Edgar Filing: TEMPLE INLAND INC

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended July 1, 2006


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From to

Commission File Number: 001-08634

Temple-Inland Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		75-1903917 (I.R.S. Employer Identification Number)

1300 MoPac Expressway South, Austin, Texas 78746
(Address of Principal Executive Offices, including Zip code)

(512) 434-5800
(Registrant’s telephone number, including area code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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. þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


	Number of common shares outstanding
Class	as of July 1, 2006
Common Stock (par value $1.00 per share)		108,751,440


Page 1 of 52		The Exhibit Index is page 52.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Temple-Inland Inc. and Subsidiaries		3
Consolidated Balance Sheets		3
Consolidated Statements of Income		5
Consolidated Statements of Cash Flows		6

Parent Company (Temple-Inland Inc. and its manufacturing and real estate subsidiaries)		7
Summarized Balance Sheets		7
Summarized Statements of Income		8
Summarized Statements of Cash Flows		9

Financial Services		10
Summarized Balance Sheets		10
Summarized Statements of Income		11
Summarized Statements of Cash Flows		12

Notes to the Consolidated Financial Statements		13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures About Market Risk		47

Item 4. Controls and Procedures		48

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		48

Item 1A. Risk Factors		49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 3. Defaults Upon Senior Securities		49

Item 4. Submission of Matters to a Vote of Security Holders		50

Item 5. Other Information		50

Item 6. Exhibits		50

SIGNATURES		51
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEET

TEMPLE-INLAND INC. AND SUBSIDIARIES
Second Quarter-End 2006
Unaudited


	Parent		Financial
	Company		Services		Consolidated
	(In millions)
ASSETS
Cash and cash equivalents	$	25	$	261	$	286
Trade receivables, less allowance for doubtful accounts of $17		511		—		511
Inventories		420		—		420
Timber and timberland		385		—		385
Real estate		446		—		446
Loans held for sale		—		37		37
Commercial loans held for sale		—		295		295
Loans, net of allowance for loan losses of $71		—		9,570		9,570
Securities available-for-sale		—		587		587
Securities held-to-maturity		—		5,251		5,251
Investment in Federal Home Loan Bank stock		—		307		307
Property, premises, and equipment		1,661		203		1,864
Goodwill		365		152		517
Other intangible assets		—		29		29
Prepaid expenses and other assets		442		218		628
Investment in financial services		1,024		—		—

TOTAL ASSETS	$	5,279	$	16,910	$	21,133


LIABILITIES
Accounts payable, accrued expenses, and other liabilities	$	779	$	154	$	928
Long-term debt and other borrowings		1,744		141		1,885
Deposits		—		9,277		9,266
Federal Home Loan Bank borrowings		—		6,009		6,009
Deferred income taxes		167		—		151
Pension liability		262		—		262
Postretirement benefits liability		136		—		136
Preferred stock issued by subsidiaries		—		305		305

TOTAL LIABILITIES		3,088		15,886		18,942


SHAREHOLDERS’ EQUITY
Preferred stock — par value $1 per share:
authorized 25,000,000 shares; none issued						—
Common stock — par value $1 per share: authorized 200,000,000 shares; issued 123,605,344 shares, including shares held in the treasury						124
Additional paid-in capital						458
Accumulated other comprehensive loss						(197	)
Retained earnings						2,354

						2,739
Cost of shares held in the treasury: 14,853,904 shares						(548	)

TOTAL SHAREHOLDERS’ EQUITY						2,191

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	21,133

Please read the notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEET
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year-End 2005
Unaudited


	Parent		Financial
	Company		Services		Consolidated
	(In millions)
ASSETS
Cash and cash equivalents	$	13	$	431	$	441
Trade receivables, less allowance for doubtful accounts of $14		411		—		411
Inventories		425		—		425
Timber and timberland		394		—		394
Real estate		403		—		403
Loans held for sale		—		280		280
Loans, net of allowance for loan losses of $74		—		9,845		9,845
Securities available-for-sale		—		654		654
Securities held-to-maturity		—		5,558		5,558
Investment in Federal Home Loan Bank stock		—		300		300
Property, premises, and equipment		1,633		193		1,826
Goodwill		236		159		395
Other intangible assets		—		31		31
Prepaid expenses and other assets		469		240		667
Investment in financial services		1,017		—		—

TOTAL ASSETS	$	5,001	$	17,691	$	21,630


LIABILITIES
Accounts payable, accrued expenses, and other liabilities	$	750	$	175	$	909
Long-term debt and other borrowings		1,599		101		1,700
Deposits		—		9,201		9,194
Federal Home Loan Bank borrowings		—		6,892		6,892
Deferred income taxes		165		—		143
Pension liability		270		—		270
Postretirement benefits liability		137		—		137
Preferred stock issued by subsidiaries		—		305		305

TOTAL LIABILITIES		2,921		16,674		19,550


SHAREHOLDERS’ EQUITY
Preferred stock — par value $1 per share:
authorized 25,000,000 shares; none issued						—
Common stock — par value $1 per share: authorized 200,000,000 shares; issued 123,605,344 shares, including shares held in the treasury						124
Additional paid-in capital						445
Accumulated other comprehensive loss						(189	)
Retained earnings						2,141

						2,521
Cost of shares held in the treasury: 12,630,953 shares						(441	)

TOTAL SHAREHOLDERS’ EQUITY						2,080

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	21,630

Please read the notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions, except per share amounts)
REVENUES
Manufacturing and real estate	$	1,134		$	1,035		$	2,235		$	2,034
Financial services		299			239			582			461

		1,433			1,274			2,817			2,495


COSTS AND EXPENSES
Manufacturing and real estate		(992	)		(970	)		(1,984	)		(1,909	)
Financial services		(244	)		(192	)		(481	)		(372	)

		(1,236	)		(1,162	)		(2,465	)		(2,281	)

OPERATING INCOME		197			112			352			214
Parent company interest		(34	)		(29	)		(67	)		(58	)
Other non-operating income (expense)		91			1			91			2

INCOME BEFORE INCOME TAXES		254			84			376			158
Income tax expense		(62	)		(16	)		(108	)		(45	)

INCOME FROM CONTINUING OPERATIONS		192			68			268			113
Discontinued operations		—			1			—			1

NET INCOME	$	192		$	69		$	268		$	114


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		109.8			113.7			110.5			113.2
Diluted		111.8			115.0			112.6			115.4

EARNINGS PER SHARE
Basic:
Income from continuing operations	$	1.75		$	0.60		$	2.42		$	1.00
Discontinued operations		—			0.01			—			0.01

Net income	$	1.75		$	0.61		$	2.42		$	1.01


Diluted:
Income from continuing operations	$	1.71		$	0.59		$	2.38		$	0.98
Discontinued operations		—			0.01			—			0.01

Net income	$	1.71		$	0.60		$	2.38		$	0.99


DIVIDENDS PAID PER SHARE OF COMMON STOCK	$	0.25		$	0.22¹/2		$	0.50		$	0.45

Please read the notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited


	First Six Months
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	268		$	114
Adjustments:
Depreciation and amortization		124			125
Amortization and accretion of financial instruments discounts and premiums, net		13			7
Provision for credit losses		—			10
Deferred income taxes		7			13
Non-cash real estate cost of sales		27			14
Real estate development expenditures		(60	)		(24	)
Other non-cash charges and (credits), net		6			33
Other		—			(4	)
Changes in:
Trade receivables		(81	)		(72	)
Inventories		11			—
Prepaid expenses and other		22			24
Accounts payable and accrued expenses		(9	)		(7	)
Loans held for sale:
Originations		(131	)		(1,366	)
Sales		374			1,548
Collections on loans serviced for others, net		—			(119	)

		571			296

CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(100	)		(126	)
Sale of non-strategic assets and operations		4			36
Securities available-for-sale, net		65			98
Securities held-to-maturity, net		297			614
Loans originated or acquired, net of principal collected		(20	)		(392	)
Proceeds from sale of loans and mortgage servicing rights		—			46
Acquisitions, net of cash acquired, and joint ventures		(135	)		(22	)
Other		10			3

		121			257

CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt		(229	)		(339	)
Additions to debt		2			1
Borrowings under accounts receivable securitization facility, net		39			50
Borrowings under revolving credit facility, net		47			(12	)
Deposits, net		72			64
Repurchase agreements and short-term borrowings, net		(617	)		(132	)
Cash dividends paid to shareholders		(55	)		(52	)
Repurchase of common stock		(153	)		(435	)
Exercise of stock options		34			35
Tax benefit on stock options exercised		7			—
Settlement of equity purchase contracts		—			345
Other		8			(27	)

		(845	)		(502	)


Effect of exchange rate changes on cash and cash equivalents		(1	)		—
Discontinued operations, principally operating activities		(1	)		—

Net increase (decrease) in cash and cash equivalents		(155	)		51
Cash and cash equivalents at beginning of period		441			372

Cash and cash equivalents at end of period	$	286		$	423

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

PARENT COMPANY (TEMPLE-INLAND INC. AND ITS MANUFACTURING AND REAL ESTATE SUBSIDIARIES)
Unaudited


	Second
	Quarter-End			Year-End
	2006			2005
	(In millions)
ASSETS
Current Assets
Cash and cash equivalents	$	25		$	13
Trade receivables, less allowance for doubtful accounts of $17 in 2006 and $14 in 2005		511			411
Inventories:
Finished goods and work in process		104			95
Raw materials		204			224
Supplies and other		112			106

Total inventories		420			425
Prepaid expenses and other		70			94

Total current assets		1,026			943
Investment in Financial Services		1,024			1,017
Timber and Timberland		385			394
Real Estate		446			403
Property and Equipment
Land and buildings		650			619
Machinery and equipment		3,412			3,337
Construction in progress		63			62
Less allowance for depreciation		(2,464	)		(2,385	)

Total property and equipment		1,661			1,633
Goodwill		365			236
Assets Held for Sale		31			34
Other Assets		341			341

TOTAL ASSETS	$	5,279		$	5,001


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	229		$	200
Accrued employee compensation and benefits		86			101
Accrued interest		37			19
Accrued property taxes		24			27
Other accrued expenses		127			136
Liabilities of discontinued operations		7			9
Current portion of long-term debt		8			12

Total current liabilities		518			504
Long-Term Debt		1,744			1,599
Deferred Income Taxes		167			165
Pension Liability		262			270
Postretirement Benefits Liability		136			137
Other Long-Term Liabilities		261			246

Total liabilities		3,088			2,921
Shareholders’ Equity		2,191			2,080

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,279		$	5,001

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC. AND ITS MANUFACTURING AND REAL ESTATE SUBSIDIARIES)
Unaudited


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
NET REVENUES	$	1,134		$	1,035		$	2,235		$	2,034

COSTS AND EXPENSES
Cost of sales		(906	)		(872	)		(1,820	)		(1,723	)
Selling		(34	)		(31	)		(68	)		(62	)
General and administrative		(58	)		(53	)		(114	)		(98	)
Other operating income (expense)		6			(14	)		18			(26	)

		(992	)		(970	)		(1,984	)		(1,909	)

		142			65			251			125
FINANCIAL SERVICES PRE-TAX EARNINGS		55			47			101			89


OPERATING INCOME		197			112			352			214
Interest expense		(34	)		(29	)		(67	)		(58	)
Other non-operating income (expense)		91			1			91			2


INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		254			84			376			158
Income tax expense		(62	)		(16	)		(108	)		(45	)


INCOME FROM CONTINUING OPERATIONS		192			68			268			113
Discontinued operations		—			1			—			1

NET INCOME	$	192		$	69		$	268		$	114

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS
PARENT COMPANY (TEMPLE-INLAND INC. AND ITS MANUFACTURING AND REAL ESTATE SUBSIDIARIES)
Unaudited


	First Six Months
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	268		$	114
Adjustments:
Depreciation and amortization		113			112
Non-cash share-based compensation		24			16
Non-cash pension and postretirement expense		28			29
Cash contribution to pension and postretirement plans		(37	)		(34	)
Deferred income taxes (benefit)		—			6
Net earnings of financial services		(63	)		(56	)
Dividends of earnings from financial services		60			25
Earnings of joint ventures		(19	)		(27	)
Dividends of earnings from joint ventures		7			19
Non-cash real estate cost of sales		27			14
Real estate development expenditures		(60	)		(24	)
Other non-cash charges (credits)		6			33
Other		(6	)		1
Changes in:
Trade receivables		(81	)		(72	)
Inventories		11			—
Prepaid expenses and other		22			24
Accounts payable and accrued expenses		(9	)		(7	)

		291			173


CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(79	)		(113	)
Sales of non-strategic assets and operations and proceeds from sale of property and equipment		13			36
Acquisitions, net of cash acquired, and joint ventures		(134	)		(3	)

		(200	)		(80	)


CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt		(3	)		(24	)
Additions of debt		2			—
Borrowings under accounts receivable securitization facility, net		39			50
Borrowings under revolving credit facility, net		47			(12	)
Cash dividends paid to shareholders		(55	)		(52	)
Repurchase of common stock		(153	)		(435	)
Exercise of stock options		34			35
Tax benefit on stock options exercised		7			—
Settlement of equity purchase contracts		—			345
Other		5			(6	)

		(77	)		(99	)


Effect of exchange rate changes on cash and cash equivalents		(1	)		—
Discontinued operations, principally operating cash flows		(1	)		—

Net increase (decrease) in cash and cash equivalents		12			(6	)
Cash and cash equivalents at beginning of period		13			22

Cash and cash equivalents at end of period	$	25		$	16

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

FINANCIAL SERVICES
Unaudited


	Second
	Quarter-End		Year-End
	2006		2005
	(In millions)
ASSETS
Cash and cash equivalents	$	261	$	431
Loans held for sale		37		280
Commercial loans held for sale		295		—
Loans, net of allowance for loan losses of $71 in 2006 and $74 in 2005		9,570		9,845
Securities available-for-sale		587		654
Securities held-to-maturity		5,251		5,558
Investment in Federal Home Loan Bank stock		307		300
Premises and equipment, net		203		193
Accounts, notes, and accrued interest receivable		118		120
Goodwill		152		159
Other intangible assets		29		31
Other assets		100		120

TOTAL ASSETS	$	16,910	$	17,691


LIABILITIES AND STOCKHOLDER’S EQUITY
Deposits	$	9,277	$	9,201
Federal Home Loan Bank borrowings		6,009		6,892
Other liabilities		154		175
Other borrowings		141		101
Preferred stock issued by subsidiaries		305		305

TOTAL LIABILITIES		15,886		16,674
Shareholder’s Equity		1,024		1,017

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	16,910	$	17,691

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES
Unaudited


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
INTEREST INCOME
Loans and loans held for sale	$	176		$	142		$	342		$	271
Securities available-for-sale		12			15			23			30
Securities held-to-maturity		64			30			126			64
Other earning assets		1			1			3			2

Total interest income		253			188			494			367


INTEREST EXPENSE
Deposits		(66	)		(45	)		(128	)		(84	)
Borrowed funds		(80	)		(46	)		(155	)		(91	)

Total interest expense		(146	)		(91	)		(283	)		(175	)


NET INTEREST INCOME		107			97			211			192
(Provision) credit for credit losses		2			(8	)		—			(10	)

NET INTEREST INCOME AFTER (PROVISION) CREDIT FOR CREDIT LOSSES		109			89			211			182


NONINTEREST INCOME
Loan origination and sale of loans		—			8			2			14
Insurance commissions and fees		19			18			33			31
Service charges on deposits		13			11			24			21
Operating lease income		2			2			4			3
Other		12			12			25			25

Total noninterest income		46			51			88			94


NONINTEREST EXPENSE
Compensation and benefits		(46	)		(43	)		(94	)		(89	)
Insurance operations, other than compensation		(4	)		(4	)		(8	)		(8	)
Occupancy		(6	)		(6	)		(12	)		(12	)
Information systems and technology		(4	)		(4	)		(7	)		(8	)
Charges related to asset impairments and severance		(7	)		—			(10	)		—
Other		(33	)		(36	)		(67	)		(70	)

Total noninterest expense		(100	)		(93	)		(198	)		(187	)


INCOME BEFORE INCOME TAXES		55			47			101			89
Income tax expense		(21	)		(17	)		(38	)		(33	)

NET INCOME	$	34		$	30		$	63		$	56

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES
Unaudited


	First Six Months
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	63		$	56
Adjustments:
Depreciation		8			10
Depreciation of leased assets		3			3
Provision for credit losses		—			10
Amortization and accretion of financial instrument discounts and premiums, net		13			7
Deferred income taxes		7			7
Changes in:
Loans held for sale:
Originations		(131	)		(1,366	)
Sales		374			1,548
Collections on loans serviced for others, net		—			(119	)
Other		(4	)		(8	)

		333			148


CASH PROVIDED BY (USED FOR) INVESTING
Securities available-for-sale:
Purchases		(2	)		—
Principal payments and maturities		67			98
Securities held-to-maturity:
Purchases		(351	)		(3	)
Principal payments and maturities		648			617
Loans originated or acquired, net of collections		(20	)		(392	)
Collection of mortgage servicing rights sale receivables		—			46
Acquisitions, net of cash acquired		(1	)		(19	)
Capital expenditures		(21	)		(13	)
Other		1			3

		321			337


CASH PROVIDED BY (USED FOR) FINANCING
Deposits, net		76			64
Repurchase agreements and short-term borrowings, net		(617	)		(132	)
Additions to debt and long-term FHLB borrowings		—			1
Payments of long-term FHLB and other borrowings		(226	)		(315	)
Dividends paid to parent company		(60	)		(25	)
Other		3			(21	)

		(824	)		(428	)


Net increase (decrease) in cash and cash equivalents		(170	)		57
Cash and cash equivalents at beginning of period		431			350

Cash and cash equivalents at end of period	$	261		$	407

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

Our consolidated financial statements are our primary financial statements and include the accounts of Temple-Inland, our manufacturing, real estate and financial services subsidiaries and variable interest entities of which we are the primary beneficiary. We also present as an integral part of the consolidated financial statements, summarized financial statements of Temple-Inland and our manufacturing and real estate subsidiaries, which we refer to as the parent company summarized financial statements, and summarized financial statements of our financial services subsidiaries as well as the significant accounting policies unique to each. We do so to provide a clearer presentation of our different businesses and because almost all of the net assets invested in financial services are subject to regulatory rules and restrictions including restrictions on the payment of dividends to the parent company. As a result, all consolidated assets are not available to satisfy all consolidated liabilities.

You should read our parent company summarized financial statements and financial services summarized financial statements along with these consolidated financial statements.

We prepared these unaudited interim financial statements in accordance with generally accepted accounting principles and Securities and Exchange Commission requirements for interim financial statements. As a result, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. However, in our opinion, all adjustments considered necessary for a fair presentation have been included. These adjustments are normal recurring accruals, except as noted. These interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, please read the financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Beginning in first quarter 2006, we changed our reportable segments by adding a fourth segment, real estate. As a result, we filed a Current Report on Form 8-K on June 30, 2006 to recast prior period parent company and financial services summarized financial statements to reflect this new segmentation and recast segment revenues to include gross real estate sales that had previously been reported net and certain other ancillary revenues that had previously been presented as a reduction of cost of sales. When we refer to our 2005 Annual Report on Form 10-K, we incorporate the recast financial information filed as part of the Form 8-K.

As part of the real estate segmentation, we transferred about $300 million in real estate assets and $110 million of related borrowings that had been included in our financial services summarized financial statements to our parent company summarized financial statements. Within the parent company summarized financial statements, we recast about $100 million of timber and timberland into real estate. As a result, we have recast prior period parent company and financial services summarized financial statements to reflect this transfer as if it occurred at the beginning of the earliest period presented. The transferred and recast assets and liabilities and their related operating results and cash flows were recast at their carrying value or historical amounts. Please read Notes 8 and 9 to the Consolidated Financial Statements for further information.

Note 2 — New Accounting Pronouncements

Share-Based Compensation

Beginning January 2006, we adopted the modified prospective application method contained in Statement of Financial Accounting Standards (SFAS) No. 123 (revised December 2004), Share-Based Payment (SFAS 123(R)), to account for share-based payments. As a result, we will apply this pronouncement to new awards or modifications of existing awards in 2006 and thereafter. We had been expensing over the service period the fair value of share-based compensation awards granted, modified or settled in 2003 through 2005, using the prospective transition method of accounting contained in SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. The principal effects of adopting SFAS 123(R) are:

•

The fair value of awards granted to retirement eligible employees is expensed at the date of grant because our stock option awards and some of our other awards provide for accelerated or continued vesting upon retirement. Previously, the fair value of these awards was expensed over the expected service period. The

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

			change accelerated about $7 million of expense into first quarter 2006 related to awards granted in 2006. We will continue to expense the fair value of awards granted prior to 2006 over the expected service period.

	•		Forfeitures over the expected term of the award are estimated at the date of grant and the estimates adjusted to reflect actual subsequent forfeitures. Previously, we had reflected forfeitures as they occurred. The effect of this change was not significant.

	•		Tax benefits recognized as a result of the exercise of employee stock options are classified as a financing cash flow. Previously, we had classified these tax benefits as an operating cash flow.

	•		The fair value of unvested outstanding options at the beginning of first quarter 2006 will be expensed over the remaining service period. The effect of this change was not significant because of our accounting for options at fair value determined at the date of grant beginning in 2003. As a result this applied only to our unvested outstanding options granted prior to 2003.

Adoption of this new pronouncement did not change the methodology we use to determine the fair value of our share-based compensation arrangements. We use the Black-Scholes-Merton option-pricing model for stock options and the grant date or period-end fair value of our common stock for all other awards.

Prior to 2003, we used the intrinsic value method in accounting for stock options. As a result, no share-based compensation expense related to those stock options granted prior to 2003 is reflected in net income for 2005 and prior years. The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all options granted.


	Second			First Six
	Quarter 2005			Months 2005
	(In millions, except per share)
Net income, as reported	$	69		$	114
Add: Stock-based compensation expense, net of related tax effects, included in the determination of reported net income		7			13
Deduct: Total stock-based compensation expense, net of related tax effects, determined under the fair value based method for all awards		(8	)		(15	)

Pro forma net income	$	68		$	112


Earnings per share:
Basic, as reported	$	0.61		$	1.01
Basic, pro forma	$	0.60		$	0.99

Diluted, as reported	$	0.60		$	0.99
Diluted, pro forma	$	0.59		$	0.97

Accounting for Purchases and Sales of Inventory with the Same Counterparty

Beginning second quarter 2006, we began applying the guidance in Emerging Issues Task Force (EITF) Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. This guidance requires that non-monetary exchanges of similar inventory be valued at the carrying value of the inventory given up instead of the fair value of the inventory received and is to be applied to exchange agreements entered into or renewed subsequent to first quarter 2006.

Our corrugated packaging segment enters into these agreements that generally represent the exchange of linerboard we manufacture for corrugated medium manufactured by others. We include these exchanges in cost of sales. The effect of applying this guidance was to reduce second quarter 2006 income from continuing operations by $1 million or $0.01 per diluted share. We expect a similar effect on income from continuing operations for each of the next three quarters as our existing exchange agreements are renewed.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Pending Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has issued a proposed new standard of accounting for defined benefit plans. This proposed new standard, if adopted as currently proposed, would be effective for our year-end 2006 and, among other matters, would require the recognition of the funded status of defined benefit plans. Based on our current analysis of this proposed standard and assuming we applied it to our year-end 2005 balance sheet using our 2005 valuation, we would increase our pension liability by about $77 million, decrease shareholders’ equity by about $48 million and decrease deferred income tax liability by about $29 million.

The EITF has ratified EITF Issue No. 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). This guidance permits these taxes to be presented on either a gross basis (included in sales and expenses) or a net basis (excluded from the income statement) as long as the chosen method is disclosed as an accounting policy. This disclosure is required beginning with our first quarter 2007. We currently use the net basis for reporting these taxes, and we do not expect to change our policy as a result of this EITF.

The FASB has issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) clarifying the accounting for and disclosure of uncertainties associated with certain aspects of measurement and recognition of income taxes. FIN 48 is effective for us beginning first quarter 2007. Based on our current understanding, we do not expect that the adoption of FIN 48 will have a significant effect on our earnings or financial position.

Note 3 — Employee Benefit Plans

The components of net periodic benefit cost of our defined benefit pension plans are:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
Service costs — benefits earned during the period	$	7		$	6		$	14		$	13
Interest cost on projected benefit obligation		18			18			36			36
Expected return on plan assets		(20	)		(18	)		(40	)		(36	)
Amortization of prior service costs		1			—			2			—
Amortization of actuarial net loss		6			6			12			12

Defined benefit expense	$	12		$	12		$	24		$	25

In first six months 2006, we made $30 million in voluntary, discretionary contributions to our defined benefit pension plans, including $15 million in second quarter 2006.

The components of net periodic benefit cost of our postretirement benefit plans are:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
Service costs — benefits earned during the period	$	1		$	1		$	2		$	2
Interest cost on projected benefit obligation		2			2			4			4
Amortization of prior service costs		(1	)		(1	)		(2	)		(2	)
Amortization of actuarial net loss		—			—			—			—

Defined benefit expense	$	2		$	2		$	4		$	4

Note 4 — Share-Based Compensation

We have shareholder approved share-based compensation plans that permit awards to key employees and non-employee directors in the form of restricted or performance units, restricted stock or options to purchase shares of our common stock. We generally grant awards annually in February, and we use treasury stock to fulfill awards settled in common stock and stock option exercises. A summary of these plans follows:

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restricted or performance units

Restricted or performance units generally have a three-year term, vest after three years of employment from the date of grant or the attainment of stated ROI based performance goals generally measured over a three-year period, and are settled in cash or common stock as determined on the date of grant. The restricted and performance units provide for accelerated vesting upon retirement or if there is a change in control. We also have director awards and bonus deferral plans that can be settled in cash or stock. A summary of activity for first six months 2006 follows:


				Weighted
				Average
				Grant Date		Aggregate
				Fair Value Per		Current
	Shares			Share		Value
	(In thousands)					(In millions)
Not vested beginning of the year		744		$	32
Granted		685			46
Vested and settled		(5	)		30
Forfeited		(16	)		36

Not vested end of second quarter 2006		1,408			39	$	60


Not vested end of second quarter 2006 subject to
Time vesting requirements		824				$	35
Performance requirements		584					25

Total		1,408				$	60


Not vested end of second quarter 2006 to be settled in
Cash		879				$	38
Stock		529					22

Total		1,408				$	60

The fair value of units vested in first six months 2006 was less than $1 million.

Restricted stock

Restricted stock awards generally vest ratably over three to six years, provide for accelerated vesting upon retirement or if there is a change in control, and are included in outstanding shares. There were no restricted stock awards granted in first six months 2006. There were 682,750 restricted stock awards outstanding at second quarter-end 2006 with a weighted average grant date fair value of $32.23 per share and an aggregate current value of $29 million. The fair value of restricted stock vested in first six months 2006 was $1 million.

Stock options

Stock options have a ten-year term, become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement or if there is a change in control. Options are granted with an exercise price equal to the market value of our common stock on the date of grant. A summary of activity for first six months 2006 follows:

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


						Weighted		Aggregate
				Weighted		Average		Intrinsic Value
				Average		Remaining		(Current value
				Exercise Price		Contractual		less exercise
	Shares			Per Share		Term		price)
	(In thousands)					(In years)		(In millions)
Outstanding beginning of the year		6,832		$	28
Granted		1,103			46
Exercised		(1,317	)		27
Forfeited		(104	)		32

Outstanding end of second quarter 2006		6,514			31		7	$	74


Exercisable end of second quarter 2006		3,657			28		5	$	56

The intrinsic value of options exercised in first six months 2006 was $23 million.

We determine the fair value of options using the Black-Scholes-Merton option-pricing model and the following assumptions:


	First Six Months
	2006			2005
Expected life of options	6.0 years			8.0 years
Expected stock price volatility		25.1	%		28.2	%
Expected dividend yield		2.4	%		2.3	%
Risk-free interest rate		4.5	%		4.1	%

Weighted average estimated fair value per option of options granted	$	11.53		$	11.13

The expected life of options is based on historical experience. The expected stock price volatility is based on historical prices of our common stock for a period corresponding to the expected life of the options with appropriate consideration given to current conditions and events. We use historical data to estimate pre-vesting forfeitures stratified into two groups based on job level.

Share-based compensation expense

Pre-tax share-based compensation expense consists of:


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(In millions)
Restricted or performance units	$	5	$	4	$	13	$	7
Restricted stock		1		—		2		1
Stock options		2		2		9		4

Total pre-tax share-based compensation expense	$	8	$	6	$	24	$	12

In first six months 2006, $19 million of share-based compensation expense was included in general and administrative expense, $1 million was included in selling expense, and $4 million was included in cost of sales. In first six months 2005, $10 million of share-based compensation expense was included in general and administrative expense and $2 million was included in cost of sales. The amount of share-based compensation capitalized was not significant. In first six months 2005, we contributed treasury stock to fulfill our 401(k) matching obligations.

The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $7 million in first six months 2006 including $3 million related to restricted or performance units and $4 million related to stock options. This accounts for most of the increase in share-based compensation expense from first six months 2005.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Unrecognized share-based compensation for all awards not vested was $30 million at second quarter-end 2006. It is likely that this cost will be recognized as expense over the next four years.

Other information


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(In millions)
Cash paid to settle restricted or performance units	$	—	$	—	$	—	$	—
Cash received from the exercise of stock options		7		5		34		35
Income tax benefit recognized from the exercise of stock options		1		—		7		—

Note 5 — Earnings Per Share

We computed earnings per share by dividing income by weighted average shares outstanding using the following:


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(In millions)
Weighted average common shares outstanding — basic		109.8		113.7		110.5		113.2
Dilutive effect of equity purchase contracts (settled in first and second quarter of 2005)		—		—		—		0.7
Dilutive effect of stock options		2.0		1.3		2.1		1.5

Weighted average shares outstanding — diluted		111.8		115.0		112.6		115.4

In 2006, we repurchased 3.5 million shares of common stock for $151 million, including $7 million in other current liabilities that was settled after second quarter-end. The repurchased shares were added to treasury shares at an average cost of $43.22 per share and completed the August 5, 2005 Board of Directors’ authorization to repurchase up to six million shares. At second quarter-end 2005, we had repurchased 12 million shares of common stock for $435 million under a February 4, 2005 Board of Directors’ authorization to repurchase up to 12 million shares.

Note 6 — Comprehensive Income

Comprehensive income consists of:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
Net income	$	192		$	69		$	268		$	114
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on:
Available-for-sale securities		—			3			—			—
Derivative instruments		—			(1	)		—			(1	)
Minimum pension liability adjustment		(1	)		—			(1	)		—
Foreign currency translation adjustments		(5	)		3			(7	)		3

Other comprehensive income (loss)		(6	)		5			(8	)		2

Comprehensive income	$	186		$	74		$	260		$	116

In second quarter 2006, because of the enactment of the new margin tax by the Texas State Legislature, we reduced our state deferred taxes associated with minimum pension liability by $1 million.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At second quarter-end 2006, the fair value of our interest-rate derivative instruments was a $1 million liability, which is about equally distributed between an interest-rate swap designated as a hedge of interest cash flows anticipated from specific borrowings and an interest-rate swap we did not designate as a hedge. Changes in the fair value of the hedge transaction increased other comprehensive income by less than $1 million in the first six months 2006. Hedge ineffectiveness was not significant in the first six months 2006. Changes in the fair value of the instrument not designated as a hedge are included in other non-operating income (expense) and resulted in income of $1 million in first six months 2006.

Note 7 — Contingencies

We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business and believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a significant adverse effect on our financial position or long-term results of operations or cash flows. It is possible however, that charges related to these matters could be significant to our results or cash flows in any one accounting period.

Note 8 — Segment Information

We have four business segments: corrugated packaging, forest products, real estate, and financial services. Corrugated packaging manufactures containerboard and corrugated packaging. Forest products manages our timber resources and manufactures a variety of building products. Real estate entitles and develops our higher and better use timberland and invests in real estate ventures. Financial services operates a savings bank and an insurance agency.

We evaluate segment performance based on return on investment (ROI). We define ROI as segment operating income divided by segment assets less segment current liabilities for our manufacturing and real estate segments and divided by segment investment for our financial services segment. Segment operating income is income before unallocated expenses and income taxes. Unallocated expenses represent expenses managed on a company-wide basis and include corporate general and administrative expense, share-based compensation, other operating and non-operating income (expense), and parent company interest expense. Other operating income (expense) includes gain or loss on sale of assets, asset impairments, severance and expenses associated with facility closures and unusual items. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements.

Beginning in first quarter 2006, we changed our reportable segments by adding a fourth segment, real estate, and recast prior period parent company and financial services summarized financial statements to reflect this new segmentation and recast segment revenues to include gross real estate sales that had previously been reported net and certain other ancillary revenues that had previously been presented as a reduction to cost of sales.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


											Expenses Not
											Allocated to
	Corrugated		Forest			Real		Financial			Segments and
	Packaging		Products			Estate		Services			Eliminations			Total
For Second Quarter 2006

(In millions)
Revenues from external customers	$	758	$	341		$	35	$	299		$	—		$	1,433
Depreciation and amortization		39		14			—		6			4			63
Segment operating income or income (loss) before taxes		67		101			9		62			15	^(a)		254
Financial services, net interest income		—		—			—		107			—			107
Capital expenditures		28		16			—		7			3			54

For First Six Months 2006 or at Second Quarter-End 2006

(In millions)
Revenues from external customers	$	1,479	$	674		$	82	$	582		$	—		$	2,817
Depreciation and amortization		77		28			1		11			7			124
Segment operating income or income (loss) before taxes		107		183			35		111			(60	)^(a)		376
Financial services, net interest income		—		—			—		211			—			211
Total assets		2,336		1,066			485		16,910			336			21,133
Investment in equity method investees and joint ventures		11		21			76		—			—			108
Capital expenditures		47		26			—		21			6			100
Goodwill		236		129			—		152			—			517

For Second Quarter 2005

(In millions)
Revenues from external customers
As reported	$	738	$	265		$	—	$	252		$	—		$	1,255
Reclassification		2		5			25		(13	)		—			19	^(b)

As reclassified		740		270			25		239			—			1,274
Depreciation and amortization
As reported		39		13			—		7			4			63
Reclassification		—		—			—		—			—			—

As reclassified		39		13			—		7			4			63
Segment operating income or income (loss) before taxes
As reported		58		58			—		51			(83	)		84
Reclassification		—		(3	)		9		(4	)		(2	)

As reclassified		58		55			9		47			(85	)^(a)		84
Financial services, net interest income
As reported		—		—			—		95			—			95
Reclassification		—		—			—		2			—			2

As reclassified		—		—			—		97			—			97
Capital expenditures
As reported		36		15			—		6			6			63
Reclassification		—		—			—		—			—			—

As reclassified		36		15			—		6			6			63

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


											Expenses Not
											Allocated to
											Segments
	Corrugated		Forest			Real		Financial			and
	Packaging		Products			Estate		Services			Eliminations			Total
For First Six Months 2005 or at Second Quarter-End 2005

(In millions)
Revenues from external customers
As reported	$	1,456	$	514		$	—	$	488		$	—		$	2,458
Reclassification		3		7			54		(27	)		—			37	^(b)

As reclassified		1,459		521			54		461			—			2,495
Depreciation and amortization
As reported		79		26			—		14			6			125
Reclassification		—		—			1		(1	)		—			—

As reclassified		79		26			1		13			6			125
Segment operating income or income (loss) before taxes
As reported		108		112			—		98			(160	)		158
Reclassification		—		(6	)		18		(9	)		(3	)		—

As reclassified		108		106			18		89			(163	)^(a)		158
Financial services, net interest income
As reported		—		—			—		189			—			189
Reclassification		—		—			—		3			—			3

As reclassified		—		—			—		192			—			192
Total Assets
As reported		2,432		972			—		16,143			286			19,833
Reclassification		—		(97	)		400		(334	)		31			—

As reclassified		2,432		875			400		15,809			317			19,833
Investment in equity method investees and joint ventures
As reported		14		38			—		63			—			115
Reclassification		—		—			63		(63	)		—			—

As reclassified		14		38			63		—			—			115
Capital expenditures
As reported		75		29			—		13			10			127
Reclassification		—		(1	)		—		—			—			(1	)^(c)

As reclassified		75		28			—		13			10			126
Goodwill
As reported		236		—			—		158			—			394


^(a)		See table below for expenses not allocated to segments.

^(b)		Revenues increased because we recast segment revenues to include gross real estate sales that had previously been reported net and certain ancillary revenues that had previously been reported as a reduction of cost of sales.

^(c)		Capital expenditures decreased because we reclassified real estate development expenditures separately.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Expenses not allocated to segments consist of:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
General and administrative	$	(26	)	$	(22	)	$	(49	)	$	(42	)
Share-based compensation		(8	)		(6	)		(24	)		(12	)
Other operating income (expense)		(8	)		(29	)		(11	)		(53	)
Other non-operating income(expense)		91			1			91			2
Parent company interest		(34	)		(29	)		(67	)		(58	)

	$	15		$	(85	)	$	(60	)	$	(163	)


Other operating income (expense) applies to:
Corrugated packaging	$	(2	)	$	(2	)	$	(4	)	$	(20	)
Forest products		1			(27	)		1			(27	)
Real estate		—			—			—			—
Financial services		(7	)		—			(10	)		—
Unallocated		—			—			2			(6	)

	$	(8	)	$	(29	)	$	(11	)	$	(53	)

Other non-operating income (expense) includes interest income and other costs associated with debt tender offers, call premiums and write-offs of unamortized financing fees related to refinancing of borrowings and in second quarter 2006 a one-time gain, after legal fees, of $89 million related to the settlement of tax litigation. Please read Note 13 to the Consolidated Financial Statements for further information.

Note 9 — Real Estate

Real estate consists of:


	Second
	Quarter-End		Year-End
	2006		2005
	(In millions)
Developed land and land under development	$	232	$	199
Land held for investment or future development and timber		113		104
Investment in real estate ventures		76		76
Income producing properties, net of accumulated depreciation		25		24

Total	$	446	$	403

In first six months 2006, we sold five acres of undeveloped commercial real estate and recognized a gain of $8 million. In first six months 2006, we transferred from forest products 15,913 additional acres of timber and timberland with a carrying value of $7 million into the real estate segment.

At second quarter-end 2006, we had ownership interests ranging from 25 to 50 percent in 12 real estate ventures accounted for using the equity method. Our investment in these ventures is included in real estate and our equity in their earnings is included in other operating income (expense). We provide development services for some of these ventures for which we receive a fee. We have not recognized significant fees for these services. Combined summarized financial information for these ventures follows:

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Second
	Quarter-End			Year-End
	2006			2005
	(In millions)
Real estate	$	174		$	184
Total assets		260			240
Borrowings, principally non-recourse		83			76
Total liabilities		96			77
Equity		164			163

Our investment in real estate ventures:
Our share of their equity	$	84		$	84
Unrecognized deferred gain^(a)		(8	)		(8	)

Investment in real estate ventures	$	76		$	76

^(a) We recognize the deferred gain from our sale to the venture as the venture sells the real estate to third parties.


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(In millions)
Revenues	$	20	$	59	$	73	$	103
Earnings		5		33		25		47
Our equity in their earnings		3		4		13		8

In first six months 2006, we contributed $3 million to the ventures and received $14 million in return of capital distributions, which are classified as investing activities for cash flow purposes.

Beginning first quarter 2006, we eliminated our historic one-month lag in accounting for our investment in our two largest real estate ventures as financial information became more readily available. The result was to increase our equity in their earnings in first six months 2006 by about $1 million.

Note 10 — Assets Held For Sale

Assets held for sale include assets of discontinued operations and other non-strategic assets held for sale.

At second quarter-end 2006, discontinued operations consist of the chemical business obtained in the acquisition of Gaylord Container Corporation. The disposition of the Gaylord chemical business has been delayed primarily due to its class action litigation that was settled in 2004. At second quarter-end 2006, the assets and liabilities of discontinued operations include $9 million of working capital and $5 million of property and equipment. Revenues from discontinued operations were $6 million in second quarter 2006 and $6 million in second quarter 2005 and $13 million in first six months 2006 and $11 million in first six months 2005.

At second quarter-end 2006, the carrying value of non-strategic assets held for sale was $9 million.

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 11 — Other Operating Income (Expense)


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
Equity in earnings of manufacturing joint ventures	$	4		$	11		$	6		$	19
Equity in earnings of real estate ventures		3			4			13			8
Closure and sale of converting and production facilities		—			(28	)		—			(39	)
Antitrust litigation		—			(1	)		—			(8	)
Proxy contest		—			—			—			(4	)
Other		(1	)		—			(1	)		(2	)

Total	$	6		$	(14	)	$	18		$	(26	)

In January 2006, we acquired the remaining 50 percent interest in Standard Gypsum LP. Please read Note 12 for further information.

Activity for second quarter 2006 within our accruals for exit costs follows:


	Beginning				Cash			End of
	of Period		Additions		Payments			Period
	(In millions)
Involuntary employee terminations	$	1	$	—	$	—		$	1
Demolition		6		—		(2	)		4

Total	$	7	$	—	$	(2	)	$	5

In addition, our financial services segment paid $1 million in severance in second quarter 2006. At second quarter-end, accruals for severance and exit costs of our financial services segment were $4 million, of which we expect to pay $1 million in severance in third quarter 2006. In second quarter 2006, our financial services segment established a plan to sell the majority of its asset-based lending portfolio, and we have classified those loans as commercial loans held for sale at second quarter-end 2006. As a result, we incurred $7 million in goodwill impairments and expect to incur about $2 million in severance and other costs in third quarter 2006 when the planned disposition is effected.

Note 12 — Acquisitions and Other Items

In January 2006, we purchased for $150 million our partner’s 50 percent interest in Standard Gypsum LP, which manufactures and sells gypsum wallboard. We also paid off the partnership’s $56 million credit agreement, of which $28 million related to the purchased interest. We paid $1 million in advisory and professional fees related to the purchase. We financed this purchase with borrowings under our revolving credit facilities. We believe that this acquisition will allow us to continue to generate earnings and returns from our gypsum operations, as these operations are low cost and are located near fast growing markets.

We no longer maintain Standard Gypsum as a separate legal entity and include all of its assets and liabilities, results of operations and cash flows in our consolidated financial statements and parent company summarized financial statements. Previously we had accounted for our interest in Standard Gypsum using the equity method. We allocated the purchase price to the 50 percent of the assets acquired and liabilities assumed based on our estimates of their fair value at the date of acquisition. We based these estimates of fair values on independent appraisals and other information. The other 50 percent of the assets and liabilities, which we already owned, were included at their carrying value. A summary of the net assets at the date of acquisition (50 percent at fair value and 50 percent at carrying value) follows:

TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Total
	(In millions)
Current assets	$	35
Property and equipment		74
Goodwill		129

Total assets		238

Current liabilities		(13	)
Current portion of long-term debt		(56	)

Total liabilities		(69	)

Net assets at date of acquisition	$	169

Goodwill is allocated to the forest products segment, and we anticipate that all of the goodwill will be deductible for income tax purposes.

The following unaudited pro forma results assume the acquisition and related financing had occurred at the beginning of 2005:


	2005
	First Six
	Months		Year
	(In millions, except per share)
Parent company revenues	$	2,130	$	4,175
Income from continuing operations		122		190
Income from continuing operations, per diluted share	$	1.06	$	1.66

We derived these pro forma results by adjusting for the effects of the purchase price allocations and financing described above. These pro forma results are not necessarily an indication of what actually would have occurred if the acquisition and financing had been completed at the beginning of 2005 and are not intended to be indicative of future results.

Note 13 — Income Taxes and Tax Litigation Settlement

Our effective tax rate was 24 percent in second quarter 2006 and 29 percent in first six months 2006. The 2006 rates reflect one-time benefits of 12 percent in second quarter 2006 and eight percent in first six months 2006 resulting from the settlement of tax litigation and the new State of Texas tax legislation. Our effective tax rate was 20 percent in second quarter 2005 and 29 percent in first six months 2005. The 2005 rates reflect a one-time tax benefit of 19 percent in second quarter 2005 and 10 percent in first six months 2005 resulting from the sale of our Pembroke, Canada MDF facility.

In second quarter 2006, we entered into a settlement agreement with the U.S. Government to resolve pending tax litigation we filed to recover tax benefits promised to us in connection with our savings and loan acquisitions in 1988. Under the terms of the settlement agreement, we received a $95 million non-taxable cash payment for past and future tax benefits that would have been available to us had legislation enacted in 1993 not eliminated those tax benefits and $4 million of taxable interest income. In connection with the settlement, we incurred legal fees of $10 million which were contingent upon the settlement. The net pre-tax gain related to this settlement was $89 million and is included in other non-operating income (expense).

Also in second quarter 2006, the Texas State Legislature enacted a new state margin tax to replace the existing franchise tax, which for us results in a lower overall State of Texas tax rate. As a result, we recognized a one-time non-cash benefit of $2 million, or $0.02 per diluted share, related to the reduction of previously provided deferred state income taxes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. A variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-looking statements. Factors and uncertainties that might cause such differences include, but are not limited to:

	•		general economic, market or business conditions;

	•		the opportunities (or lack thereof) that may be presented to and pursued by us;

	•		the availability and price of raw materials we use;

	•		fluctuations in the cost of purchased energy;

	•		fluctuations in the cost we incur to transport the raw materials we use and the products we manufacture;

	•		assumptions related to pension and postretirement costs, and share-based compensation;

	•		assumptions related to accounting for impaired assets;

	•		the collectibility of loans and accounts receivable and related provision for losses;

	•		competitive actions by other companies;

	•		changes in laws or regulations and actions or restrictions of regulatory agencies;

	•		the accuracy of certain judgments and estimates concerning our integration of acquired operations;

	•		our ability to execute certain strategic and business improvement initiatives; and

	•		other factors, many of which are beyond our control.

Our actual results, performance, or achievement probably will differ from those expressed in, or implied by, these forward-looking statements, and accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on our results of operations or financial condition. In view of these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We expressly disclaim any obligation to publicly revise any forward-looking statements contained in this report to reflect the occurrence of events after the date of this report.

Non-GAAP Financial Measure

Return on investment (ROI) is an important internal measure for us because it is a key component of our evaluation of overall performance and the performance of our business segments. Studies have shown that there is a direct correlation between shareholder value and ROI and that shareholder value is created when ROI exceeds the cost of capital. ROI allows us to evaluate our performance on a consistent basis as the amount we earn relative to the amount invested in our business segments. A significant portion of senior management’s compensation is based on achieving ROI targets.

In evaluating overall performance, we define ROI as operating income, adjusted for significant unusual items, divided by parent company total assets, less certain assets and certain current liabilities. In evaluating segment performance, we define ROI as segment operating income divided by segment assets less segment current liabilities for our manufacturing and real estate segments, and divided by segment investment for our financial services segment. We do not believe there is a comparable GAAP financial measure to our definition of ROI. The reconciliation of our ROI calculation to amounts reported under GAAP is included in a later section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Despite its importance to us, ROI is a non-GAAP financial measure that has no standardized definition and as a result may not be comparable with other companies’ measures using the same or similar terms. Also there may be limits in the usefulness of ROI to investors. As a result, we encourage you to read our consolidated financial statements in their entirety and not to rely on any single financial measure.

Accounting Policies

Critical Accounting Estimates

In first six months 2006, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for the year 2005 except that as a result of the classification of our fourth business segment, real estate, we have added the following:

The amount of profit we recognize on the sale of real estate is significantly affected by estimates we make regarding future revenues and development costs. Changes in these estimates will affect profits recognized on future sales of real estate.

New and Pending Accounting Pronouncements

Beginning January 2006, we adopted the modified prospective application method of accounting for share-based payments contained in SFAS No. 123 (revised December 2004), Share-Based Payment. Beginning second quarter 2006, we began applying the guidance in EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. Please read Note 2 to the Consolidated Financial Statements for further information about these new pronouncements and other pending accounting pronouncements.

Results of Operations for Second Quarter 2006 and 2005

Summary

We manage our operations through four business segments: corrugated packaging, forest products, real estate and financial services. As previously announced, beginning January 2006, we classified into a real estate business segment our real estate operations that were previously included within our forest products and financial services segments. As a result, we have recast 2005 segment information to reflect four business segments. A summary of the results of operations by business segment follows:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions, except per share)
Revenues
Corrugated packaging	$	758		$	740		$	1,479		$	1,459
Forest products		341			270			674			521
Real estate		35			25			82			54
Financial services		299			239			582			461

Total revenues	$	1,433		$	1,274		$	2,817		$	2,495

Segment Operating Income
Corrugated packaging	$	67		$	58		$	107		$	108
Forest products		101			55			183			106
Real estate		9			9			35			18
Financial services		62			47			111			89

Total segment operating income		239			169			436			321
Expenses not allocated to segments
General and administrative		(26	)		(22	)		(49	)		(42	)
Share-based compensation		(8	)		(6	)		(24	)		(12	)
Other operating income (expense)		(8	)		(29	)		(11	)		(53	)
Other non-operating income (expense)		91			1			91			2
Parent company interest		(34	)		(29	)		(67	)		(58	)

Income before income taxes		254			84			376			158
Income taxes		(62	)		(16	)		(108	)		(45	)

Income from continuing operations		192			68			268			113
Discontinued operations		—			1			—			1

Net income	$	192		$	69		$	268		$	114

Average diluted shares outstanding		111.8			115.0			112.6			115.4

Income from continuing operations, per diluted share	$	1.71		$	0.59		$	2.38		$	0.98

ROI, annualized								15.7	%		10.0	%

Significant items affecting income from continuing operations included:

	•		In 2006, we experienced improved markets for our corrugated packaging and forest products, principally gypsum and particleboard, and we benefited from the acquisition of our partner’s 50 percent interest in Standard Gypsum LP. While we continued to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization and increase operating efficiencies, costs, principally energy and freight, offset much of the benefit. In addition, we began classifying real estate as our fourth business segment. Real estate operations benefited from an $8 million gain on sale of land held for commercial use. Financial services operations benefited from improved net interest income attributable to an increase in earning assets, principally mortgage-backed securities, and improved credit conditions. Actions taken to lower costs in our financial services operation associated with the elimination of the wholesale mortgage and the majority of our asset-based lending operations resulted in charges of $10 million. As a result of the adoption of the new share-based compensation accounting pronouncement related to awards granted to retirement eligible employees, we accelerated the expensing of $7 million of share-based compensation. In addition, we recognized an $89 million net pre-tax gain resulting from the tax litigation settlement, most of which was non-taxable.

	•		In 2005, we continued to see the benefits in our manufacturing operations of our initiatives to lower costs, improve asset utilization and increase operating efficiencies despite higher raw material costs. In addition, we experienced higher prices and shipments for most of our product offerings. Our financial services operations were negatively impacted by lower net interest income resulting from a decrease in average earning assets and more normalized credit loss provisions. Actions taken to lower costs and improve asset utilization and operating efficiencies resulted in charges and expenses of $53 million, principally related to the closure of our Antioch, California converting facility and the sale of

our Pembroke, Canada MDF facility and charges associated with antitrust litigation and the 2005 proxy contest. As a result of the sale of our Pembroke, Canada MDF facility, we recognized a one-time tax benefit of $16 million.

Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in energy costs, interest rates, new housing starts, home repair and remodeling activities, loan collateral values (particularly real estate) and the strength of the U.S. dollar. Given the commodity nature of our manufactured products, we have little control over market pricing or market demand.

Corrugated Packaging

We manufacture linerboard and corrugating medium that we convert into corrugated packaging and sell in the open market. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging products and, to a lesser degree, from the sale of linerboard in the domestic and export markets.

A summary of our corrugated packaging results follows:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(Dollars in millions)
Revenues	$	758		$	740		$	1,479		$	1,459
Costs and expenses		(691	)		(682	)		(1,372	)		(1,351	)

Segment operating income	$	67		$	58		$	107		$	108

Segment ROI								10.4	%		10.1	%

Corrugated packaging pricing, which includes freight and is net of discounts, and shipments improved due to market demand.


	Second Quarter			First Six Months
	2006 versus Second			2006 versus First Six
	Quarter 2005			Months 2005
	Increase (Decrease)
Corrugated packaging
Average prices		4	%		1	%
Shipments, average week		2	%		1	%
Industry shipments, average week ^(a)		5	%		2	%

Linerboard
Average prices		17	%		2	%
Shipments, tons		(25	)%		(19	)%


		^(a) Source: Fibre Box Association

Corrugated packaging shipments were generated with three fewer converting facilities at second quarter-end 2006 compared with second quarter-end 2005 and four fewer converting facilities compared with the beginning of second quarter 2005.

Linerboard shipments to third parties were down because more of our production was used in our converting facilities, which is consistent with our strategy to convert more of the linerboard we produce in our own converting facilities.

Compared with first quarter 2006, average corrugated packaging prices were up four percent and shipments were up two percent, while average linerboard prices were up 20 percent and shipments were down 22 percent. We announced a $50 per ton increase in the price of linerboard effective March 15, 2006.

Costs and expenses were up one percent in second quarter 2006 compared with second quarter 2005 and up two percent in first six months 2006 compared with first six months 2005. Higher volumes and prices for most raw materials were partially offset by lower costs attributable to the closure of three converting facilities, workforce reductions and increased mill reliability and efficiency, which resulted in lower maintenance costs and improved raw material yield and energy usage. In second quarter 2006, major flooding along the Susquehanna River resulted in temporary closure of our Binghamton, NY box plant and adversely affected segment operating results by $2 million, principally related to property damage. The plant is expected to be back in production in August 2006.

Fluctuations in our significant cost and expense components included:


	Second Quarter			First Six Months
	2006 versus Second			2006 versus First
	Quarter 2005			Six Months 2005
	Increase (Decrease)
	(In millions)
Wood fiber	$	2		$	2
Recycled fiber		(5	)		(16	)
Freight		11			22
Energy		4			13
Depreciation		—			(2	)
Pension and postretirement		(1	)		(2	)

The costs of our outside purchases of wood and recycled fiber, energy and freight fluctuate based on the market prices we pay for these commodities. As we continue to reduce our dependency on natural gas, the increase in our energy costs is principally related to electricity and fuel oils. It is likely that these costs will continue to fluctuate in 2006.

Information about our converting facilities and mills follows:


	Second Quarter						First Six Months
	2006			2005			2006			2005
Number of converting facilities (at quarter-end)		65			68			65			68
Mill capacity, in thousand tons		892			859			1,784			1,718
Mill production, in thousand tons		883			863			1,773			1,738
Percent mill production used internally		95	%		93	%		94	%		92	%
Percent of total fiber requirements sourced from recycled fiber		34	%		36	%		34	%		36	%
Corrugating medium purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		23			22			37			37

Forest Products

We own or lease 1.8 million acres of strategic timberland in Texas, Louisiana, Georgia, and Alabama. We grow timber, cut the timber and convert it into products or sell it in the open market. We manufacture lumber, gypsum wallboard, particleboard, fiberboard and medium density fiberboard (MDF). Our forest products segment revenues are principally derived from the sales of these products and, to a lesser degree, from sales of fiber and hunting, mineral and recreational leases of our timberland. We also own a 50 percent interest in an MDF joint venture. In January 2006, we acquired the remaining 50 percent interest in Standard Gypsum LP. As a result, we are now consolidating its operating results. Previously we had included only our 50 percent interest in its operating results in our segment results.

A summary of our forest products results follows:


	Second Quarter									First Six Months
	2006			2005						2006			2005
							Pro									Pro
	Actual			Actual			forma^(a)			Actual			Actual			forma^(a)
	(Dollars in millions)
Revenues	$	341		$	270		$	320		$	674		$	521		$	617
Costs and expenses		(240	)		(215	)		(256	)		(491	)		(415	)		(495	)

Segment operating income	$	101		$	55		$	64		$	183		$	106		$	122


Segment ROI											37.1	%		25.0	%		23.4	%


		^(a) Pro forma to reflect the consolidation of Standard Gypsum LP.

Pricing, which includes freight and is net of discounts, improved for gypsum, particleboard, and MDF. Shipments improved for particleboard, gypsum, and lumber.


	Second Quarter			First Six Months
	2006 versus Second			2006 versus First
	Quarter 2005			Six Months 2005
	Increase (Decrease)
Lumber:
Average prices		(15	)%		(9	)%
Shipments		8	%		10	%
Gypsum:
Average prices		37	%		34	%
Shipments		155	%		163	%
Particleboard:
Average prices		13	%		5	%
Shipments		1	%		(2	)%
MDF:
Average prices		5	%		(1	)%
Shipments		(33	)%		(38	)%

Compared with first quarter 2006, average prices were down seven percent for lumber and up nine percent for gypsum, 16 percent for particleboard, and eight percent for MDF. Shipments were down one percent for lumber, five percent for gypsum, and one percent for particleboard while shipments were up five percent for MDF.

Gypsum shipments were positively impacted by the consolidation of Standard Gypsum LP beginning January 2006. MDF shipments were negatively impacted by the sale of our Pembroke MDF facility in second quarter 2005.

Segment operating results also include:


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(In millions)
Our share of joint venture operating income	$	1	$	8	$	1	$	14
Mineral and hunting lease		14		8		28		14

	$	15	$	16	$	29	$	28

The decrease in joint venture operating income is due to the consolidation of Standard Gypsum LP. Mineral lease revenue is generally derived from lease and royalty interest and fluctuates based on changes in the market price for energy. It is likely prices will continue to fluctuate in 2006.

Costs and expenses were up 12 percent in second quarter 2006 compared with second quarter 2005 and up 18 percent in first six months 2006 compared with first six months 2005. Higher volumes and prices for most raw

materials and the increase in reported cost attributable to the consolidation of Standard Gypsum LP beginning January 2006 offset cost reductions attributable to the sale of our Pembroke MDF facility in June 2005.

Fluctuations in our significant cost and expense components included:


	Second Quarter			First Six Months
	2006 versus Second			2006 versus First
	Quarter 2005			Six Months 2005
	Increase (Decrease)
	(In millions)
Wood fiber	$	(2	)	$	(3	)
Energy, principally natural gas		4			15
Freight		9			17
Chemical		(1	)		(3	)
Depreciation		1			2
Pension and postretirement		(1	)		(2	)

Our goal is to increase use of wood fiber from our timberland and reduce our reliance on outside purchases. The costs of our outside purchases of fiber, energy, freight and chemicals fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate in 2006.

Information about our timber harvest and converting and manufacturing facilities follows:


	Second Quarter						First Six Months
	2006			2005			2006			2005
Timber harvest, in million tons:
Sawtimber		0.6			0.6			1.2			1.2
Pulpwood		0.7			0.9			1.5			1.7

Total		1.3			1.5			2.7			2.9
Number of converting and manufacturing facilities (at quarter-end)		17			17			17			17
Average operating rates for all product lines excluding sold or closed facilities:
High		116	%		106	%		113	%		102	%
Low		88	%		91	%		93	%		91	%
Average		100	%		96	%		100	%		96	%
Gypsum facing paper purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		21			30			37			38
Percent of gypsum facing paper supplied by our Premier Boxboard Limited LLC joint venture								76	%		85	%

Real Estate

We entitle and develop real estate that we own directly or participate in through ventures. Currently, we have projects in eight states and eleven markets encompassing about 238,000 acres, including 203,000 acres of high-value lands located in Georgia, principally near Atlanta, and in Texas. We are creating the infrastructure and securing entitlements on these lands for single-family residential, commercial, mixed-use and multi-family housing site development. Our real estate segment revenues are principally derived from the sale of developed and undeveloped real estate and to a lesser degree, from the sale of timber and operations of commercial income producing properties.

A summary of our real estate results follows:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(Dollars in millions)
Revenues	$	35		$	25		$	82		$	54
Costs and expenses		(29	)		(20	)		(60	)		(44	)
Our share of real estate ventures’ income		3			4			13			8

Segment operating income	$	9		$	9		$	35		$	18


Segment ROI								17.0	%		9.7	%

Beginning first quarter 2006, we eliminated our historic one-month lag in accounting for our investment in our two largest real estate ventures as financial information became more readily available. The one-time effect of eliminating this one-month lag was to increase our equity in their earnings in first quarter and first six months 2006 by about $1 million.

Revenue consists of:


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(Dollars in millions)
Residential real estate revenue	$	19	$	14	$	36	$	23
Lots sold		463		354		805		548

Commercial real estate revenue	$	2	$	—	$	18	$	10
Acres sold		36		4		43		130

Land held for investment or future development revenue	$	6	$	4	$	13	$	8
Acres sold		845		514		1,768		962

Income producing properties, timber and other revenues	$	8	$	7	$	15	$	13

Total revenues	$	35	$	25	$	82	$	54

Commercial real estate revenue for first six months 2006 includes $14 million related to the sale of five acres of undeveloped commercial real estate for which we recognized a gain of $8 million.

Information about our real estate projects and our real estate ventures follows:


	Second
	Quarter-End
	2006
Owned and consolidated ventures:
Developed land and land under development
Number of projects		31
Residential lots remaining		11,951
Commercial acres remaining		722

Land held for investment or future development
Number of projects		20
Acres in entitlement process		21,950
Acres undeveloped		196,379

Ventures accounted for using the equity method:
Ventures’ lot sales, (for first six months 2006)
Lots sold		1,122^(a)
Revenue per lot sold	$	52,098

Ventures’ developed land and land under development
Number of projects		23
Residential lots remaining		11,789
Commercial acres remaining		669

Land held for investment or future development, in acres		6,519^(b)


		^(a) The previously discussed elimination of the one month reporting lag resulted in a one-time increase in the number of lots sold of 122 lots.

		^(b) Sales in second quarter 2006 totaled 75 acres.

Financial Services

We own a savings bank, Guaranty Bank, which includes an insurance agency subsidiary. Guaranty makes up the predominant amount of our financial services segment operating income, revenues, assets and liabilities. In general, we gather funds from depositors, borrow money, and invest the resulting cash in loans and securities.

A summary of our financial services results follows:


	Second Quarter				First Six Months
	2006		2005		2006			2005
	(Dollars in millions)
Net interest income	$	107	$	97	$	211		$	192
Segment operating income		62		47		111			89
Segment ROI						21.8	%		19.2	%

Net Interest Income and Earning Assets and Deposits

Net interest income increased in 2006 as a result of our purchases of mortgage-backed securities in late 2005 and early 2006, as well as the impact of our noninterest bearing funds in the rising interest rate environment.

Information concerning our net interest margin follows:


	Second Quarter										First Six Months
	2006					2005					2006					2005
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
	(Dollars in millions)
Earning assets	$	16,363		6.19	%	$	14,912		5.05	%	$	16,474		6.00	%	$	14,937		4.91	%
Interest-bearing liabilities		15,147		(3.84	)%		13,871		(2.64	)%		15,278		(3.70	)%		13,918		(2.52	)%
Impact of noninterest bearing funds				0.29	%				0.18	%				0.27	%				0.18	%

Net interest margin				2.64	%				2.59	%				2.57	%				2.57	%

As we are currently positioned, if interest rates remain relatively stable, it is likely that our net interest margin will remain near its current level. However, if interest rates change significantly, it is likely that our net interest margin will decline. Please read Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, for further information.

The following tables summarize the composition of earning assets and deposits:


	Second Quarter-End
	2006			2005
	(Dollars in millions)
Residential housing assets:
Loans held for sale	$	37		$	315
Loans		6,853			7,189
Securities		6,145			4,531

Total residential housing assets		13,035			12,035
Other earning assets		3,198	^(a)		3,114

Total earning assets	$	16,233		$	15,149

Residential housing assets as a percentage of total earning assets		80	%		79	%

Noninterest bearing deposit accounts	$	777		$	716
Interest bearing deposit accounts		3,500			3,840
Certificates of deposit		5,000			4,471

Total deposits	$	9,277		$	9,027


		^(a) Includes $295 million of commercial loans held for sale.

Earning assets were higher at second quarter-end 2006 compared with second quarter-end 2005, because purchases of mortgage-backed securities more than offset declines in loans held for sale and single-family mortgage loans. Loans held for sale and single-family mortgage loans declined due to the repositioning of our mortgage origination activities. In second quarter 2006, we settled the purchase of $0.4 billion in single-family mortgage-backed securities.

Earning assets have declined over the past two quarters, and we expect this trend to continue through year-end 2006. This trend is primarily due to payments on single-family mortgage loans and securities exceeding new single-family mortgage loan production and securities purchases. We anticipate our single-family mortgage loans will continue to decline for the balance of the year due to the elimination of our wholesale mortgage production network in first quarter 2006. We are developing the capability to begin acquiring mortgage loans from some of our correspondent mortgage warehouse borrowers, but do not expect significant loan volume increases until 2007. Other than our planned sale of approximately $0.3 billion of asset-based loans, we anticipate our commercial loans will remain relatively consistent with second quarter-end 2006 levels throughout 2006.

A portion of our loans consists of adjustable-rate mortgages that have various monthly payment amount options (Option ARMs). These payment options generally include the ability to select from fully amortizing payments, interest-only payments and payments less than the interest accrual rate, which can result in negative amortization increasing the principal amount of the loan. At second quarter-end 2006, loans included $0.9 billion of Option

ARMs and securities included $3.5 billion that had Option ARMs as the underlying assets. Of these securities, $0.6 billion are U.S. Government Sponsored Enterprise issued and $2.9 billion are senior tranches of private-label offerings. All of these securities bear AAA ratings from nationally recognized securities rating organizations. Interest income recognized and added to the principal balance of the Option ARM loans was $3 million in second quarter 2006 and $6 million in first six months 2006.

Asset Quality and Allowance for Credit Losses

Various asset quality measures we monitor are:


	Second Quarter-End						Year-End
	2006			2005			2005
	(Dollars in millions)
Non-performing loans	$	35		$	52		$	35
Foreclosed real estate		2			3			2

Non-performing assets	$	37		$	55		$	37


Non-performing loans as a percentage of total loans		0.37	%		0.52	%		0.35	%
Non-performing assets ratio		0.39	%		0.55	%		0.37	%
Allowance for loan losses as a percentage of non-performing loans		199	%		150	%		213	%
Allowance for loan losses as a percentage of total loans		0.73	%		0.78	%		0.75	%

The following table summarizes changes in the allowances for credit losses:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(Dollars in millions)
Loans:
Balance at beginning of period	$	69		$	82		$	74		$	85
Provision (credit) for loan losses		(2	)		6			—			8
Net charge-offs		4			(10	)		(3	)		(15	)

Balance at end of period		71			78			71			78


Unfunded credit commitments:
Balance at beginning of period		7			6			7			7
Provision for commitment-related credit losses		—			2			—			2
Net charge-offs		—			(2	)		—			(3	)

Balance at end of period		7			6			7			6


Combined allowances for credit losses at period end	$	78		$	84		$	78		$	84


Provision (credit) for:
Loan losses	$	(2	)	$	6		$	—		$	8
Commitment-related credit losses		—			2			—			2

Combined provision (credit) for credit losses	$	(2	)	$	8		$	—		$	10


Net charge-offs as a percentage of average loans outstanding		(0.12	)%		0.47	%		0.08	%		0.37	%

In second quarter 2006, we completed the sale for $2 million of our proof-of-claim related to a lease to an automobile parts manufacturer, which we had charged off in 2005. Although changes in credit quality are difficult to predict, it is likely that we will recognize provisions for credit losses in future periods.

Noninterest Income and Noninterest Expense

Loan origination and sale of loans decreased $8 million for the second quarter and $12 million for first six months 2006 compared with 2005 primarily due to repositioning our mortgage origination activities. As a result of the repositioning, we do not anticipate significant single-family loan originations or sales through the rest of 2006.

Expenses Not Allocated to Segments

Unallocated expense represents expenses managed on a company-wide basis and includes corporate general and administrative expense, share-based compensation, other operating and non-operating income (expense), and parent company interest expense.

The change in share-based compensation was principally due to the adoption of the new accounting pronouncement and the immediate expensing of awards granted to retirement eligible employees because many of our awards provide for accelerated or continued vesting upon retirement. Please read Notes 2 and 4 to the Consolidated Financial Statements for further information. Based on our current expectations, it is likely that share-based compensation expense for the year 2006 will be in the range of $40 to $45 million.

Other operating income (expense) not allocated to business segments consists of:


	Second Quarter						First Six Months
	2006			2005			2006			2005
	(In millions)
Closure of converting and production facilities and sale of non-strategic assets	$	—		$	(28	)	$	—		$	(39	)
Elimination of wholesale mortgage origination network		—			—			(3	)		—
Goodwill impairment		(7	)		—			(7	)		—
Antitrust litigation		—			(1	)		—			(8	)
Proxy contest		—			—			—			(4	)
Other		(1	)		—			(1	)		(2	)

Total	$	(8	)	$	(29	)	$	(11	)	$	(53	)

As a result of our decision to eliminate the asset-based lending operation of our financial services segment, we recognized a goodwill impairment of $7 million in second quarter 2006.

We are continuing our efforts to enhance return on investment by lowering costs, improving operating efficiencies and increasing asset utilization. As a result, we will continue to review operations that are unable to meet return objectives and determine appropriate courses of action, including consolidating and closing converting facilities and selling under-performing assets.

Other non-operating income (expense) includes interest income and other costs associated with debt tender offers, call premiums and write-offs of unamortized financing fees related to refinancing or borrowings and in second quarter 2006 a one-time gain, after legal fees, of $89 million related to the settlement of tax litigation. Please read Note 13 to the Consolidated Financial Statements for further information.

The change in parent company interest expense in second quarter and first six months 2006 was due to an increase in long-term debt, principally due to the acquisition of our partner’s 50 percent interest in Standard Gypsum LP, and to higher interest rates on our variable-rate debt.

Income Taxes

Our effective tax rate was 24 percent in second quarter 2006 and 29 percent in first six months 2006. The rate reflects one-time tax benefits of 11 percent in second quarter 2006 and seven percent in first six months 2006 resulting from the settlement of tax litigation with the U.S. Government and of one percent in second quarter 2006 and one percent in first six months 2006 resulting from new State of Texas tax legislation. Our effective tax rate was 20 percent in second quarter 2005 and 29 percent in first six months 2005. These 2005 rates reflect a one-time tax benefit of 19 percent in second quarter 2005 and ten percent in first six months 2005 resulting from the sale of our Pembroke, Canada MDF facility. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, foreign operating losses, and other items for which no financial benefit is recognized until realized.

For the full year 2006, we anticipate our annual effective income tax rate to be about 33 percent including the effect of the one-time benefits and about 38 percent excluding the effect of the one-time benefits.

Average Shares Outstanding

The change in average shares outstanding was principally due to the net effect and timing of the repurchases of common stock. The change in average diluted shares outstanding was principally due to the above factor and the dilutive effect of employee stock options resulting from the increase in the market price of our common stock.

Capital Resources and Liquidity for First Six Months 2006

We separately discuss our capital resources and liquidity for Temple-Inland and our manufacturing and real estate subsidiaries, which we refer to as the parent company, and our financial services subsidiaries in order for the reader to better understand our different businesses and because almost all of the net assets invested in financial services are subject to regulatory rules and regulations including restrictions on the payment of dividends to the parent company.

Sources and Uses of Cash

Consolidated cash from operations was $571 million in first six months 2006 and $296 million in first six months 2005. Consolidated cash from operations represents the sum of parent company and financial services cash from operations, less the dividends from financial services, which are eliminated upon consolidation. In first six months 2006 we received $60 million in dividends from financial services and in first six months 2005 we received $25 million in dividends from financial services.

Parent Company Sources and Uses of Cash


	First Six Months
	2006			2005
	(In millions)

We received cash from:
Operations	$	230		$	213
Dividends from financial services^(a)		60			25
Proceeds from tax litigation settlement, net		89			—
Real estate development expenditures net of non-cash cost of sales		(33	)		(10	)
Working capital changes		(57	)		(55	)

From operations		289			173
Sale of non-strategic and other assets		13			36
Exercise of options and related tax benefits, and in 2005 the settlement of equity purchase contracts		41			380
Borrowing, net		85			14

Total sources		428			603


We used cash to:
Return to shareholders through:
Dividends		(55	)		(52	)
Repurchase of common stock		(153	)		(435	)
Reinvest in the business through:
Capital expenditures		(79	)		(113	)
Acquisition, joint ventures, and other		(129	)		(9	)

Total uses		(416	)		(609	)

Change in cash and cash equivalents	$	12		$	(6	)


^(a)		Dividends we receive from financial services are eliminated in the consolidated statements of cash flows.

We operate in cyclical industries, and our operating cash flows vary accordingly. Our principal operating cash requirements are for compensation, wood and recycled fiber, energy, interest, and taxes. The dividends we receive from financial services are dependent on its level of earnings and capital needs and are subject to regulatory approval and restrictions. As previously disclosed, dividends from financial services are expected to be substantially more in 2006 than in 2005.

Working capital is subject to cyclical operating needs, the timing of collection of receivables and the payment of payables and expenses and to a lesser extent to seasonal fluctuations in our operations. In addition operating cash flows are affected by the timing of the payment of real estate development expenditures and the collection of proceeds from the eventual sale of the real estate.

In 2006 and 2005, many of our employees took advantage of the increasing spread between the market price of our common stock and the exercise price of employee stock options and exercised their stock options. As a result, we issued 1,282,291 shares of common stock in first six months 2006 and 1,341,159 shares in first six months 2005 to employees exercising options. In addition, in first six months 2005, we issued 10,875,739 shares of our common stock and received $345 million in cash in conjunction with the settlement of our equity purchase contracts. This completed our obligations under the equity purchase contracts issued in May 2002.

We paid cash dividends to shareholders of $0.50 per share in first six months 2006 and $0.45 per share in first six months 2005.

In August 2005, we announced that our Board of Directors approved a repurchase program of up to six million shares. In first six months 2006, we repurchased 3.5 million shares for $151 million, at an average price of $43.22 per share including $7 million that was settled after second quarter-end 2006. Through second quarter-end 2006, under this authorization, we have repurchased six million shares for $251 million, at an average price of $41.87 per share.

In January 2006, we purchased the remaining 50 percent interest in Standard Gypsum LP for $150 million. In addition, we paid off its $56 million credit agreement.

Capital expenditures and timberland reforestation and acquisition are expected to approximate $190 million in 2006 or about 84 percent of expected 2006 depreciation and amortization. Most of the expected 2006 expenditures relate to initiatives to increase reliability and efficiency at our linerboard mills.

Financial Services Sources and Uses of Cash


	First Six Months
	2006			2005
	(In millions)
We received cash from:
Operations	$	94		$	93
Changes in loans held for sale, and other		239			55
Net repayments on loans and securities		342			320

From operations		675			468
Collection of mortgage servicing rights sale receivables		—			46

Total sources		675			514


We used cash to:
Pay dividends to the parent company		(60	)		(25	)
Change in deposits and borrowings		(767	)		(382	)
Reinvest in the business through capital expenditures, acquisitions and other uses		(18	)		(50	)

Total uses		(845	)		(457	)

Change in cash and cash equivalents	$	(170	)	$	57

Our principal operating cash requirements are for compensation, interest, and taxes. Changes in loans held for sale are subject to the timing of the origination and subsequent sale of the loans and the level of refinancing activity. As a result of the repositioning of our mortgage origination activities, it is likely that the cash flow related to these activities will be substantially lower in future periods.

The changes in deposits and borrowings and the amounts invested in loans and securities generally move in tandem because we use deposits and borrowings to finance these investments. In first six months 2006, we used cash flow from the sale of loans held for sale and from principal payments on mortgage-backed securities to repay

some of our borrowings. In first quarter 2005, we completed the acquisition of an insurance agency for $18 million cash.

We anticipate continued commercial loan commitment growth throughout 2006, however we expect this growth will be more than offset by repayments of single-family mortgage loans.

We expect dividends we pay to the parent company to be substantially more in 2006 than in 2005.

Liquidity

Almost all of the net assets invested in financial services are subject to regulatory rules and restrictions including restrictions on the payment of dividends to the parent company. As a result, all consolidated assets are not available to satisfy all consolidated liabilities. To provide a clearer understanding of our different businesses, we discuss our contractual obligations for the parent company and financial services separately.

Parent Company Liquidity

Our sources of short-term funding are our operating cash flows, dividends received from financial services, and borrowings under our existing accounts receivable securitization facility and committed credit agreements.

At second quarter-end 2006, we had $845 million in unused borrowing capacity under our credit agreements and accounts receivable securitization facility.


				Accounts
				Receivable
	Credit			Securitization
	Agreements			Facility			Total
	(In millions)
Committed	$	850		$	250		$	1,100
Less: borrowings		(185	)		(70	)		(255	)

Unused borrowing capacity at second quarter-end 2006	$	665		$	180		$	845

Our committed credit agreements include a $750 million revolving credit facility that expires in 2010. The remainder of our credit agreements expire in 2006 ($10 million) through 2010. Our accounts receivable securitization facility expires in 2008. As a result of the current discussions related to settling the audit of certain tax exempt bonds, it is likely that in third quarter 2006, we will refinance $30 million of currently outstanding tax exempt bonds. Please read Part II. Item 1. Legal Proceedings for further information.

At second quarter-end 2006, the fair value of our interest rate derivative instruments was a $1 million liability. The interest rate instruments expire in 2008. These instruments are non-exchange traded and are valued using either third-party resources or models.

Financial Services Liquidity

Our sources of short-term funding are our operating cash flows, new deposits, borrowings and, if necessary, sales of assets. Assets that can be readily converted to cash, or against which we can readily borrow, include short-term investments, loans, mortgage loans held for sale, and securities. At second quarter-end 2006, we had available liquidity of $3.5 billion. As previously disclosed, it is likely we will redeem, within the next 12 months, the $305 million of preferred stock issued by subsidiaries. Proceeds for the redemption will likely be raised by a financial services subsidiary issuing $305 million of trust preferred securities.

Off-Balance Sheet Arrangements

Parent Company

At second quarter-end 2006, there were no significant changes in parent company off-balance sheet arrangements from that disclosed in our Annual Report on Form 10-K for the year 2005 except for the elimination of the following guarantees:

•

$28 million as a result of the Standard Gypsum LP acquisition and

•

$20 million as a result of the refinancing by the parent company of borrowings by a financial services subsidiary related to real estate.

Financial Services

A comparison of our second quarter-end 2006 unfunded commitments with those disclosed in our Annual Report on Form 10-K for the year 2005 follows:


	Second
	Quarter-End		Year-End
	2006		2005
	(In millions)

Single-family mortgage loans	$	87	$	204
Unused lines of credit		1,839		2,209
Unfunded portion of loan commitments		4,261		4,141
Unfunded portion of commercial loans held for sale		142		—
Commitments to originate commercial loans		911		571
Letters of credit		430		373

Total	$	7,670	$	7,498

Capital Adequacy and Other Regulatory Matters

At second quarter-end 2006, Guaranty Bank met or exceeded all applicable regulatory capital requirements. We expect to maintain Guaranty’s capital at a level that exceeds the minimum required for designation as “well capitalized” under the capital adequacy regulations of the Office of Thrift Supervision (OTS). From time to time, the parent company may make capital contributions to or receive dividends from Guaranty.

Selected financial and regulatory capital data for Guaranty and its consolidated subsidiaries follows:


	Second
	Quarter-End		Year-End
	2006		2005
	(In millions)

Balance sheet data:
Total assets	$	16,881	$	17,652
Total deposits		9,285		9,201
Shareholder’s equity		1,098		1,099


				Regulatory			For Categorization as
	Actual			Minimum			"Well Capitalized"
Regulatory capital ratios:
Tangible capital		7.29	%		2.00	%		N/A
Leverage capital		7.29	%		4.00	%		5.00	%
Risk-based capital		10.56	%		8.00	%		10.00	%

Pension and Postretirement Matters

We made voluntary, discretionary contributions of $30 million to the defined benefit pension plans in first six months 2006, and it is likely that we will make additional voluntary, discretionary contributions to the defined benefit plans in the remainder of 2006 of $30 million, $15 million per quarter.

Energy

Energy costs were $172 million in first six months 2006 compared with $144 million in first six months 2005. Our energy costs fluctuate based on the market prices we pay for these commodities and on the amount and mix of the types of fuel we may use. We hedge very little of our energy needs. It is likely that these costs will continue to fluctuate during 2006.

Litigation and Related Matters

We are involved in various legal proceedings that arise from time to time in the ordinary course of doing business, and we believe that adequate reserves have been established for any probable losses. We do not believe that the outcome of any of these proceedings should have a material adverse effect on our financial position or long-term results of operations or cash flow. It is possible, however, that charges related to these matters could be significant to results of operations or cash flows in any single accounting period.

Since we filed our Annual Report on Form 10-K for the period ended December 31, 2005, there have been no material developments in pending legal proceedings other than as disclosed in Part II, Item 1 of this report.

Calculation of Non-GAAP Financial Measure


	Parent			Corrugated			Forest			Real			Financial
	Company			Packaging			Products			Estate			Services
	(Dollars in millions)

First Six Months 2006
Return
Operating income or segment operating income determined in accordance with GAAP	$	352	^(a)	$	107		$	183		$	35		$	111
Adjustments for significant unusual items		—			N/A			N/A			N/A			N/A

As defined	$	352		$	107		$	183		$	35		$	111


Investment
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,001		$	2,318		$	866		$	422		$	1,017
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(492	)		(269	)		(76	)		(11	)		—
Assets held for sale		(34	)		N/A			N/A			N/A			N/A
Municipal bonds related to capital leases included in other assets		(188	)		N/A			N/A			N/A			N/A
Acquisition of Standard Gypsum, LP in January 2006		196			N/A			196			N/A			N/A

As defined	$	4,483		$	2,049		$	986		$	411		$	1,017


ROI, annualized		15.7	%		10.4	%		37.1	%		17.0	%		21.8	%


First Six Months 2005
Return
Operating income or segment operating income determined in accordance with GAAP	$	214	^(a)	$	108		$	106		$	18		$	89
Adjustments for significant unusual items		—			N/A			N/A			N/A			N/A

As defined	$	214		$	108		$	106		$	18		$	89


Investment
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,006		$	2,459		$	919		$	381		$	927
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(519	)		(323	)		(71	)		(9	)		N/A
Assets held for sale		(34	)		N/A			N/A			N/A			N/A
Municipal bonds related to capital leases included in other assets		(188	)		N/A			N/A			N/A			N/A

As defined	$	4,265		$	2,136		$	848		$	372		$	927


ROI, annualized		10.0	%		10.1	%		25.0	%		9.7	%		19.2	%


^(a)		Net of expenses not allocated to segments of $84 million in 2006 and $107 million in 2005.

ROI, annualized is not necessarily indicative of the ROI that may be expected for the entire year.

STATISTICAL AND OTHER DATA

Parent Company

Manufacturing

Revenues and unit sales of our manufacturing activities, excluding joint venture operations follows:


	Second Quarter				First Six Months
	2006		2005		2006		2005
	(Dollars in millions)
*Revenues*
Corrugated Packaging
Corrugated packaging	$	737	$	715	$	1,435	$	1,406
Linerboard		21		25		44		53

Total	$	758	$	740	$	1,479	$	1,459


Forest Products
Pine lumber	$	76	$	84	$	160	$	159
Gypsum wallboard^(a)		116		34		228		65
Particleboard		58		50		107		104
Medium density fiberboard^(a)		19		26		35		57
Fiberboard		22		21		43		41
Mineral and hunting leases		14		8		28		14
Fiber and other		36		47		73		81

Total	$	341	$	270	$	674	$	521


*Unit sales* Corrugated Packaging
Corrugated packaging, thousands of tons		884		886		1,753		1,743
Linerboard, thousands of tons		47		63		107		132

Total, thousands of tons		931		949		1,860		1,875


Forest Products
Pine lumber, million board feet		216		200		434		393
Gypsum wallboard, million square feet^(a)		537		211		1,100		418
Particleboard, million square feet		164		162		329		335
Medium density fiberboard, million square feet^(a)		41		61		80		130
Fiberboard, million square feet		106		109		208		216


^(a)		Comparisons of revenue and unit sales of gypsum wallboard are affected by the January 2006 acquisition of Standard Gypsum LP and of MDF are affected by the June 2005 sale of the Pembroke facility.

Real Estate

Information about our real estate activities follows:

A summary of projects we own in the entitlement process ^(a) at second quarter-end 2006 follows:


Project	County	Project Acres^(b)

Projects we own
California
Hidden Creek Estates	Chatsworth		700
Terrace at Hidden Hills	Calabasas		30

Georgia
Bay Springs	Carroll		440
Dry Pond	Cherokee		950
Fox Hall	Coweta		350
Friendship Road	Cherokee		110
Garland Mountain	Cherokee		350
Gold Creek	Dawson		1,090
Grove Park	Coweta		160
Happy Valley Farm	Coweta		750
Jackson Park	Jackson		690
Legion Lake	Carroll		210
Lithia Springs	Haralson		260
Mill Creek	Coweta		770
Pickens School	Pickens		420
The Overlook at Waleska	Cherokee		510
Town West	Bartow		1,110
Triple C Road	Bartow		180
Wolf Creek	Carroll		11,810
Yellow Creek	Cherokee		1,060

Total			21,950


^(a)		A project is deemed to be in the entitlement process when customary steps necessary for the preparation and submittal of an application, like conducting pre-application meetings or similar discussions with governmental officials, have commenced, or an application has been filed. Projects listed may have significant steps remaining, and there is no assurance that entitlements ultimately will be received.

^(b)		Project acres are approximate. The actual number of acres entitled may vary.

A summary of activity within our entitled ^(a), developed and under development projects at second quarter-end 2006 follows:


					Residential Lots				Commercial Acres^(c)
					Lots Sold				Acres Sold
		Interest			Since		Lots		Since		Acres
Project	County	Owned^(b)			Inception		Remaining		Inception		Remaining

Projects we own
Colorado
Buffalo Highlands	Weld		100	%		—		645		—		—
Johnstown Farms	Weld		100	%		115		699		—		—
Stonebraker	Weld		100	%		—		600		—		—
Texas
Caruth Lakes	Rockwall		100	%		245		629		—		—
Cibolo Canyons	Bexar		100	%		226		1,523		32		113
Harbor Lakes	Hood		100	%		177		401		—		13
Hunter’s Crossing	Bastrop		100	%		192		385		19		95
Maxwell Creek	Collin		100	%		494		529		—		—
Oakcreek Estates	Comal		100	%		—		630		—		—
The Colony	Bastrop		100	%		332		1,093		22		50
The Gables at North Hill	Collin		100	%		156		126		—		—
The Preserve at Pecan Creek	Denton		100	%		—		819		—		9
The Ridge at Ribelin Ranch	Travis		100	%		—		—		—		189
Other Texas Projects (8)	Various		100	%		2,463		208		107		61
Missouri, Tennessee, and Utah
Other Projects (4)	Various		100	%		829		375		—		—

						5,229		8,662		180		530


Projects in entities we consolidate
Texas
City Park	Harris		75	%		513		788		36		129
Lantana	Denton		55	% ^(d)		75		2,260		—		—
Other Texas Projects (4)	Various		Various			213		241		2		63

						801		3,289		38		192

Total owned and consolidated						6,030		11,951		218		722


Projects in ventures that we account for using the equity method
Georgia
Seven Hills	Paulding		50	%		474		605		5		14
The Georgian	Paulding		38	%		274		1,112		—		—
Other Georgia Projects (6)	Various		Various			2,061		656		—
Texas
Bar C Ranch	Tarrant		50	%		94		1,087		—		—
Fannin Farms West	Tarrant		50	%		224		220		—		—
Lantana	Denton		Various	^(d)		1,569		296		1		79
Long Meadow Farms	Fort Bend		19	%		342		2,370		—		134
Southern Trails	Brazoria		40	%		162		897		—		—
Stonewall Estates	Bexar		25	%		—		386		—		—
Summer Creek	Fort Bend		50	%		—		525		—		37
Summer Creek Ranch	Tarrant		50	%		742		1,703		—		374
Summer Lakes	Fort Bend		50	%		294		850		42		9
Village Park	Collin		30	%		242		327		—		7
Other Texas Projects (5)	Various		Various			752		359		—		15
Florida
Other Projects (3)	Various		Various			449		396		—		—

Total in ventures						7,679		11,789		48		669


Combined Total						13,709		23,740		266		1,391


^(a)		A project is deemed entitled when all major discretionary land-use approvals have been received. Some projects may require additional permits for development.

^(b)		Interest owned reflects our net equity interest in the project, whether owned directly or indirectly. There are some projects that have multiple ownership structures within them. Accordingly, portions of these projects may appear as owned, consolidated, and/or accounted for on the equity method.

^(c)		Commercial acres are net developable acres, and may be fewer than the gross acres available in the project.

^(d)		The Lantana project consists of a series of 17 partnerships in which our interests range from 25% to 55%. We account for eight of these partnerships in which our interests range from 25% to 50% using the equity method and we consolidate the remaining partnerships.

Financial Services

Information about financial services loan portfolio follows:


	Second Quarter-End						Year-End
	2006			2005			2005
	(In millions)
Single-family mortgage	$	2,748		$	3,447		$	3,112
Single-family mortgage warehouse		699			770			757
Single-family construction		2,039			1,572			1,665
Multifamily and senior housing		1,367			1,400			1,469

Total residential housing		6,853			7,189			7,003
Commercial real estate		901			731			758
Commercial and business		881			817			843
Energy lending		758			683			756
Asset-based lending and leasing		93	^(a)		419			395
Consumer and other		155			193			164

Total loans		9,641			10,032			9,919
Less allowance for loan losses		(71	)		(78	)		(74	)

Loans receivable, net	$	9,570		$	9,954		$	9,845


^(a)		Excludes $295 million of commercial loans held for sale.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our current level of interest rate risk is primarily due to the lending and funding activities of our financial services segment and to a lesser degree to an increase in parent company variable-rate long-term debt. The following table illustrates the estimated effect on our pre-tax income of immediate, parallel and sustained shifts in interest rates for the next 12 months at second quarter-end 2006, with comparative year-end 2005 information. This estimate assumes that debt reductions from contractual payments will be replaced with short-term variable rate debt; however, that may not be the financing alternative we choose to follow. This estimate also considers the effect of changing prepayment speeds, repricing characteristics and average balances over the next 12 months.


	Increase (Decrease) in Income Before Income Taxes
	Second Quarter-End 2006						Year-End 2005
	Parent			Financial			Parent		Financial
	Company			Services			Company		Services
	(In millions)

Change in Interest Rates
+2%	$	(4	)	$	(33	)	$	—	$	(31	)
+1%		(2	)		(12	)		—		(12	)
-1%		2			(12	)		—		(20	)
-2%		4			(39	)		—		(49	)

Parent company interest rate risk is related to our variable-rate long-term debt and our interest rate swaps. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable rate long-term debt. The parent company interest rate sensitivity change from year-end 2005 is due to an increase in variable rate debt, primarily related to the acquisition of the remaining 50% of Standard Gypsum. Additionally, changes in interest rates will affect the value of the interest rate swap agreements (currently $50 million notional amount). We believe that any changes in the value of these agreements would not be significant.

Our financial services segment is subject to interest rate risk to the extent interest-earning assets and interest-bearing liabilities repay or reprice at different times or in differing amounts or both. The change in our interest rate

sensitivity from year-end 2005 is due to slower prepayment rate projections on our mortgage assets and shorter maturity certificates of deposit, which are more sensitive to changes in market rates.

Foreign Currency Risk

In second quarter 2006, there were no significant changes in foreign currency risk from that disclosed in our Annual Report on Form 10-K for the year 2005.

Commodity Price Risk

In second quarter 2006, there were no significant changes in commodity price risk from that disclosed in our Annual Report on Form 10-K for the year 2005.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our chief executive officer and chief financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures are adequate and effective to ensure that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Since we filed our Annual Report on Form 10-K for the year 2005, there have been no material developments in pending legal proceedings other than as discussed below.

Tax-Exempt Bonds

As previously disclosed the IRS is examining four of our solid waste disposal bond issues aggregating $120 million of which only the $30 million City of Maysville, Kentucky bonds issued in 1992 are currently outstanding. We are finalizing a settlement with the IRS of these audits that would require us to pay no more than $3 million and redeem the $30 million City of Maysville bonds. We expect these settlements and the redemption of the bonds to be completed during third quarter 2006. Other than the redemption, the final settlement will have no effect on holders of the bonds.

Bogalusa

We continue to work with environmental consultants and the Louisiana Department of Environmental Quality (DEQ) to investigate the source of contaminated water discovered in a manhole adjacent to our facility in Bogalusa, Louisiana. Phase II of the investigation process, which involved drilling more and deeper test wells in the affected area, is complete. Our investigation report, including remediation recommendations, is due to the Louisiana DEQ in September 2006. We currently estimate that we will incur remediation expenses of about $4 million, for which we have established a reserve, and about $6 million in capitalized costs in connection with this project.

Tax Litigation

In second quarter 2006, we entered into a settlement agreement with the U.S. Government to resolve pending tax litigation we filed to recover tax benefits promised to us in connection with our savings and loan acquisitions in 1988. Under the terms of the settlement agreement, we received a $99 million cash payment for past and future tax benefits that would have been available to us had legislation enacted in 1993 not eliminated those tax benefits. All but $4 million of the settlement payment is non-taxable. As part of the settlement, we paid a $10 million contingency fee to our outside law firm.

Other

We are defending a lawsuit in California Superior Court in which a former supplier has alleged claims for breach of contract, fraudulent misrepresentation, intentional interference with a business opportunity, misappropriation of trade secrets, and other matters. The plaintiff is suing to recover actual and punitive damages. The fraud and intentional interference claims have been dismissed in response to our motions for summary judgment. A trial date for this case is currently pending, and the parties have engaged in settlement discussions, although no agreement has been reached. We are also defending three class action claims in California state court alleging violations of that state’s on-duty meal break laws. One of these cases has been dismissed and is currently on appeal. The remaining cases are currently in the discovery and motion stage. While we continue to defend these lawsuits and have established reserves that we believe are adequate, we do not anticipate that the outcome in any or all of these cases should have a material adverse effect on our financial position or long-term results of operations or cash flows.

Item 1A. Risk Factors

There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities^(a)


							Maximum
					Total Number		Number of
					of Shares		Shares That
					Purchased as		May Yet be
			Average		Part of Publicly		Purchased
	Total Number		Price		Announced		Under the
	of Shares		Paid per		Plans or		Plans
Period	Purchased		Share		Programs		or Programs
Month 1 (4/1/2006 —4/30/2006)		—		—		—		2,000,000
Month 2 (5/1/2006 — 5/31/2006)		1,088,000	$	44.10		1,088,000		912,000
Month 3 (6/1/2006 — 6/30/2006)		912,000	$	41.44		912,000		-0-

Total		2,000,000	$	42.89		2,000,000


^(a)		On August 5, 2005, we announced that our Board of Directors authorized the repurchase of up to six million shares of our common stock. The plan had no expiration date. Through first six months 2006, we had repurchased six million shares at an average price per share of $42.87 under this authorization, which has now been completed. On August 4, 2006, we announced that our Board of Directors authorized another repurchase of up to six million shares of our common stock. This plan has no expiration date. Other than the August 2005 authorization, we have no plans or programs that expired during the period covered by the table above and no plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.

Item 3. Defaults Upon Senior Securities

None.

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

We held our annual meeting of stockholders on May 5, 2006, at which a quorum was present. The table below sets forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes for each matter voted upon at that meeting, as certified by the independent inspector of elections.


						Abstentions
				Against or		and Broker
Matter		For		Withheld		Non-votes

1.	Election of four directors
	(a) Cassandra C. Carr		101,134,440		834,813		—
	(b) James T. Hackett		101,083,467		885,786		—
	(c) Arthur Temple III		100,510,960		1,458,293		—
	(d) Larry Temple		100,548,979		1,420,274		—

2.	Ratification of appointment of Ernst & Young LLP		100,687,954		675,701		605,598

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits.

31.1 — Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 — Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 — Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 — Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.


	TEMPLE-INLAND INC. (Registrant)
Dated: August 7, 2006	By	/s/ Randall D. Levy
		Randall D. Levy
		Chief Financial Officer


	By	/s/ Troy L. Hester
		Troy L. Hester
		Corporate Controller and Principal Accounting Officer

INDEX TO EXHIBITS


Exhibit No.	Description	Page No.

31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		53

31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		55

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		57

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		58