,565  |   |                         | $ | 28,810  |      |  | $ | 77,323  |   |  | $ | 62,346  |  
|Wood products                                                 |  |                      | 3,487   |   |                         |   | 2,805   |      |  |   | 6,679   |   |  |   | 5,815   |  
|Pulp and paperboard                                           |  |                      | 11,149  |   |                         |   | 13,387  |      |  |   | 22,651  |   |  |   | 22,120  |  
|Consumer products                                             |  |                      | 23      |   |                         |   | 18      |      |  |   | 43      |   |  |   | 39      |  
|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Total                                                         |  | $                    | 56,224  |   |                         | $ | 45,020  |      |  | $ | 106,696 |   |  | $ | 90,320  |  
|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Operating Income (Loss)                                       |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Resource                                                      |  | $                    | 14,142  |   |                         | $ | 6,756   |      |  | $ | 24,832  |   |  | $ | 18,809  |  
|Wood products                                                 |  |                      | 13,928  |   |                         |   | 23,914  |      |  |   | 22,777  |   |  |   | 35,623  |  
|Pulp and paperboard                                           |  |                      | 276     |   |                         |   | 5,872   |      |  |   | 3,134   |   |  |   | (1,889  | )
|Consumer products                                             |  |                      | 2,172   |   |                         |   | (1,238  | )    |  |   | 1,575   |   |  |   | (5,055  | )
|Eliminations                                                  |  |                      | 480     |   |                         |   | 1,669   |      |  |   | 2,131   |   |  |   | 2,104   |  
|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|                                                              |  |                      | 30,998  |   |                         |   | 36,973  |      |  |   | 54,449  |   |  |   | 49,592  |  
|Corporate                                                     |  |                      | (17,707 | ) |                         |   | (25,279 | )    |  |   | (35,009 | ) |  |   | (48,221 | )
|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  
|Consolidated earnings from continuing operations before taxes |  | $                    | 13,291  |   |                         | $ | 11,694  |      |  | $ | 19,440  |   |  | $ | 1,371   |  
|                                                              |  |                      |         |   |                         |   |         |      |  |   |         |   |  |   |         |  



|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.
Words such as anticipate, expect, intend, plan, target, project, believe, seek, schedule, estimate, and similar expressions are
intended to identify such forward-looking statements. 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. Important 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; changes in raw material, energy, and other costs; and the factors discussed under the section titled Factors
influencing our results of operations on pages 13-14 of this Form 10-Q. Forward-looking statements contained in this report present managements views only as of the date



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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 14 manufacturing facilities, located in Arkansas, Idaho, Illinois, Michigan, Minnesota and Nevada. Our business is
organized into four segments:



| |  |  | The Resource segment manages our timberlands, which supply 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. For the first six months of 2005, Resource segment net sales were $119.9 million, representing approximately 15% of our net sales from continuing operations, before elimination of intersegment
sales. Intersegment sales were $77.3 million for the period. In addition to wood fiber sales, net sales for the segment include revenue generated from the sale of land that occurs from time to time as part of the normal management of our timberland
base.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Wood Products segment manufactures lumber, plywood, and particleboard at eight mills located in Arkansas, Idaho, Michigan and Minnesota. The Michigan mill, purchased on May 2,
2005, manufactures lumber. The segments 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 $237.7 million for the
first six months of 2005, representing approximately 29% of our net sales from continuing operations, before elimination of intersegment sales. Intersegment sales were $6.7 million for the period.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Pulp and Paperboard segment manufactures bleached paperboard used in packaging and bleached softwood market pulp. The Pulp and Paperboard segment operates two pulp and
paperboard mills located in Arkansas and Idaho. Pulp and Paperboard segment net sales were $267.2 million for the first six months of 2005, representing approximately 33% of our net sales from continuing operations, before elimination of
intersegment sales. Intersegment sales were $22.7 million for the period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Consumer Products segment manufactures tissue products primarily sold on a private label basis by major grocery store chains. The segment operates two tissue mills with related
converting facilities in Idaho and Nevada, and two additional tissue converting facilities located in Illinois and Michigan. Consumer Products segment net sales were $185.7 million for the first six months of 2005, representing approximately 23% of
our net sales from continuing operations before elimination of intersegment sales. The segment did not have significant intersegment sales during the period.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Amounts reported for Discontinued operations in the Statements of Operations and Comprehensive Income include
the results of operations for the first six months of 2004 for the OSB operations sold to Ainsworth Lumber Co. Ltd. in September 2004.



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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, international trade agreements or disputes, 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 harvest levels from our timberlands, 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.



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 pricing policies of some provincial governments. Negotiations continue between the two countries to resolve the dispute, although both countries are pursuing their own
independent litigation and administrative remedies. Any resulting agreement or other determination could have a significant effect on lumber markets in the United States.



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 may currently be 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, no downtime was taken at any of our facilities due to an inability to cover variable
costs.



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Energy has become one of our most volatile operating expenses over the past several years. In periods of
high energy prices, market conditions may prevent us from passing higher energy costs on to our customers through price increases, and therefore such increased costs could adversely affect our operating results. We have taken steps through
conservation and electrical production to reduce our exposure to the volatile spot market for energy and to rate increases by regulated utilities. Our energy costs in future periods will depend principally on our ability to continue to produce a
substantial portion of our electricity needs internally, on changes in market prices for natural gas and on reducing usage. From time to time we have entered into derivative financial instruments as a hedge against potential increases in the cost of
natural gas. We entered into several such contracts in the third quarter of 2003, covering a portion of our expected natural gas purchases from November 2003 through March 2004. We have not entered into any such contracts since the third quarter of
2003.



Another significant expense is the cost of wood fiber
needed to supply our manufacturing facilities. Our overall results of operations are favorably affected to the extent we supply wood fiber from our own timberlands, due to its low cost basis relative to wood fiber purchased on the open market. The
percentage of our wood fiber requirements supplied by our timberlands will fluctuate based on a variety of factors, including changes in our timber harvest levels, weather, 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.



The disparity between cost of wood
fiber harvested and the cost of wood fiber purchased on the open market is due to the fact that the capitalized costs to establish fee timber were expended many years ago. The initial stand establishment costs remain as a capitalized asset until the
timber reaches maturity, which typically ranges from 30 to 60 years. On-going forest management costs include recurring items necessary to the ownership and administration of timber producing property and are expensed as incurred. The cost of
purchased wood fiber is significantly higher due to the fact that the wood fiber being purchased from third parties is mature and is purchased at the current market price.



Finally, changes in our manufacturing capacity, primarily as a result of capital spending programs or asset purchases and
dispositions, have significantly affected our results of operations in recent periods. In early 2004, we began operating a new tissue machine in Las Vegas, Nevada, which produces approximately 30,000 tons a year. In June 2004, we began operating a
tissue converting facility in Elwood, Illinois. In September 2004, we sold our three OSB operations in Bemidji, Cook and Grand Rapids, Minnesota. In May 2005, we purchased a lumber mill in Gwinn, Michigan. Each of these changes has affected or will
affect our levels of net sales and expenses, as well as the comparability of our operating results from period to period. Additionally, the profitability of our manufacturing segments depends largely on our ability to operate our manufacturing
facilities efficiently and at or near full capacity. Our operating results would be adversely affected if market demand does not justify operating at these levels or if our operations are inefficient or suffer significant interruption for any
reason.



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Critical Accounting Policies



Our principal accounting policies are discussed on pages 44-48 of our Annual
Report on Form 10-K for the year ended December 31, 2004. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the reported financial position and operating results of the company. Management believes the accounting policies discussed below represent the most complex, difficult and subjective judgments it makes in this regard.



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



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



There are currently no authoritative accounting rules relating
to costs to be capitalized for 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. As examples: harvest
cycles can vary by geographic region and by species of timber; weather patterns can affect harvest cycles; environmental regulations and restrictions may limit the companys ability to harvest certain timberlands; changes in harvest plans may
occur; and scientific advancement in seedlings and timber growing technology may affect future harvests. Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon



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amounts reported in our statements of operations and financial condition. Because of the number of variables involved and the interrelationship between the
variables, sensitivity analysis of individual variables is not practical.



Restructuring charges and discontinued operations. In 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 January 2004, we recorded a charge for a workforce reduction in our Consumer Products segment. In September 2004, we sold our three OSB operations in Minnesota. These events required us to record estimates of
liabilities for employee benefits, environmental clean-up and other costs at the time of the events. In making these judgments, we considered contractual obligations, legal liabilities, and possible incremental costs incurred as a result of
restructuring plans to determine the liability. Our estimated liabilities could differ materially from actual costs incurred, with resulting adjustments to future period earnings for any differences, although no material adjustments to our original
estimates have occurred for the events described above.



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



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



Note 11 to our 2004 Form 10-K consolidated
financial statements included information for the three years ended December 31, 2004, on the components of pension and OPEB expense and 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, 2004 and 2003. Note 10, Pension and Other Postretirement Benefit Plans, on pages 8-9 of this Form 10-Q, includes information on the components of pension and OPEB expense for the quarters and six
months ended June 30, 2005 and 2004.



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, 2004, we calculated obligations using a 5.90% discount rate. The discount rates used at December
31, 2003 and 2002 were 6.25% and 6.75%, respectively. To determine the expected



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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 the three-year period ended December 31, 2004, was 9.5%. Over the past 27 years, the period during which we have actively managed pension assets, our actual average annual return on pension plan assets has been approximately
12%.



Total periodic pension plan income in 2004 was $11.5
million. 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. 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 annual plan expense by approximately $1.3 million. A 25 basis point change in the assumption for
expected return on plan assets would affect annual plan expense by approximately $1.6 million. The actual rates on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.



No minimum pension contributions are required for 2005 due to the funded
status of our pension plans at December 31, 2004. We estimate contributions to our non-qualified pension plan will total approximately $1.4 million in 2005.



For our OPEB plans, expense for 2004 was $25.2 million. The discount rate used to calculate OPEB obligations was 5.90% at December 31, 2004, and 6.25% and
6.75% at December 31, 2003 and 2002, respectively. The assumed health care cost trend rate used to calculate OPEB obligations and expense for 2004 was a 7% increase over the previous year, with the rate of increase adjusted to 12% in 2005 and
declining 1 percent annually to a long-term ultimate rate increase assumption of 6% for 2011 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
annual plan expense by approximately $0.8 million. A 1% change in the assumption for health care cost trend rates would have affected 2004 plan expense by approximately $2.2-$2.7 million and the total postretirement obligation by approximately
$30.3-$35.6 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 11 to our 2004 Form 10-K financial statements for related balance sheet effects at December 31, 2004 and 2003.



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Recent Accounting Pronouncements



In December 2004 the FASB issued a revision of SFAS No. 123,
Share-Based Payment. The revised Statement requires the recognition of compensation cost in the Statement of Operations for equity instruments awarded to employees, based on the grant date fair value of the award. The revised Statement
was to become effective for interim or annual periods beginning after June 15, 2005. However, in April 2005, the effective date was amended by the Securities and Exchange Commission to allow companies to implement the revised Statement in the next
fiscal year beginning after June 15, 2005. We will therefore use the modified prospective method to implement the revised Statement on January 1, 2006, and believe the effect of adoption on our results of operations will be comparable to the pro
forma disclosures contained in Note 7, Equity-Based Compensation, on page 7.



In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, which states that a company must recognize a liability for the fair value of a legal obligation to perform
asset retirement activities that are conditional on a future event if the amount can be reasonably estimated. FIN 47 clarifies that conditional obligations meet the definition of an asset retirement obligation in SFAS No. 143, Accounting for
Asset Retirement Obligations, and therefore should be recognized if their fair value is reasonably estimable. Companies must adopt FIN 47 no later than the end of the fiscal year ending after December 15, 2005. We are currently reviewing FIN
47 to determine what effect, if any, it may have on our financial condition or results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. This Statements retrospective-application requirement replaces Accounting Principles Board (APB)
Opinion No. 20s requirement to recognize most voluntary changes in an accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The requirements of SFAS No.
154 become effective for accounting changes made in fiscal years beginning after December 15, 2005.



Employees



Hourly union labor contracts expiring in 2005 are set forth below.



|                       |  |                                                                        |  |                                                                          |  |                                    
|---------------------- |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -----------------------------------
|ContractExpirationDate |  | Location                                                               |  | Union                                                                    |  | ApproximateNumber ofHourlyEmployees
|May 8*                 |  | Wood Products Division & Resource Management Division Warren, Arkansas |  | International Association of Machinists & Aerospace Workers              |  | 250                                
|                       |  |                                                                        | 
|August 1**             |  | Pulp & Paperboard Division Cypress Bend, Arkansas                      |  | Paper, Allied-Industrial Chemical and Energy Workers International Union |  | 250                                

---

|* | Completed negotiation of new three-year contract effective May 9, 2005.
|- | -----------------------------------------------------------------------

|** | Completed negotiation of new four-year contract effective August 1, 2005.
|-- | -------------------------------------------------------------------------



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 26 of this Form 10-Q. In the period-to-period
discussion of our results of operations below, when we discuss our consolidated net sales, contributions by each of the segments to our net



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



As a
result of our decision in August 2004 to sell our OSB operations and associated assets, those operations have been classified as Discontinued operations in the Statements of Operations for the quarter and six months ended June 30, 2004.
The discussion below addresses our continuing businesses.



Quarter Ended
June 30, 2005, Compared to Quarter Ended June 30, 2004



Net Sales  Net sales increased 7%, to $367.6 million for the quarter ended June 30, 2005, from $343.2 million for the same period in 2004. Resource segment net sales were $3.5 million higher primarily due to increased Arkansas
log sales to third parties. Wood Products net sales increased $7.9 million as a result of increased shipments for lumber, partially offset by lower selling prices for plywood and particleboard. Pulp and Paperboard segment net sales were $4.6 million
higher due to increased paperboard selling prices, which were partially offset by decreased pulp and paperboard shipments and lower pulp selling prices. Consumer Products segment net sales increased $8.4 million due to increased selling prices of
consumer tissue products.



Depreciation, amortization and
cost of fee timber harvested  For the quarter ended June 30, 2005, depreciation, amortization and cost of fee timber harvested totaled $20.7 million, a decrease of $0.5 million from the prior year amount of $21.2 million.



Materials, labor and other operating expenses  Materials, labor
and other operating expenses increased 10% to $305.3 million for the quarter ended June 30, 2005, from $276.7 million for the second quarter of 2004. The higher costs were due primarily to increased lumber shipments, higher wood fiber costs for the
Wood Products and Pulp and Paperboard segments, and higher outside converting and packaging costs for the Consumer Products segment.



Selling, general and administrative expenses  Selling, general and administrative expenses were $21.7 million for the second quarter of 2005,
compared to $21.8 million incurred for the same period of 2004.



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



Interest expense, net of capitalized interest  Interest expense totaled $7.2 million for the quarter ended June
30, 2005, compared to $12.5 million in the prior year period. The decrease was the result of the repayment of approximately $282 million in debt during the fourth quarter of 2004, using a portion of the proceeds from the sale of our OSB operations



Interest income  For the quarter ended June 30,
2005, interest income was $0.6 million, compared to $0.5 million for the same period of 2004.



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Provision for taxes  For the quarter ended June 30, 2005, we recorded an income tax
provision of $5.1 million on earnings from continuing operations of $13.3 million, based on an estimated annual effective tax rate of 38.5%. The second quarter 2004 provision of $4.6 million reflected the adjustment of the rate to 39.5% from 39%
used for the first quarter of 2004. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect of the Qualified Domestic Production Activity Credit.



Earnings from continuing operations  We recorded earnings from continuing operations of $8.2 million for the
quarter ended June 30, 2005, compared to earnings of $7.1 million for the same period in 2004. Improved results for the Resource and Consumer Products segments and lower interest expense were largely responsible for the favorable comparison.



Discontinued operations  For the quarter ended
June 30, 2004, discontinued operations consisted of the results of our OSB operations. For the second quarter of 2004, the OSB operations recorded pre-tax income of $70.5 million on net sales of $129.4 million.



Discussion of business segments  The Resource segment reported
operating income of $14.1 million for the second quarter of 2005, up from $6.8 million earned in the same period of 2004. Segment net sales were $61.1 million for the second quarter of 2005 compared to $44.8 million for the 2004 period. The
increases in operating income and net sales were primarily due to increased harvests of fee timber in Idaho and Arkansas and higher sales prices for logs. Revenue from sales of nonstrategic land for the segment was $1.0 million in the second quarter
of 2005, compared to $1.1 million in the second quarter of 2004. No long-term pattern or trends should be associated with the land sales portion of the segments operating activities, as land sale amounts can and usually do vary between
reporting periods. The period-to-period fluctuations are due to the unique characteristics of each transaction, such as location, size, accessibility, parcel attributes and the value to certain buyers. Resource segment expenses were $46.9 million in
the second quarter of 2005 compared to $38.0 million in the second quarter of 2004, reflecting the increased harvests of fee timber. Land sales generally do not have a material effect on segment expenses due to the low cost basis on most of our
timberland.



The Wood Products segment reported operating
income of $13.9 million for the second quarter of 2005, compared to $23.9 million recorded in the second quarter of 2004. Higher wood fiber costs and lower selling prices were primarily responsible for the decline. Net sales for the segment were
$130.9 million for the second quarter of 2005, $8.6 million higher than the $122.3 million recorded for the same period of 2004. Lumber net sales were $102.4 million, up from $94.3 million in 2004. The favorable comparison was due to increased
shipments, which were largely the result of the acquisition of the Gwinn, Michigan, lumber mill in early May 2005. Lower selling prices for lumber partially offset the increased shipments. Plywood net sales decreased to $14.9 million for the second
quarter of 2005, compared to $16.1 million in 2004.



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Sales prices were 11% lower, which more than offset a 4% increase in shipment volume compared to the same period a year ago. Particleboard net sales were
$4.5 million for the second quarter of 2005, compared to $5.2 million for the second quarter of 2004, as a result of an 8% decrease in shipments and 7% lower selling prices. Other sales for the segment, which consist primarily of
by-products such as chips, were $9.0 million for the second quarter of 2005, 35% higher than the $6.7 million recorded for the second quarter of 2004, due largely to chip sales at our Gwinn lumber mill. Segment expenses were higher for the second
quarter of 2005, totaling $117.0 million versus $98.4 million in 2004. Increased lumber shipments and higher wood fiber costs for the segment were primarily responsible for the higher expense amount.



The Pulp and Paperboard segment reported operating income for 2005s
second quarter of $0.3 million, compared to income of $5.9 million for the same period of 2004. Segment net sales were $140.4 million for the second quarter of 2005, up from $138.0 million for the 2004 period. Paperboard net sales increased to
$126.2 million, compared to $119.8 million in the second quarter of 2004. The favorable comparison was primarily due to a 10% increase in selling prices, partially offset by decreased shipments. Pulp sales (including intersegment sales) were $14.0
million for the second quarter of 2005, compared to $18.2 million for the same period in 2004. The decrease in pulp sales for 2005 was due largely to lower selling prices and decreased shipments to external customers and the Consumer Products
segment. Segment expenses were higher for the second quarter of 2005, totaling $140.1 million, compared to $132.2 million in the second quarter of 2004. The increase was due primarily to higher wood fiber, chemical and maintenance costs.



The Consumer Products segment reported operating income of $2.2 million
for the second quarter of 2005, compared to an operating loss of $1.2 million recorded in the second quarter of 2004. Segment net sales improved 10% to $91.5 million versus $83.1 million recorded for the 2004 period. Selling prices increased 12%
while product shipments decreased slightly compared to the prior year period. Selling prices were positively affected by our new ultra towel product and increased prices for most of our other consumer tissue products. Segment expenses were higher
for the second quarter of 2005, totaling $89.4 million, versus $84.4 million in 2004. The increased expenses in 2005 were largely attributable to higher outside converting and packaging costs.



Six Months Ended June 30, 2005, Compared to Six Months Ended June 30, 2004



Net Sales  Net sales increased 7% to $703.8 million for the
six months ended June 30, 2005, from $659.8 million for the same period in 2004. Resource net sales decreased to $42.6 million, compared to $44.2 million for the first six months of 2004. Lower land sales in Idaho and Arkansas were primarily
responsible for the decline. Wood Products net sales increased to $231.1 million from $221.7 million for the first half of 2004, due largely to increased lumber shipments. Pulp and Paperboard segment net sales were $244.5 million, $7.7 million more
than the $236.8 million reported for the first half of 2004 due primarily to higher paperboard selling prices. Consumer Products segment net sales increased to $185.6 million from $157.1 million due to increased shipments and higher selling prices.



Depreciation, amortization and cost of fee timber
harvested  For the six months ended June 30, 2005, depreciation, amortization and cost of fee timber harvested totaled $40.7 million, a $3.6 million decrease compared to $44.3 million recorded in the first six months of 2004. The decrease
was due to lower depletion expense in Minnesota and lower amortization expense.



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Materials, labor and other operating expenses  Materials, labor and other operating expenses
increased to $587.4 million for the six months ended June 30, 2005, from $546.2 million for the six months ended June 30, 2004. The higher costs were due primarily to increased shipments of lumber and consumer tissue products, higher wood fiber
costs for the Wood Products and Pulp and Paperboard segments and increased packaging, transportation and outside converting costs for the Consumer Products segment.



Selling, general and administrative expenses  Selling, general and administrative expenses were $43.2 million
for the first six months of 2005, compared to $43.0 million incurred for the same period of 2004.



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 in 2004 due to the workforce reduction. By June 2004, all costs had been incurred for the workforce reduction, resulting in a reversal of less than $0.1 million to the
initial charge.



Interest expense, net of capitalized
interest  Interest expense totaled $14.5 million for the six months ended June 30, 2005, compared to $24.3 million in the comparable prior year period. The decrease was the result of the repayment of approximately $282 million in debt
during the fourth quarter of 2004, using a portion of the proceeds from the sale of our OSB operations.



Interest income  For the six months ended June 30, 2005, interest income was $1.3 million, compared to $0.6 million for the same period in
2004. The increase was primarily due to a higher average short-term investments balance for the first half of 2005.



Provision for taxes  For the six months ended June 30, 2005, we recorded an income tax provision of $7.5 million on earnings from continuing
operations of $19.4 million, based on an estimated effective tax rate of 38.5%. During the first six months of 2004, an estimated tax rate of 39.5% was used to derive an income tax provision of $0.5 million, calculated on our earnings from
continuing operations, before taxes, of $1.4 million. The estimated effective tax rate was reduced in 2005 to incorporate the anticipated effect of the Qualified Domestic Production Activity Credit.



Earnings from continuing operations  We recorded earnings from
continuing operations of $12.0 million for the six months ended June 30, 2005, compared to earnings from continuing operations of $0.8 million for the same period in 2004. The favorable comparison was due to improved results for the Resource, Pulp
and Paperboard and Consumer Products segments and lower interest expense.



Discontinued operations  Discontinued operations for the six months ended June 30, 2004, consisted of the results of our OSB operations. For the first six months of 2004, the OSB operations recorded
pre-tax income of $116.6 million on net sales of $233.3 million.



Other comprehensive loss, net of tax  For the six months ended June 30, 2004, we recorded a net derivative loss due to cash flow hedges of less than $0.1 million, after-tax. There were no derivative transactions in the first
half of 2005.



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Discussion of business segments  The Resource segment reported operating income of $24.8
million for the first six months of 2005, $6.0 million higher than $18.8 million recorded in the same period of 2004. Segment net sales were $119.9 million for the first six months of 2005, compared to $106.6 million recorded for the same period of
2004. The higher earnings and net sales for 2005 were due largely to increased fee harvests in Idaho and Arkansas, combined with higher sales prices for logs. Revenue from sales of nonstrategic land for the segment was $2.6 million in the first half
of 2005, compared to $5.1 million in the first half of 2004. No long-term pattern or trends should be associated with the land sales portion of the segments operating activities. Resource segment expenses were $95.1 million in the first six
months of 2005, compared to $87.8 million in the first six months of 2004. The higher expenses were primarily attributable to the increased harvests of fee timber. Land sales generally do not have a material effect on segment expenses due to the low
cost basis on most of our timberland.



The Wood Products
segment reported operating income of $22.8 million for the first six months of 2005, compared to income of $35.6 million recorded in the first six months of 2004. Although wood product markets during the first six months of 2005 benefited from
continued strong homebuilding activity, those benefits were more than offset by higher wood fiber costs. Net sales for the segment rose to $237.7 million for the first half of 2005, 5% higher than the $227.5 million recorded for the same period of
2004. Lumber net sales were $185.8 million, up from $171.9 million in 2004. The favorable comparison was the result of increased shipments, largely due to shipments from the Gwinn, Michigan, lumber mill, which was acquired in May 2005, and slightly
higher selling prices. Plywood net sales decreased to $27.3 million for the first six months of 2005, compared to $31.6 million for the first six months of 2004. Shipment volume decreased 7% and sales prices were 8% lower than in the same period a
year ago. Particleboard net sales were $9.3 million for the first six months of 2005, 8% lower than the $10.1 million recorded for the first six months of 2004 due to lower shipments and selling prices. Segment expenses were higher for the first
half of 2005, totaling $215.0 million, versus $191.9 million for the first half of 2004. Higher wood fiber costs and increased lumber shipments largely accounted for the increase over 2004.



The Pulp and Paperboard segment reported operating income for the first six
months of 2005 of $3.1 million, compared to a loss of $1.9 million for the first six months of 2004. Segment net sales were $267.2 million for the first half of 2005, up from $258.9 million for the 2004 period. Paperboard net sales increased to
$239.5 million, compared to $228.3 million in the first six months of 2004. Selling prices were 10% higher than the same period a year ago, although shipments decreased 5% compared to the prior years first six months. Pulp sales (including
intersegment sales) were lower for the first six months of 2005, totaling $27.2 million, compared to $30.5 million for the same period in 2004. The decrease in pulp sales for the 2005 period was due to lower shipments and slightly lower selling
prices. Segment expenses were higher for the first six months of 2005, totaling $264.1 million, compared to $260.8 million in the first six months of 2004. The increase primarily reflected higher wood fiber, chemical and maintenance costs.



The Consumer Products segment reported operating earnings of
$1.6 million for the first six months of 2005, compared to a loss of $5.1 million for the first six months of 2004. Segment net sales were $185.7 million for the first half of 2005, 18% higher than the $157.1 million recorded for the 2004 period.
The increase in net sales was due to an 11% increase in selling prices and a 6% increase in product shipments compared to the prior year period. Shipments were positively affected by sales of our new ultra towel product and the addition of our
Elwood, Illinois, converting operation in June 2004. Segment expenses were higher for the first six months of 2005, totaling $184.1 million, versus $162.2 million in the first six months of 2004. Increased product shipments and higher packaging,
transportation and outside converting costs contributed to the increase. Segment expenses for the first half of 2004 included a pre-tax charge of $1.2 million for a workforce reduction.



Liquidity and Capital Resources



At June 30, 2005, our financial position included long-term debt of $335.4 million, including current installments on
long-term debt of $2.4 million. Long-term debt at June 30, 2005 (including current installments) declined slightly from the balance at December 31, 2004 of $336.5 million due to normal repayments on maturing debt of $1.1 million. Stockholders
equity for the first six months of 2005 increased $9.9 million, largely due to net earnings of $12.0 million and the utilization of treasury stock upon exercise of employee stock options for an aggregate consideration of $5.5 million, which were
partially offset by dividend payments of $8.7 million. The ratio of long-term debt (including current installments) to stockholders equity was .49 to 1 at June 30, 2005, compared to .50 to 1 at December 31, 2004.



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Scheduled payments due on long-term debt during each of the five years subsequent to December 31, 2005,
are as follows:



|                       |  |   |        
|---------------------- |  | - | -------
|(Dollars in thousands) |  |  
|2006                   |  | $ | 2,358  
|2007                   |  |   | 6,159  
|2008                   |  |   | 209    
|2009                   |  |   | 100,410
|2010                   |  |   | 11     



Working capital
totaled $226.4 million at June 30, 2005, a decrease of $28.7 million from December 31, 2004. The significant changes in the components of working capital are as follows:



| |  |  | Short-term investments decreased $57.0 million. Positive cash flow from increased operating earnings not immediately needed for operations was more than offset by cash used for
capital expenditures and dividends, resulting in a decrease in cash invested in short-term bank instruments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Receivables increased $3.1 million primarily as a result of higher trade receivables due to a corresponding increase in customer sales. The receipt of payment on an income tax
receivable related to a 2004 overpayment of taxes partially offset the increase in trade receivables.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inventories increased $28.2 million largely due to an increase in paperboard, lumber and pulp inventories. The increased pulp and paperboard inventories were primarily due to
market-related conditions. The increase in lumber inventories was primarily attributable to the establishment of a finished goods inventory at the Gwinn, Michigan mill.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Accounts payable and accrued liabilities increased $4.4 million due to an increase in book overdrafts.
| | - |  | ------------------------------------------------------------------------------------------------------



Net cash provided by continuing operations for the first six months of 2005 totaled $12.1 million, compared with $67.6
million for the same period in 2004. Cash used for working capital changes in 2005, versus cash provided by working capital changes in 2004, was largely responsible for the unfavorable comparison. This use of cash was partially offset by net
earnings from continuing operations of $12.0 million in 2005, versus net earnings from continuing operations of $0.8 million in 2004. The higher earnings were generally due to improved results for the Resource and Consumer Products segments and
lower interest expense.



For the six months ended June 30,
2005, net cash used for investing was $16.8 million, compared to $182.3 million for the first six months of 2004. In 2005, a decrease in our short-term investments provided $57.0 million in cash, as discussed above, which was more than offset by
capital spending of $68.6 million. Capital spending in 2005 included $22.5 million for the purchase of the Gwinn, Michigan, lumber mill, $5.3 million in additional equipment and installation costs associated with our tissue converting facility in
Elwood, Illinois, and $4.0 million toward the replacement of dry kilns at our lumber operation in Lewiston, Idaho. The balance of capital spending in the first half of 2005 focused on forest resources and various smaller projects designed to improve
product quality and manufacturing efficiency. Cash was used in the first six months of 2004 primarily for increasing short-term investments and for capital spending projects.



Net cash provided by financing totaled $4.7 million for the six months ended June 30, 2005, compared with $5.9 million
during the same period in 2004. The majority of cash provided by financing in 2005s first six months resulted from an $8.7 million change in book overdrafts and the issuance of treasury stock totaling $5.5 million related to the exercise of
stock options. These amounts were partially offset by dividend payments of $8.7 million. The majority of the cash provided in 2004 was from the issuance of treasury stock related to the exercise of employee stock options, partially offset by a
decrease in book overdrafts and the payment of dividends.



Cash
generated from discontinued operations in the first six months of 2004 totaled $111.7 million, which was largely related to operating results



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for our former OSB operations. There were no discontinued operations in the first six months of 2005.



Our current unsecured bank credit facility, which expires June 28, 2007, is
comprised of a revolving line of credit of up to $125 million, including a $35 million subfacility for letters of credit and a $10 million subfacility for swing line loans. Usage under either or both subfacilities reduces availability under the
revolving line of credit. As of June 30, 2005, there were no borrowings outstanding under the revolving line of credit; however, approximately $9.8 million of the letter of credit subfacility was being used to support several outstanding letters of
credit.



The agreement governing our credit facility contains
certain covenants that, among other things, limit to a certain degree 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 or change the nature of our business. The credit facility also contains financial maintenance covenants establishing a maximum
funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the credit facility include, but are not limited to, payment defaults, covenant defaults,
breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or asserted invalidity of security interests or loan
documentation, and certain change of control events involving our company. As of June 30, 2005, we were in compliance with the covenants of our credit facility.



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



As of
June 30, 2005, Standard & Poors Ratings Services (S&P) rated our senior unsecured debt at BB+, with a stable outlook. The rating has remained unchanged since January 30, 2003. Since the first quarter of 2003, Fitch, Inc. has rated our
senior unsecured debt at BB+. In October 2004, Moodys Investors Service Inc. downgraded its rating of our senior unsecured debt from Baa3 with a negative outlook to Ba1 with a stable outlook. Moodys also downgraded our senior secured
subordinated rating from Ba1 to Ba2. 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 27-28 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 expanding or
restructuring of our operations to achieve greater efficiencies, the possibility of converting to a real estate investment trust, and the disposition of assets that may have greater value to others, as in the sale of our OSB operations in 2004.
There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position.



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POTLATCH CORPORATION AND
CONSOLIDATED SUBSIDIARIES

Changes in Statements of Operations

(Dollars in thousands)



|                                                            |  |                       |         |   |                          |   |         |                    |  |     |      |  |   |         |   |  |                    |         |   |  |       |   
|----------------------------------------------------------- |  | --------------------- | ------- | - | ------------------------ | - | ------- | ------------------ |  | --- | ---- |  | - | ------- | - |  | ------------------ | ------- | - |  | ----- | --
|                                                            |  | Quarter Ended June 30 |         |   | Six Months Ended June 30 |  
|                                                            |  | 2005                  |         |   | 2004                     |   |         | Increase(Decrease) |  |     | 2005 |  |   | 2004    |   |  | Increase(Decrease) |        
|Net sales                                                   |  | $                     | 367,649 |   |                          | $ | 343,245 |                    |  | 7   | %    |  | $ | 703,843 |   |  | $                  | 659,774 |   |  | 7     | % 
|Costs and expenses:                                         |  |                       |         |   |                          |   |         |                    |  |     |      |  |   |         |   |  |                    |         |   |  |       |   
|Depreciation, amortization and cost of fee timber harvested |  |                       | 20,689  |   |                          |   | 21,158  |                    |  | (2  | %)   |  |   | 40,702  |   |  |                    | 44,331  |   |  | (8    | %)
|Materials, labor and other operating expenses               |  |                       | 305,325 |   |                          |   | 276,718 |                    |  | 10  | %    |  |   | 587,368 |   |  |                    | 546,174 |   |  | 8     | % 
|Selling, general and administrative expenses                |  |                       | 21,707  |   |                          |   | 21,775  |                    |  |    |      |  |   | 43,160  |   |  |                    | 42,986  |   |  |      |   
|Restructuring charge                                        |  |                       |        |   |                          |   | (87     | )                  |  | *   |      |  |   |        |   |  |                    | 1,193   |   |  | *     |   
|Earnings from operations                                    |  |                       | 19,928  |   |                          |   | 23,681  |                    |  | (16 | %)   |  |   | 32,613  |   |  |                    | 25,090  |   |  | 30    | % 
|Interest expense                                            |  |                       | (7,235  | ) |                          |   | (12,478 | )                  |  | (42 | %)   |  |   | (14,486 | ) |  |                    | (24,338 | ) |  | (40   | %)
|Interest income                                             |  |                       | 598     |   |                          |   | 491     |                    |  | 22  | %    |  |   | 1,313   |   |  |                    | 619     |   |  | 112   | % 
|Provision for taxes                                         |  |                       | 5,117   |   |                          |   | 4,568   |                    |  | 12  | %    |  |   | 7,484   |   |  |                    | 542     |   |  | 1,281 | % 
|Earnings from continuing operations                         |  |                       | 8,174   |   |                          |   | 7,126   |                    |  | 15  | %    |  |   | 11,956  |   |  |                    | 829     |   |  | 1,342 | % 
|Discontinued operations:                                    |  |                       |         |   |                          |   |         |                    |  |     |      |  |   |         |   |  |                    |         |   |  |       |   
|Earnings from discontinued operations                       |  |                       |        |   |                          |   | 70,533  |                    |  | *   |      |  |   |        |   |  |                    | 116,623 |   |  | *     |   
|Income tax provision                                        |  |                       |        |   |                          |   | 28,091  |                    |  | *   |      |  |   |        |   |  |                    | 46,066  |   |  | *     |   
|Net earnings                                                |  | $                     | 8,174   |   |                          | $ | 49,568  |                    |  | (84 | %)   |  | $ | 11,956  |   |  | $                  | 71,386  |   |  | (83   | %)



|* | 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 short-term investments, unsecured bank credit facility and
long-term debt, credit rate risk on our credit sensitive debentures and equity price risk related to our accelerated stock repurchase program.



Our short-term investments are invested in money market funds and bonds with very short maturity periods and therefore earn an interest rate commensurate
with low-risk instruments. We do not attempt to hedge our exposure to interest rate risk for our short-term investments.



As of June 30, 2005, we had no borrowings outstanding under our unsecured bank credit facility. The interest rates applied to borrowings under the credit
facility are adjusted often and therefore react quickly to any movement in the general trend of market interest rates. We do not attempt to mitigate the effects of short-term interest rate fluctuations on our credit facility borrowings through the
use of derivative financial instruments.



All of our long-term
debt is fixed-rate and therefore changes in market interest rates do not expose us to interest rate risk for these financial instruments.In 2004 and prior years, we hedged a portion of our long-term debt using interest rate swaps. These
swaps were designated as fair value hedges. We currently have no such hedges, and we do not anticipate entering into any in the foreseeable future.



We currently have $100 million of credit sensitive debentures outstanding that pay interest to the debt holder based upon our credit ratings as
established by S&P or Moodys. The following table denotes the interest rate applicable based on various credit ratings:



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



On January 30, 2003,
S&P announced that it had lowered our senior unsecured debt rating to BB+ from BBB-. The rating downgrade caused the interest rate on our credit sensitive debentures to increase from 9.425% to 12.5%, effective January 30, 2003. On October 11,
2004, Moodys announced that it had lowered the rating on our senior unsecured debt to Ba1 from Baa3. Because S&Ps rating was already at that level, the change had no effect on the interest rate for the credit sensitive debentures.



During the third quarter of 2003, we entered into several
derivative financial instruments designated as cash flow hedges for a portion of our natural gas purchases during November 2003 through March 2004. As designated cash flow hedges, changes in the fair value of the financial instruments were
recognized in Other comprehensive loss, net of tax to the extent the hedges were deemed effective, until the hedged item was 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 have not entered into any additional instruments to hedge our expected future natural gas purchases.



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In October 2004, our board of directors authorized the repurchase of approximately $75 million of our
outstanding common stock, to be implemented through an accelerated stock repurchase program with a financial counterparty. In November 2004, we repurchased 1,560,397 shares for $75.4 million, or approximately $48.29 per share, subject to adjustment
as described below. In connection with the repurchase, the counterparty will purchase shares for its own account in the open market over a nine-month period ending in August 2005. At the end of that period, we will receive or pay a price adjustment
based on the volume weighted average price of shares traded during the period. Approximately 808,900 of the shares purchased through the accelerated stock repurchase program are subject to a collar, which sets a minimum and maximum price for shares
repurchased, for the purpose of limiting the price adjustment. For the shares subject to the collar, the maximum price adjustment we would receive is equal to $187,500, or $.23 per share, and the maximum price adjustment we would pay is equal to
$1,875,000, or $2.32 per share. The price adjustment for the remainder of the shares is not subject to any limitation. Any obligation we may have under the stock repurchase program may be settled by the issuance of company stock or a cash payment at
our discretion.



The following table discloses quantitative
information about market risks:



|                       |  |                                              |     |   |      |   |       |      |  |   |       |   |  |      |     |   |            |   |         |       |  |   |         |   |  |   |         |  
|---------------------- |  | -------------------------------------------- | --- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | - | ---------- | - | ------- | ----- |  | - | ------- | - |  | - | ------- | -
|                       |  | Expected Maturity Date (as of June 30, 2005) |     |   |      |  
|(Dollars in thousands) |  | 2005                                         |     |   | 2006 |   |       | 2007 |  |   | 2008  |   |  | 2009 |     |   | Thereafter |   |         | Total | 
|Long-term debt:        |  |                                              |     |   |      |   |       |      |  |   |       |   |  |      |     |   |            |   |         |       |  |   |         |   |  |   |         |  
|Fixed rate             |  | $                                            | 2   |   |      | $ | 2,358 |      |  | $ | 6,159 |   |  | $    | 209 |   |            | $ | 100,410 |       |  | $ | 226,298 |   |  | $ | 335,436 |  
|Average interest rate  |  |                                              | 6.0 | % |      |   | 6.3   | %    |  |   | 6.1   | % |  |      | 6.9 | % |            |   | 12.5    | %     |  |   | 7.0     | % |  |   | 8.6     | %
|Fair value at 06/30/05 |  |                                              |     |   |      |   |       |      |  |   |       |   |  |      |     |   |            |   |         |       |  |   |         |   |  | $ | 376,425 |  



|                                                                        |  |               |        
|----------------------------------------------------------------------- |  | ------------- | -------
|                                                                        |  | Maturity-2005
|Accelerated stock repurchase transaction:                               |  |               |        
|Collared contract volume (shares)                                       |  |               | 808,894
|Capped settlement amount                                                |  | $             | 1,875  
|Floor settlement amount                                                 |  | $             | 188    
|Forward price (per share)                                               |  | $             | 46.36  
|Shares purchased by counterparty through 06/30/05 subject to collar     |  |               | 673,404
|                                                                        | 
|Uncollared contract volume (shares)                                     |  |               | 751,503
|Initial trade price                                                     |  | $             | 49.90  
|Shares purchased by counterparty through 06/30/05 not subject to collar |  |               | 625,626
|Average price of repurchased shares through 06/30/05                    |  | $             | 48.72  



|ITEM 4. | Controls and Procedures
|------- | -----------------------



We maintain disclosure controls and procedures, as such term is defined in Rule 13a-14(c) under the Securities and Exchange Act of 1934 (the
Exchange Act), which are designed to ensure that information required to be disclosed by us in reports that we file or submit 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 our management, including our Chief



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Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures, we 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, our 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 our 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, as of such date, our disclosure controls and procedures are effective to meet the objective for which they were designed and operate at
the reasonable assurance level.



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



PART II



|ITEM 1. | Legal Proceedings
|------- | -----------------



In late January 2004, we voluntarily reported to the Minnesota Pollution Control Agency (MPCA) a potential air permit violation at our former oriented
strand board facility in Bemidji, Minnesota (sold in September 2004), relating to the non-operation of equipment used to control nitrous oxide emissions from a wood-fired boiler for a period of approximately 29 months. Corrective action was taken,
and we cooperated with the MPCA in its investigation. The MPCA completed its investigation, and effective April 12, 2005, we and the MPCA entered into a Stipulation Agreement that provided for payment of a civil penalty in the amount of $725,000,
which was within the amount of the reserve for this matter established in accordance with SFAS No. 5, Accounting for Commitments and Contingencies. The penalty was paid in the second quarter of 2005.



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



At the annual meeting of stockholders of the company held on May 2, 2005, the companys stockholders voted on five proposals as follows:



Proposal 1



Election of Three Directors



|                        |  |            |  |               
|----------------------- |  | ---------- |  | --------------
|                        |  | Votes For  |  | Votes Withheld
|Jerome C. Knoll         |  | 42,057,420 |  | 1,869,927     
|Lawrence S. Peiros      |  | 42,042,600 |  | 1,884,747     
|William T. Weyerhaeuser |  | 38,415,997 |  | 5,511,350     



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Proposal 2



Amendment of Restated Certificate of Incorporation to Eliminate Time Phased Voting.



|                 |  |           
|---------------- |  | ----------
|Votes For        |  | 35,008,362
|Votes Against    |  | 3,846,017 
|Abstentions      |  | 531,455   
|Broker Non-Votes |  | 4,541,513 



Proposal 3



2005 Stock Incentive Plan



|                 |  |           
|---------------- |  | ----------
|Votes For        |  | 35,885,626
|Votes Against    |  | 3,041,288 
|Abstentions      |  | 458,920   
|Broker Non-Votes |  | 4,541,513 



Proposal 4



Ratification of the Appointment of
Independent Auditor



|              |  |           
|------------- |  | ----------
|Votes For     |  | 42,652,683
|Votes Against |  | 865,806   
|Abstentions   |  | 408,858   



Proposal 5



Stockholder Proposal Urging
Preparation of Dividend Policy Report



|                 |  |           
|---------------- |  | ----------
|Votes For        |  | 2,544,754 
|Votes Against    |  | 34,992,790
|Abstentions      |  | 1,848,290 
|Broker Non-Votes |  | 4,541,513 



|ITEM 6. | Exhibits
|------- | --------



The exhibit index is located on page 32 of this Form 10-Q.



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##### Table of Contents



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. Zuehlke Vice President, Finance, Chief Financial Officer (Duly Authorized; Principal Financial Officer)By

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




Date: August 9, 2005



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POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES



Exhibit Index





|
|

|         |  |                                                                                                                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  |                                                                                                                                                            
|         |  | PART II                                                                                                                                                    
|         | 
|(4)      |  | Registrant undertakes to file with the Securities and Exchange Commission, upon request, any instrument with respect to long-term debt.                    
|         | 
|(10)(b)1 |  | Potlatch Corporation Severance Program for Executive Employees, as Amended and Restated as of May 24, 2005.                                                
|         | 
|(10)(c)1 |  | Potlatch Corporation 2000 Stock Incentive Plan, as amended through May 24, 2005.                                                                           
|         | 
|(10)(d)1 |  | Potlatch Corporation Salaried Employees Supplemental Benefit Plan, As Amended and Restated Effective January 1, 1989, and as amended through May 24, 2005.
|         | 
|(10)(e)1 |  | Potlatch Corporation 2005 Stock Incentive Plan, as amended through May 24, 2005.                                                                           
|         | 
|(10)(g)1 |  | Potlatch Corporation Deferred Compensation Plan for Directors, as amended through May 24, 2005.                                                            
|         | 
|(10)(n)1 |  | Potlatch Corporation 1995 Stock Incentive Plan, as Amended and Restated December 2, 1999, and as amended through May 24, 2005.                             
|         | 
|(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                                               

---

|1 | Management compensatory plan or arrangement.
|- | --------------------------------------------



32