Cautionary Statement Regarding Forward-Looking Information

This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements regarding future revenues, costs, manufacturing output, capital expenditures and timber supply issues. Words such as “anticipate,” “expect,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect management’s current views regarding future events based on estimates and assumptions, and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from those expressed or implied by forward-looking statements contained in this report. Important factors that could cause or contribute to such differences include, but are not limited to, changes in the United States and international economies; changes in exchange rates between the U.S. dollar and other currencies; changes in the level of construction activity; changes in worldwide demand for our products; changes in worldwide production and production capacity in the forest products industry; competitive pricing pressures for our products; unanticipated manufacturing disruptions; changes in general and industry-specific environmental laws and regulations; unforeseen environmental liabilities or expenditures; weather conditions; changes in raw material, energy, and other costs; and the factors discussed under the section titled “Factors influencing our results of operations” on pages 13-14 of this Form 10-Q. Forward-looking statements contained in this report present management’s views only as of the date

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of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.

Overview

We are a vertically integrated and diversified forest products company. We own approximately 1.5 million acres of timberland and operate 14 manufacturing facilities, located in Arkansas, Idaho, Illinois, Michigan, Minnesota and Nevada. Our business is organized into four segments:

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

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Factors influencing our results of operations

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

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

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

Tariffs, quotas or trade agreements can also affect the markets for our products, particularly our wood products. In 2002, the United States imposed duties on imported lumber from Canada in response to a dispute over the stumpage pricing policies of some provincial governments. Negotiations continue between the two countries to resolve the dispute, although both countries are pursuing their own independent litigation and administrative remedies. Any resulting agreement or other determination could have a significant effect on lumber markets in the United States.

Our industry is capital intensive, which leads to high fixed costs and generally results in continued production as long as prices are sufficient to cover variable costs. These conditions have contributed to substantial price competition, particularly during periods of reduced demand. Some of our competitors may currently be lower-cost producers in some of the businesses in which we operate, and accordingly these competitors may be less adversely affected than we are by price decreases. For the periods presented in this Form 10-Q, no downtime was taken at any of our facilities due to an inability to cover variable costs.

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

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

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

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

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Critical Accounting Policies

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

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

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

There are currently no authoritative accounting rules relating to costs to be capitalized for timber and timberlands. We have used relevant portions of current accounting rules, industry practices and our judgment in determining costs to be capitalized or expensed. Alternate interpretations and judgments could significantly affect the amounts capitalized. Additionally, models and observations used to estimate the current recoverable timber volume on our lands are subject to judgments that could significantly affect volume estimates. As examples: harvest cycles can vary by geographic region and by species of timber; weather patterns can affect harvest cycles; environmental regulations and restrictions may limit the company’s ability to harvest certain timberlands; changes in harvest plans may occur; and scientific advancement in seedlings and timber growing technology may affect future harvests. Different assumptions for either the cost or volume estimates, or both, could have a significant effect upon

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

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

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

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

Note 11 to our 2004 Form 10-K consolidated financial statements included information for the three years ended December 31, 2004, on the components of pension and OPEB expense and the underlying actuarial assumptions used to calculate periodic expense, as well as the funded status for our pension and OPEB plans as of December 31, 2004 and 2003. Note 10, “Pension and Other Postretirement Benefit Plans,” on pages 8-9 of this Form 10-Q, includes information on the components of pension and OPEB expense for the quarters and six months ended June 30, 2005 and 2004.

The discount rate used in the determination of pension benefit obligations and pension expense is based on high-quality fixed income investment interest rates. At December 31, 2004, we calculated obligations using a 5.90% discount rate. The discount rates used at December 31, 2003 and 2002 were 6.25% and 6.75%, respectively. To determine the expected

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long-term rate of return on pension assets, we employ a process that analyzes historical long-term returns for various investment categories, as measured by appropriate indices. These indices are weighted based upon the extent to which plan assets are invested in the particular categories in arriving at our determination of a composite expected return. The assumed long-term rate of return on pension plan assets used for the three-year period ended December 31, 2004, was 9.5%. Over the past 27 years, the period during which we have actively managed pension assets, our actual average annual return on pension plan assets has been approximately 12%.

Total periodic pension plan income in 2004 was $11.5 million. An increase in the discount rate or the expected return on plan assets, all other assumptions remaining the same, would reduce pension plan expense, and conversely, a decrease in either of these measures would increase plan expense. As an indication of the sensitivity that pension expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $1.3 million. A 25 basis point change in the assumption for expected return on plan assets would affect annual plan expense by approximately $1.6 million. The actual rates on plan assets may vary significantly from the assumption used because of unanticipated changes in financial markets.

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

For our OPEB plans, expense for 2004 was $25.2 million. The discount rate used to calculate OPEB obligations was 5.90% at December 31, 2004, and 6.25% and 6.75% at December 31, 2003 and 2002, respectively. The assumed health care cost trend rate used to calculate OPEB obligations and expense for 2004 was a 7% increase over the previous year, with the rate of increase adjusted to 12% in 2005 and declining 1 percent annually to a long-term ultimate rate increase assumption of 6% for 2011 and thereafter.

As an indication of the sensitivity that OPEB expense has to the discount rate assumption, a 25 basis point change in the discount rate would affect annual plan expense by approximately $0.8 million. A 1% change in the assumption for health care cost trend rates would have affected 2004 plan expense by approximately $2.2-$2.7 million and the total postretirement obligation by approximately $30.3-$35.6 million. The actual rates of health care cost increases may vary significantly from the assumption used because of unanticipated changes in health care costs.

Periodic pension and OPEB expense are included in “Materials, labor and other operating expenses” and “Selling, general and administrative expenses” in the Statements of Operations. The expense is allocated to all business segments. Depending upon the funded status of the different plans, either a long-term asset or long-term liability is recorded for plans with overfunding or underfunding, respectively. Any unfunded accumulated pension benefit obligation in excess of recorded liabilities is accounted for in stockholders’ equity as accumulated other comprehensive income. See Note 11 to our 2004 Form 10-K financial statements for related balance sheet effects at December 31, 2004 and 2003.

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Recent Accounting Pronouncements

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

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

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

Results of Operations

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

A summary of period-to-period changes in items included in the Statements of Operations is presented on page 26 of this Form 10-Q. In the period-to-period discussion of our results of operations below, when we discuss our consolidated net sales, contributions by each of the segments to our net

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sales are reported after elimination of intersegment sales. In the “Discussion of Business Segments” sections below, each segment’s net sales are set forth before elimination of intersegment sales.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

The agreement governing our credit facility contains certain covenants that, among other things, limit to a certain degree our ability and our subsidiaries’ ability to create liens, merge or consolidate, dispose of assets, incur indebtedness and guarantees, pay dividends, repurchase or redeem capital stock and indebtedness, make certain investments or acquisitions, enter into certain transactions with affiliates or change the nature of our business. The credit facility also contains financial maintenance covenants establishing a maximum funded indebtedness to capitalization ratio, a minimum consolidated net worth requirement, and a minimum interest coverage ratio. Events of default under the credit facility include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, material adverse judgments, actual or asserted invalidity of security interests or loan documentation, and certain change of control events involving our company. As of June 30, 2005, we were in compliance with the covenants of our credit facility.

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

As of June 30, 2005, Standard & Poor’s Ratings Services (S&P) rated our senior unsecured debt at BB+, with a stable outlook. The rating has remained unchanged since January 30, 2003. Since the first quarter of 2003, Fitch, Inc. has rated our senior unsecured debt at BB+. In October 2004, Moody’s Investors Service Inc. downgraded its rating of our senior unsecured debt from Baa3 with a negative outlook to Ba1 with a stable outlook. Moody’s also downgraded our senior secured subordinated rating from Ba1 to Ba2. The interest rate we pay on some of our debt is influenced by our credit ratings. See Item 3 – Quantitative and Qualitative Disclosures About Market Risk on pages 27-28 for additional information.

It is our practice to periodically review strategic and operational alternatives to improve our operating results and financial position. In this regard, we consider and plan to continue to consider, among other things, adjustments to our capital expenditures and overall spending, the expanding or restructuring of our operations to achieve greater efficiencies, the possibility of converting to a real estate investment trust, and the disposition of assets that may have greater value to others, as in the sale of our OSB operations in 2004. There can be no assurance that we will be successful in implementing any new strategic or operational initiatives or, if implemented, that they will have the effect of improving our operating results and financial position.

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