tin10q20101002.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended October 2, 2010

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

1300 MoPac Expressway South, 3rd Floor, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes¨ No

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

Large accelerated filer þ	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

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:

Class	Number of common shares outstanding as of October 2, 2010
Common Stock (par value $1.00 per share)	107,812,520

Page 1 of 40

The Exhibit Index is page 34.

	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3. Quantitative and Qualitative Disclosures About Market Risk	29

Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	31

Item 1A. Risk Factors	31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3. Defaults Upon Senior Securities	31

Item 4. [Removed and Reserved]	31

Item 5. Other Information	31

Item 6. Exhibits	32

SIGNATURES	33

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		(Unaudited)Third Quarter-End 2010			Year-End 2009
		(In millions)
ASSETS
Current Assets
Cash and cash equivalents	$	52		$	36
Trade receivables, net of allowance for doubtful accounts of $15 in 2010 and $14 in 2009		469			411
Inventories:
Work in process and finished goods		107			97
Raw materials		201			182
Supplies and other		139			134
Total inventories		447			413
Deferred tax asset		119			69
Income taxes receivable		2			13
Prepaid expenses and other		51			50
Total current assets		1,140			992
Property and Equipment
Land and buildings		681			682
Machinery and equipment		3,627			3,581
Construction in progress		50			54
Less allowances for depreciation		(2,768	)		(2,722	)
Total property and equipment		1,590			1,595
Financial Assets of Special Purpose Entities		2,475			2,475
Goodwill		394			394
Other Assets		280			253
TOTAL ASSETS	$	5,879		$	5,709
LIABILITIES
Current Liabilities
Accounts payable	$	210		$	186
Accrued employee compensation and benefits		103			108
Accrued interest		15			17
Accrued property taxes		18			12
Other accrued expenses		140			131
Current portion of long-term debt		—			—
Current portion of pension and postretirement benefits		17			17
Total current liabilities		503			471
Long-Term Debt		709			710
Nonrecourse Financial Liabilities of Special Purpose Entities		2,140			2,140
Deferred Tax Liability		723			721
Liability for Pension Benefits		275			285
Liability for Postretirement Benefits		103			105
Other Long-Term Liabilities		404			391
TOTAL LIABILITIES		4,857			4,823
SHAREHOLDERS’ EQUITY
Temple-Inland Inc. 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 in 2010 and 2009, including shares held in the treasury		124			124
Additional paid-in capital		427			433
Accumulated other comprehensive loss		(237	)		(256	)
Retained earnings		1,205			1,099
Cost of shares held in the treasury: 15,792,824 shares in 2010 and 16,228,916 shares in 2009		(589	)		(606	)
Total Temple-Inland Inc. shareholders’ equity		930			794
Noncontrolling Interest of Special Purpose Entities		92			92
TOTAL SHAREHOLDERS’ EQUITY		1,022			886
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,879		$	5,709

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

		Third Quarter						First Nine Months
		2010			2009			2010			2009
		(In millions, except per share)

NET REVENUES	$	966		$	885		$	2,847		$	2,732
COSTS AND EXPENSES
Cost of sales		(813	)		(753	)		(2,491	)		(2,331	)
Selling		(27	)		(27	)		(82	)		(83	)
General and administrative		(37	)		(45	)		(121	)		(132	)
Other operating income (expense)		(6	)		67			(8	)		142
		(883	)		(758	)		(2,702	)		(2,404	)
OPERATING INCOME		83			127			145			328
Other non-operating income (expense)		––			(3	)		––			(2	)
Interest income on financial assets of special purpose entities		2			4			4			23
Interest expense on nonrecourse financial liabilities of special purpose entities		(5	)		(5	)		(14	)		(23	)
Interest expense on debt		(13	)		(14	)		(39	)		(50	)
INCOME BEFORE TAXES		67			109			96			276
Income tax benefit (expense)		59			(42	)		45			(107	)
NET INCOME		126			67			141			169
Net (income) loss attributable to noncontrolling interest of special purpose entities		(1	)		––			––			(1	)
NET INCOME ATTRIBUTABLE TO TEMPLE-INLAND INC.	$	125		$	67		$	141		$	168

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		107.9			106.9			107.8			106.8
Diluted		109.4			108.6			109.5			107.7

EARNINGS PER SHARE
Basic	$	1.15		$	0.62		$	1.30		$	1.56
Diluted	$	1.13		$	0.61		$	1.28		$	1.55
DIVIDENDS PER SHARE	$	0.11		$	0.10		$	0.33		$	0.30

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

				First Nine Months
				2010			2009
				(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
	Net income		$	141		$	169
	Adjustments:
		Depreciation and amortization		145			151
		Asset impairment charges		9			––
		Gains related to purchase and retirement of long-term debt		––			(15	)
		Write-off of fees related to special purpose entities		––			17
		Non-cash share-based and long-term incentive compensation		20			39
		Cash payment for share-based awards settled		(17	)		(5	)
		Non-cash pension and postretirement expense		53			37
		Cash contribution to pension and postretirement plans		(42	)		(44	)
		Deferred income taxes		(37	)		62
		Other		(31	)		13
	Changes in:
		Receivables		(56	)		(11	)
		Inventories		(34	)		36
		Accounts payable and accrued expenses		42			(3	)
		Prepaid expenses and other		10			(6	)
				203			440
CASH PROVIDED BY (USED FOR) INVESTING
	Capital expenditures			(144	)		(81	)
	Sale of non-strategic assets and operations			2			4
	Other			––			(8	)
				(142	)		(85	)
CASH PROVIDED BY (USED FOR) FINANCING
	Payments of debt			––			(245	)
	Borrowings under accounts receivable securitization facility, net			(5	)		35
	Borrowings under revolving credit facility, net			4			(89	)
	Fees related to revolving credit facility			(6	)		––
	Fees related to special purpose entities			(4	)		(19	)
	Changes in book overdrafts			(5	)		(7	)
	Cash dividends paid to shareholders			(35	)		(32	)
	Exercise of stock options			4			2
	Tax benefit on share-based compensation			1			1
				(46	)		(354	)
Effect of exchange rate changes on cash and cash equivalents				1			––
Net increase in cash and cash equivalents				16			1
Cash and cash equivalents at beginning of period				36			41
Cash and cash equivalents at end of period			$	52		$	42

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Basis of Presentation

Our consolidated financial statements include the accounts of Temple-Inland Inc. and its subsidiaries and special purpose and variable interest entities of which it is the primary beneficiary. We account for our investment in other ventures under the equity method.

We prepare our 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. We have reclassified prior year’s operating cash flows and current liabilities for consistency with our 2010 classification of share-bas ed compensation payments and related accruals. For further information, please read the financial statements included in our Annual Report on Form 10-K for the year 2009.

Note 2 – Accounting Pronouncements

Beginning January 2010, we adopted certain amendments to Accounting Standards Codification (ASC) 810, Consolidation, that revised how the primary beneficiary of a variable interest entity is determined and the frequency of assessing the need to consolidate a variable interest entity. Adoption did not have a significant effect on our earnings or financial position.

Note 3 – Employee Benefit Plans

Defined benefit and postretirement benefit expense consists of:

		Defined Benefits												Postretirement Benefits
		Qualified				Supplemental				Total				Postretirement Benefits
		2010		2009		2010		2009		2010		2009		2010		2009
Third Quarter:		(In millions)
Service costs – benefits earned during the period	$	6	$	6	$	––	$	––	$	6	$	6	$	––	$	––
Interest cost on projected benefit obligation		20		20		––		––		20		20		2		2
Expected return on plan assets		(19	)	(20	)	––		––		(19	)	(20	)	––		––
Amortization of prior service costs		1		1		1		1		2		2		––		––
Amortization of actuarial net loss		5		3		––		––		5		3		––		––
Benefit expense	$	13	$	10	$	1	$	1	$	14	$	11	$	2	$	2

First Nine Months:
Service costs – benefits earned during the period	$	18	$	17	$	1	$	1	$	19	$	18	$	1	$	1
Interest cost on projected benefit obligation		60		60		1		1		61		61		5		5
Expected return on plan assets		(56	)	(59	)	––		––		(56	)	(59	)	––		––
Amortization of prior service costs		2		2		2		2		4		4		(1	)	(1	)
Amortization of actuarial net loss		15		8		1		––		16		8		––		––
Benefit expense	$	39	$	28	$	5	$	4	$	44	$	32	$	5	$	5

In addition, in 2010 we recognized $4 million of expense related to lump-sum payments of supplemental benefits. We made $30 million in voluntary, discretionary contributions to our qualified defined benefit plan in first nine months 2010 and 2009.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

Note 4 – Share-Based and Long-Term Incentive Compensation

We have shareholder approved share-based compensation plans that permit awards to key employees and non-employee directors in the form of cash-settled restricted or performance stock units, stock-settled restricted stock units, or options to purchase shares of our common stock. We also have long-term incentives for key employees in the form of fixed value awards that vest over multiple years. We generally grant awards annually in February, and we use treasury stock to fulfill awards settled in common stock and stock option exercises.

Share-based and long-term incentive compensation expense consists of:

		Third Quarter				First Nine Months
		2010		2009		2010		2009
		(In millions)
Cash-settled restricted or performance stock units	$	3	$	11	$	10	$	30
Stock-settled restricted stock units		––		––		1		––
Stock options		1		1		5		5
Total share-based compensation expense		4		12		16		35
Fixed value cash awards		2		1		4		4
Total share-based and long-term incentive compensation expense	$	6	$	13	$	20	$	39

The fair value of share-based compensation awards granted to retirement eligible employees and expensed at the date of grant was $3 million in first nine months 2010 and $2 million in first nine months 2009.

Share-based and long-term incentive compensation expense is included in:

		Third Quarter				First Nine Months
		2010		2009		2010		2009
		(In millions)
Cost of sales	$	––	$	1	$	2	$	4
Selling		––		––		1		2
General and administrative		6		12		17		33
Total share-based and long-term incentive compensation expense	$	6	$	13	$	20	$	39

Cash-settled restricted or performance stock units

Cash-settled restricted or performance stock units generally have a three-year term and vest after three years from the date of grant or the attainment of stated ROI based performance goals, generally measured over a three-year period.

A summary of activity for first nine months 2010 follows:

		Cash-Settled Units		Weighted Average Grant Date Fair Value Per Share						Aggregate Current Value
	(In thousands)							(In millions)
Not vested beginning of year		2,753			$	18
Granted		599				17
Vested and settled		(661	)			42
Forfeited		(7	)			23
Not vested end of third quarter 2010		2,684				12	$		52

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

Unrecognized share-based compensation expense related to non-vested cash-settled restricted or performance stock units was $21 million at third quarter-end 2010 share price of $19 per share. We expect to recognize this cost over a weighted average period of two years. The fair value of awards to be settled in cash was $33 million at third quarter-end 2010, of which $13 million is included in accrued employee compensation and benefits and $20 million in long-term liabilities. The fair value of awards settled in cash in first nine months 2010 was $17 million.

Stock-settled restricted stock units

Stock-settled restricted stock units granted in February 2010 vest after three years from the date of grant upon attainment of stated ROI-based performance goals. There is no accelerated vesting upon retirement for these awards and cumulative dividends on these awards will be paid at the time of vesting if the stated ROI-based performance goals are met.

A summary of activity for first nine months 2010 follows:

		Stock-Settled Units	Weighted Average Grant Date Fair Value Per Share					Aggregate Current Value
	(In thousands)						(In millions)
Not vested beginning of year		––		$	––
Granted		369			20
Vested and settled		––			––
Forfeited		––			––
Not vested end of third quarter 2010		369		$	20	$			7

Unrecognized share-based compensation expense related to non-vested stock-settled restricted stock units was $6 million at third quarter-end 2010. We expect to recognize this cost over a weighted average period of two years.

Stock options

Stock options have a ten-year term, generally become exercisable ratably over four years and provide for accelerated or continued vesting upon retirement, death, disability, or if there is a change in control.

A summary of activity for first nine months 2010 follows:

	Shares			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (Current value less exercise price)
	(In thousands)					(In years)		(In millions)
Outstanding beginning of year		7,317	$		15
Granted		629			17
Exercised		(343	)		12
Forfeited		(35	)		19
Outstanding end of third quarter 2010		7,568			15	6	$		35

Exercisable end of third quarter 2010		4,707			16	5	$		18

Unrecognized share-based compensation expense related to non-vested stock option awards was $7 million at third quarter-end 2010. We expect to recognize this cost over a weighted average period of three years.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

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

	First Nine Months
	2010		2009
Expected dividend yield	3.2	%	3.2	%
Expected stock price volatility	66.6	%	57.5	%
Risk-free interest rate	3.2	%	2.6	%
Expected life of options (in years)	8		8

Weighted average estimated fair value of options at grant date	$ 10.23		$ 2.49

Fixed Value Cash Awards

Long-term incentive compensation expense is related to $18 million of fixed value cash awards that were granted to employees in February and August 2009. These awards are not tied to our stock price. The fixed value cash awards generally vest over periods from three to six years and provide for accelerated or continued vesting upon retirement, death, disability, or if there is a change of control.

Unrecognized long-term incentive compensation expense related to fixed value cash awards was $9 million at third quarter-end 2010. We expect to recognize this cost over a weighted average period of three years. At third quarter-end 2010, accrued long-term incentive compensation for fixed value cash awards was $9 million and is included in other long-term liabilities.

Note 5 – Other Operating and Non-operating Income (Expense)

		Third Quarter						First Nine Months
		2010			2009				2010			2009
		(In millions)
Other Operating Income (Expense):
Equity in earnings of joint ventures	$	1		$	––		$		3		$		2
Gain (loss) on sale or retirement of operating property and equipment		(2	)		(1	)			(4	)			1
Costs and asset impairments, primarily related to box plant transformation		(5	)		(1	)			(17	)			(5	)
Alternative fuel mixture credits, net of costs		––			69				10				146
Litigation and other		––			––				––				(2	)
Other operating income (expense)	$	(6	)	$	67		$		(8	)	$		142

Other Non-operating Income (Expense):
Substitution costs	$	––		$	––		$		––		$		(17	)
Gain (loss) on purchase and retirement of debt		––			(3	)			––				15
Interest income		––			––				––				––
Other non-operating income (expense)	$	––		$	(3	)	$		––		$		(2	)

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

In connection with the second phase of our box plant transformation, in first nine months 2010, we closed our Santa Fe Springs, California sheet plant and our Phoenix, Arizona and Evansville, Indiana box plants. In first nine months 2010, we recognized asset impairment charges of $9 million, severance and other employee costs of $2 million, and other transformation related costs of $6 million. Activity for first nine months 2010 within our accruals for exit costs, which is primarily composed of accrued severance and other employee costs, follows:

		First Nine Months 2010
		(In millions)
Beginning of period	$	––
Additions		2
Cash payments		(2	)
End of period	$	––

In 2009, we generated and claimed alternative fuel mixture tax credits of $228 million, of which we recognized $218 million and provided a $10 million reserve due to an uncertainty in the tax law regarding whether a portion of the alternative fuel we used would qualify for the tax credit. In first quarter 2010, the Internal Revenue Service clarified this uncertainty allowing us to recognize all of the tax credits we claimed. As a result, our first nine months 2010 other operating income (expense) includes the reversal of the $10 million reserve established in 2009.

Other non-operating income in first nine months 2009 consists of substitution costs of $17 million related to the replacement of an issuer of irrevocable letters of credit securing the notes we received in connection with the 2007 sale of our timberland and a net gain of $15 million resulting from the purchase and retirement of $245 million of our long-term debt.

Note 6 – Income Taxes

In a memo dated October 5, 2010, the IRS provided clarification that both alternative fuel mixture credits and cellulosic biofuel producer credits can be claimed in the same taxable year for different volumes of black liquor. As a result, in third quarter 2010, we recognized an income tax benefit of $83 million related to cellulosic biofuel producer credits we earned on black liquor produced and used as a fuel from the beginning of 2009 through late March 2009. Our first nine months 2010 income tax benefit includes the above $83 million benefit and a one-time tax expense of $3 million due to the elimination of the tax deduction for drug expenses reimbursed under the Medicare Part D subsidy program.

Note 7 – Earnings per Share

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

		Third Quarter						First Nine Months
		2010			2009				2010			2009
		(In millions)
Earnings for basic and diluted earnings per share:
Net income	$	126		$	67		$		141		$		169
Less: Distributed and undistributed amounts allocated to participating securities		(1	)		(1	)			(1	)			(1	)
		125			66				140				168
Less: Net (income) loss attributable to noncontrolling interest of special purpose entities		(1	)		––				––				(1	)
Net income available to common shareholders	$	124		$	66		$		140		$		167
Weighted average shares outstanding:
Weighted average shares outstanding - basic		107.9			106.9				107.8				106.8
Dilutive effect of stock options		1.5			1.7				1.7				0.9
Weighted average shares outstanding - diluted		109.4			108.6				109.5				107.7

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

Participating securities include unvested cash-settled restricted stock units issued to employees that contain nonforfeitable rights to dividends. These units are scheduled to vest in first quarter 2011.

At third quarter-end 2010 and 2009, we did not include 3,628,287 and 4,376,785 stock options outstanding held by our employees in computing diluted earnings per share because they were anti-dilutive.

Certain employees of entities spun off in 2007 participated in our employee stock option program. Following the spin-offs, these employees retained stock option rights associated with our stock. These stock options will remain a consideration in our dilutive effect of stock options until they are exercised, cancelled or expire. Information regarding options held by employees of spun-off entities follows:

	Third Quarter-End
		2010		2009
		(Shares in thousands)
Options held		451		790
Options exercisable		436		745
Weighted average exercise price	$	19	$	17
Weighted average remaining contractual term (in years)		5		5

At third quarter-end 2010 and 2009, we did not include 279,112 and 536,774 stock options outstanding held by employees of spun off entities in computing diluted earnings per share because they were anti-dilutive.

Note 8 – Financial Assets and Nonrecourse Financial Liabilities of Special Purpose Entities

In 2009, we arranged for the substitution of two banks issuing letters of credit securing the notes we received in connection with the 2007 sale of our timberland. In each case, the credit ratings of the letter of credit bank had been reduced below the required minimums. In first nine months 2010, we entered into two separate three-year agreements, one with JP Morgan Chase Bank, National Association and one with Crédit Agricole Corporate and Investment Bank whereby each of these banks agrees to issue up to $1.4 billion in irrevocable letters of credit in substitution for letters of credit issued by a bank whose credit ratings get reduced below the required minimums. For each agreement, we paid an upfront fee, which is being amortized over the three-year term of the agreement, and also agreed to pay a quarterly fee on the unused commitment. The aggregate expense related to the amortization of the upfront fees and the quarterly fees for both agreements totals about $1 million per quarter.

Note 9 – Long-Term Debt

At third quarter-end 2010, our long-term debt was $709 million, which included $125 million of borrowings under our accounts receivable securitization facility, which expires in October 2012, and $29 million of borrowings under committed credit agreements, $25 million of which must be repaid in August 2011. We have classified these borrowings as long-term debt because of our intent and ability to refinance them on a long-term basis under our existing facilities.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

Note 10 – Shareholders’ Equity

A summary of changes in total shareholders’ equity follows:

	First Nine Months
	2010											2009
		Temple-Inland Inc. Shareholders’ Equity				Noncontrolling Interest			Total Shareholders’ Equity				Temple-Inland Inc. Shareholders’ Equity				Noncontrolling Interest			Total Shareholders’ Equity
	(In millions)
Beginning of year	$		794		$		92	$		886		$		686		$		91	$		777
Comprehensive income, net of tax:
Net income			141				––			141				168				1			169
Defined benefit plans			15				––			15				5				––			5
Foreign currency translation adjustment			4				––			4				2				––			2
Total Comprehensive Income										160											176
Dividends paid on common stock — ($0.33 per share in 2010 and $0.30 per share in 2009)			(35	)			––			(35	)			(32	)			––			(32	)
Share-based compensation, net of distributions			11				––			11				5				––			5
Balance at third quarter-end	$		930		$		92	$		1,022		$		834		$		92	$		926

Comprehensive income was $132 million for third quarter 2010 and $67 million for third quarter 2009. We issued 436,092 and 391,623 shares of common stock in first nine months 2010 and 2009 to employees exercising options and for vesting of share-settled units.

Note 11 – Segment Information

We have two business segments: corrugated packaging and building products. Corrugated packaging manufactures linerboard and corrugating medium (collectively referred to as containerboard), which we convert into corrugated packaging, and lightweight gypsum facing paper. Building products manufactures a variety of building products.

We evaluate performance based on operating income before items not included in segments and income taxes. Items not included in segments represent items managed on a company-wide basis and include corporate general and administrative expense, share-based and long-term incentive compensation, other operating and non-operating income (expense), and interest income and expense. Other operating income (expense) includes gain or loss on sale of assets, asset impairments, closure related severance costs, and unusual income and expense items. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Intersegment sales are recorded at market prices. Intersegment sales and shared service expense allocations are netted i n costs and expenses.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

		Corrugated Packaging		Building Products		Items Not Included in Segments and Eliminations		Total
		(In millions)
Third Quarter 2010:
Revenues from external customers	$	809	$	157	$	––	$	966
Depreciation and amortization		37		10		2		49
Equity income from joint ventures		––		1		––		1
Income (loss) before taxes		121		(10	)	(44	) (a)	67
Capital expenditures		48		10		1		59

First Nine Months 2010 or at Third Quarter-End 2010:
Revenues from external customers	$	2,347	$	500	$	––	$	2,847
Depreciation and amortization		107		31		7		145
Equity income from joint ventures		––		3		––		3
Income (loss) before taxes		230		(4	)	(130	)(a)	96
Total assets		2,378		551		2,950		5,879
Investment in equity method investees and joint ventures		2		25		––		27
Goodwill		265		129		––		394
Capital expenditures		121		18		5		144

Third Quarter 2009:
Revenues from external customers	$	734	$	151	$	––	$	885
Depreciation and amortization		36		11		3		50
Equity income from joint ventures		––		––		––		––
Income (loss) before taxes		94		(4	)	19	(a)	109
Capital expenditures		22		6		1		29

First Nine Months 2009 or at Third Quarter-End 2009:
Revenues from external customers	$	2,286	$	446	$	––	$	2,732
Depreciation and amortization		109		34		8		151
Equity income from joint ventures		––		2		––		2
Income (loss) before taxes		290		(9	)	(5	) (a)	276
Total assets		2,284		573		2,926		5,783
Investment in equity method investees and joint ventures		3		27		––		30
Goodwill		265		129		––		394
Capital expenditures		64		15		2		81

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

(a) Items not included in segments consist of:

		Third Quarter						First Nine Months
		2010			2009			2010			2009
		(In millions)
General and administrative expense	$	(17	)	$	(18	)	$	(54	)	$	(53	)
Share-based and long-term incentive compensation		(6	)		(13	)		(20	)		(39	)
Other operating income (expense)		(5	)		68			(7	)		139
Other non-operating expense		––			(3	)		––			(2	)
Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities		(3	)		(1	)		(10	)		––
Interest expense on debt		(13	)		(14	)		(39	)		(50	)
	$	(44	)	$	19		$	(130	)	$	(5	)

Other operating income (expense) applies to:
Corrugated packaging	$	(4	)	$	69		$	(6	)	$	143
Building products		(1	)		––			(1	)		––
Unallocated		––			(1	)		––			(4	)
	$	(5	)	$	68		$	(7	)	$	139

Note 12 — Fair Values and Fair Value Measurements of Financial Instruments

Information about our fixed rate long-term debt that is not measured at fair value follows:

	At Third Quarter-End 2010		At Year-End 2009
	Carrying Value	Fair Value	Carrying Value	Fair Value	Valuation Technique
	(In millions)
Financial Liabilities
Fixed rate, long-term debt	$555	$593	$555	$580	Level 2 - Market Approach

Differences between carrying value and fair value are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to subsequent movements in interest rates. We excluded financial instruments from the table that are either carried at fair value or have fair values that approximate their carrying amount due to their short-term nature or variable interest rates.

Note 13 – Contingencies and Other

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. Expenses related to litigation are included in operating income.

On September 9, 2010, Temple-Inland was one of eight containerboard producers named as defendants in a class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit is captioned Kleen Products LLC v. Packaging Corp. of America (N.D. Ill.). The complaint alleges that the defendants, beginning in August 2005, conspired to artificially increase prices of containerboard and corrugated containers. The alleged class is all persons in the United States who purchased corrugated sheets or corrugated containers directly from any defendant during the period August 2005 to the present. The complaint seeks to recover an unspecified amount of treble actual damages and attorney’s fees on behalf of the purported class. Four a dditional plaintiffs have filed substantially the same complaints in the Northern District of Illinois. We expect all five cases to be consolidated. We strongly dispute the allegations made against the Company and intend to defend vigorously against this litigation. However, because this action is in its preliminary stages, we are unable to predict an outcome or to estimate a range of reasonably possible loss.

In addition, in first nine months 2010 we closed our Phoenix, Arizona box plant. Certain of the plant’s employees participated in a multi-employer pension plan. We may incur a claim for additional contributions due to

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

the plan’s unfunded pension obligations. At this time we are unable to predict if such a claim will be made and if so, the amount that might be claimed.

We do not believe that the outcome of any of these matters should have a significant adverse effect on our financial position, long-term results of operations, or cash flows.

Note 14 – Subsequent Event

On October 22, 2010, we purchased and retired $10 million of our 7.875% Senior Notes due in 2012. The purchase was at a premium, which will result in a loss of $1 million in fourth quarter 2010.

As a part of Box Plant Transformation II, on October 25, 2010 we announced the closure of our Carol Stream, Illinois box plant. We anticipate the closure to occur in second quarter 2011. As a result, we expect to incur asset impairment changes, severance and other costs as we complete the closure activities.

On November 2, 2010 we extended the maturity of our $250 million accounts receivable securitization facility to October 2013.

On November 5, 2010, our Board of Directors declared a regular quarterly dividend of $0.11 per share payable on December 15, 2010.

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,” “likely,” “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-look ing 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 us and that we may pursue

·	fluctuations in costs and expenses including the costs of raw materials, purchased energy, and freight

·	changes in interest rates

·	demand for new housing

·	accuracy of accounting assumptions related to impaired assets, pension and postretirement costs, contingency reserves, and income taxes

·	competitive actions by other companies

·	changes in laws or regulations

·	our ability to execute certain strategic and business improvement initiatives

·	the accuracy of certain judgments and estimates concerning the integration of acquired operations

·	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. Except as required by law, 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 Measures

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 total segment operating income, less general and administrative expenses and share-based and long-term incentive compensation not included in segments, divided by total assets, less certain assets and certain current liabilities. 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 nine months 2010, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for the year 2009.

New Accounting Pronouncements

Beginning January 2010, we adopted certain amendments to Accounting Standards Codification (ASC) 810, Consolidation, which did not have a significant effect on our earnings or financial position. Please read Note 2 to the Consolidated Financial Statements for further information.

Box Plant Transformation II

Over the past few years, we have been focused on changing the culture in our box plant system to run converting equipment near design capacity, thereby lowering costs through improved asset utilization. This effort, which we called “Box Plant Transformation,” has resulted in the closure of four box plants and the elimination of about 1,100 employee positions significantly lowering costs and improving margins.

In February 2010, we announced the second phase of this effort, “Box Plant Transformation II,” which is designed to further reduce our box plant system cost. We anticipate Box Plant Transformation II to take three years and result in the closure of up to 12 box plants and the elimination of as many as 900 employee positions. The capital investment for Box Plant Transformation II is estimated to be about $250 million over the three years, which we will likely fund from operations or borrowings under our committed credit agreements.

The initial steps in effecting Box Plant Transformation II began in first nine months 2010 when we closed one sheet plant and two box plants. As a result, in first nine months 2010, we recognized non-cash asset impairment charges of $8 million, severance and other employee costs of $2 million for about 200 employees, and other transformation costs of $6 million. On October 25, 2010 we announced the closure of our Carol Stream, Illinois box plant. We anticipate the closure to occur in second quarter 2011. As a result, we expect to incur asset impairment charges, severance and other costs as we complete the closure activities. As we continue to refine and implement Box Plant Transformation II, it is likely we will incur additional asset impairments, severance and other costs, which cou ld be significant.

Results of Operations for Third Quarter and First Nine Months 2010 and 2009

Summary

We manage our operations through two business segments: corrugated packaging and building products. A summary of the results of operations by business segment follows:

		Third Quarter						First Nine Months
		2010			2009			2010			2009
		(In millions, except per share)
Revenues
Corrugated packaging	$	809		$	734		$	2,347		$	2,286
Building products		157			151			500			446
Total revenues	$	966		$	885		$	2,847		$	2,732
Segment operating income
Corrugated packaging	$	121		$	94		$	230		$	290
Building products		(10	)		(4	)		(4	)		(9	)
Total segment operating income		111			90			226			281
Items not included in segments
General and administrative expense		(17	)		(18	)		(54	)		(53	)
Share-based and long-term incentive compensation		(6	)		(13	)		(20	)		(39	)
Other operating income (expense)		(5	)		68			(7	)		139
Other non-operating income (expense)		––			(3	)		––			(2	)
Net interest income (expense) on financial assets and nonrecourse financial liabilities of special purpose entities		(3	)		(1	)		(10	)		––
Interest expense on debt		(13	)		(14	)		(39	)		(50	)
Income before taxes		67			109			96			276
Income tax benefit (expense)		59			(42	)		45			(107	)
Net income		126			67			141			169
Net (income) loss attributable to noncontrolling interest of special purpose entities		(1	)		––			––			(1	)
Net income attributable to Temple-Inland Inc.	$	125		$	67		$	141		$	168

Average basic shares outstanding		107.9			106.9			107.8			106.8
Average diluted shares outstanding		109.4			108.6			109.5			107.7

Earnings per basic share	$	1.15		$	0.62		$	1.30		$	1.56
Earnings per diluted share	$	1.13		$	0.61		$	1.28		$	1.55

ROI, annualized								7.9	%		9.1	%

In first nine months 2010, significant items affecting net income included:

Corrugated packaging experienced slightly higher prices and slightly lower total shipments compared with first nine months 2009. Building products experienced higher prices for lumber and MDF and lower prices for gypsum wallboard and particleboard, while volumes were up for gypsum wallboard, MDF, and lumber, and down slightly for particleboard.

·	Input costs, principally recycled fiber, wood fiber and freight costs, increased significantly, but we continue to benefit from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies.

·	Share-based and long-term incentive compensation decreased $19 million compared with first nine months 2009 primarily due to the impact of fluctuating share prices on our cash-settled awards at the end of each reporting period when compared with prior year-end share prices.

·	Other operating income (expense) includes a $17 million charge primarily associated with asset impairments, severance and other costs primarily related to Box Plant Transformation II and a $10 million benefit related to alternative fuel mixture tax credits.

·	We recognized a tax benefit of $83 million related to cellulosic biofuel producer credits and one-time income tax expense of $3 million related to the impact of the Patient Protection and Affordable Care Act on the Medicare Part D retiree drug subsidy program.

In first nine months 2009, significant items affecting net income included:

·	Corrugated packaging experienced lower prices and volumes compared with first nine months of 2008. Building products experienced lower prices and volumes for most of its products.

·	Most key input costs declined compared with first nine months 2008, and we benefited from our continuing initiatives to lower costs, improve asset utilization, and increase operating efficiencies.

·	Share-based and long-term incentive compensation increased $23 million compared with first nine months 2008 primarily due to the impact of fluctuating share prices on our cash-settled awards at the end of each reporting period when compared with prior year-end share prices.

·	We recognized one-time other operating income of $146 million related to alternative fuel mixture tax credits, net of related costs, and incurred $7 million of other operating expense primarily associated with 2008 facility closures and severance related to headcount reductions.

·	We recognized a net gain of $15 million in connection with the purchase and retirement of $245 million of our long-term debt.

·	We recognized $17 million of non-operating expense associated with the replacement of an issuer of irrevocable letters of credit securing the notes we received in connection with the 2007 sale of our timberland.

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, 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 (collectively referred to as containerboard), which we convert into corrugated packaging, and lightweight gypsum facing paper. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging products and, to a lesser degree, from the sale of containerboard and lightweight gypsum facing paper (collectively referred to as paperboard).

A summary of our corrugated packaging results follows:

		Third Quarter						First Nine Months
		2010			2009			2010			2009
		(In millions)
Revenues	$	809		$	734		$	2,347		$	2,286
Costs and expenses		(688	)		(640	)		(2,117	)		(1,996	)
Segment operating income	$	121		$	94		$	230		$	290

Segment ROI								15.2	%		18.3	%

We benefited in third quarter 2010 compared with third quarter 2009 from higher box prices, lower mill maintenance, and box plant transformation. These benefits were partially offset by higher input costs when compared with third quarter 2009 for wood fiber, recycled fiber, energy, chemicals, and freight.

Fluctuations in corrugated packaging pricing (which includes freight and is net of discounts) and shipments are set forth below:

	Third Quarter 2010 versus Third Quarter 2009		First Nine Months 2010 versus First Nine Months 2009
	Increase/(Decrease)
Corrugated packaging
Average prices	9	%	1	%
Shipments, average week	––		––
Industry shipments, average week(a)	3	%	3	%

Paperboard
Average prices	38	%	22	%
Shipments, in thousand tons	31		42

_____________

(a) Source: Fibre Box Association

Compared with second quarter 2010, average corrugated packaging prices were up four percent, and average shipments were down one percent. For the same period, average paperboard prices were up five percent and shipments were up 25,000 tons.

Costs and expenses were up six percent in first nine months 2010 when compared with first nine months 2009, and down five percent in third quarter 2010 compared with second quarter 2010. The increase in costs in first nine months 2010 was primarily the result of higher prices for wood fiber, recycled fiber, energy, and freight and the impact of unscheduled and extended mill outages.

Fluctuations in our significant cost and expense components included:

	Third Quarter 2010 versus Third Quarter 2009			First Nine Months 2010 versus First Nine Months 2009
	Increase/(Decrease) (In millions)
Wood fiber	$	5	$		28
Recycled fiber		26			123
Energy, principally natural gas		6			13
Freight		8			24
Chemicals		3			(2	)
Depreciation		1			(2	)

The costs of wood, pulp and recycled 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 for the remainder of 2010.

Information about our converting facilities and mills follows:

	Third Quarter				First Nine Months
	2010		2009		2010		2009
Number of converting facilities (at quarter-end)	60		63		60		63
Corrugated packaging shipments, in thousand tons	815		825		2,499		2,490
Paperboard production, in thousand tons	1,036		1,012		3,023		2,927
Percent containerboard production used internally	90	%	93	%	92	%	93	%
Percent total fiber requirements sourced from recycled fiber	42	%	42	%	42	%	44	%

Please read Box Plant Transformation II for further information about first nine months 2010 facilities closures and $16 million of related costs that are not included in segment results.

Building Products

We manufacture lumber, gypsum wallboard, particleboard, medium density fiberboard (MDF), and fiberboard. Our building products segment revenues are principally derived from sales of these products. We also own a 50 percent interest in Del-Tin Fiber LLC, a joint venture that produces MDF at a facility in El Dorado, Arkansas.

A summary of our building products results follows:

		Third Quarter						First Nine Months
		2010			2009			2010			2009
		(In millions)
Revenues	$	157		$	151		$	500		$	446
Costs and expenses		(167	)		(155	)		(504	)		(455	)
Segment operating income (loss)	$	(10	)	$	(4	)	$	(4	)	$	(9	)

Segment ROI								(1.1	)%		(2.2	)%

Fluctuations in product pricing (which includes freight and is net of discounts) and shipments are set forth below:

	Third Quarter 2010 versus Third Quarter 2009			First Nine Months 2010 versus First Nine Months 2009
	Increase/(Decrease)
Lumber:
Average prices		(2	)%		22	%
Shipments		8	%		1	%
Gypsum wallboard:
Average prices		4	%		(6	)%
Shipments		6	%		13	%
Particleboard:
Average prices		(2	)%		(3	)%
Shipments		(14	)%		(1	)%
MDF:
Average prices		13	%		8	%
Shipments		(3	)%		5	%

Housing markets deteriorated in the quarter compared with third quarter 2009, and we experienced lower demand for particleboard and MDF, and lower pricing for lumber and particleboard. Compared with second quarter 2010, average prices were down 26 percent for lumber, down three percent for particleboard, down one percent for MDF, and down two percent for gypsum wallboard. Shipments were down four percent for lumber, down 19 percent for particleboard, down 17 percent for MDF, and up six percent for gypsum wallboard.

As we move into the fourth quarter, we are continuing to see pressure on demand and pricing due to the low level of housing activity.

Costs and expenses were up 11 percent in first nine months 2010 compared with first nine months 2009, and down five percent in third quarter 2010 compared with second quarter 2010. The increase in costs in first nine months was primarily attributable to an increase in input costs and slightly higher operating rates. In addition, first nine months 2010 costs included $3 million of pension expense associated with lump-sum payments for employees who retired in 2010. First nine months 2009 costs include a $3 million gain from a sale in lieu of condemnation of land near our lumber mill in Rome, Georgia and costs of about $1 million related to an indefinite shutdown of our lumber mill in Buna, Texas.

Fluctuations in our significant cost and expense components included:

	Third Quarter 2010 versus Third Quarter 2009			First Nine Months 2010 versus First Nine Months 2009
	Increase/(Decrease) (In millions)
Wood fiber	$	6	$		14
Energy, principally natural gas		2			4
Chemicals		1			4
Freight		2			10

The costs of our fiber, energy, chemicals, and freight fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate for the remainder of 2010.

Information about our converting and manufacturing facilities follows:

	Third Quarter		First Nine Months
	2010	2009	2010	2009
Number of converting and manufacturing facilities (at quarter-end)	16	16	16	16

The number of converting and manufacturing facilities includes our lumber mill in Buna, Texas, which was indefinitely shutdown in second quarter 2009. We may curtail our production to match demand for our products.

Items Not Included in Segments

Items not included in segments are income and expenses that are managed on a company-wide basis and include corporate general and administrative expense, share-based and long-term incentive compensation, other operating and non-operating income (expense), and interest income and expense.

The change in share-based and long-term incentive compensation for first nine months 2010 compared with 2009 is principally due to the impact on our cash-settled awards of fluctuating share prices at the end of each reporting period when compared with prior year-end share prices. Please read Note 4 to the Consolidated Financial Statements for further information.

Other operating income (expense) not included in business segments for first nine months 2010 includes a charge of $17 million associated with asset impairments, severance and other costs primarily related to Box Plant Transformation II and a benefit of $10 million related to alternative fuel mixture tax credits.

Please read Box Plant Transformation II for further information about first nine months 2010 facilities closures and related costs. As we continue to implement Box Plant Transformation II we will incur additional asset impairments, severance and other costs, which could be significant.

In 2009, we generated and claimed alternative fuel mixture tax credits of $228 million of which we recognized $218 million and provided a $10 million reserve due to an uncertainty in the tax law regarding whether a portion of the alternative fuel we used would qualify for the tax credit. In first quarter 2010, the Internal Revenue Service clarified this uncertainty allowing us to recognize all of the tax credits we claimed. As a result, in first six months 2010, we reversed the $10 million reserve established in 2009.

Other non-operating income (expense) for first nine months 2009 includes costs of $17 million associated with the replacement of SunTrust Bank as an issuer of irrevocable letters of credit securing the notes we received in connection with the sale of our timberland in 2007. The $17 million consists of $15 million in fees that we paid in connection with the issuance of the SunTrust letters of credit, which were being amortized over the life of the letters of credit, and $2 million in other fees associated with terminating the transaction with SunTrust. Other non-operating income (expense) also includes net gain of $15 million in connection with the purchase and retirement of $245 million of our long-term debt.

Net interest income on financial assets and nonrecourse liabilities of special purpose entities includes fees associated with arrangements to issue substitute letters of credit. These amounts relate to the activities of the special purpose entities created to effect the sale of our timberland in 2007 and their subsequent nonrecourse borrowings in December 2007. At third quarter-end 2010 and 2009, the interest rate on our financial assets was 0.51 percent and 0.52 percent and the interest rate on our nonrecourse financial liabilities was one percent and 0.87 percent. These interest rates are variable and are based on different indices and, therefore, may not always reflect the same spread.

The change in interest expense in first nine months 2010 compared with first nine months 2009 was primarily due to lower levels of debt outstanding.

Income Taxes

In a memo dated June 28, 2010, the Internal Revenue Service (IRS) provided clarification to the effect that black liquor, a by-product of the paper making process, produced and used as a fuel by a registered producer qualifies for the $1.01 per gallon taxable, non-refundable cellulosic biofuel producer credit. This credit may be used to offset federal income taxes payable, subject to certain limitations. Our registration as a producer of cellulosic biofuel was approved on August 16, 2010.

The memo also clarifies that cellulosic biofuel produced before registration may be claimed and that a producer may not claim both the cellulosic biofuel producer credit and the alternative fuel mixture tax credit for the same volume of black liquor. As we previously disclosed, we claimed and recognized $228 million of alternative fuel mixture tax credits related to black liquor produced and used from late March 2009, when we began mixing black liquor as an alternative fuel, through year-end 2009.

Both the alternative fuel mixture credit and the cellulosic biofuel producer credit apply only to black liquor produced and used in 2009.

Excluding the tax benefit of $83 million related to cellulosic biofuel producer credits and the one-time income tax charge of $3 million due to the elimination of the tax deduction for drug expenses reimbursed under the Medicare Part D subsidy program, our effective tax rate was 36 percent in third quarter and first nine months 2010. Our effective tax rate was 39 percent in third quarter and first nine months 2009. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, deferred taxes on unremitted foreign income, and the domestic production activities deduction.

Average Shares Outstanding

The increase in average shares outstanding in third quarter and first nine months 2010 was due to shares issued to employees exercising stock options and vesting of share-settled units. The increase in the dilutive effect of stock options in first nine months 2010 was due to the increase in our share price.

Capital Resources and Liquidity for First Nine Months 2010

Sources and Uses of Cash

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. 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.

		First Nine Months
		2010			2009
		(In millions)
Cash received from:
Operations		241	(a)		424	(a)(b)
Working capital		(38	)(c)		16
Cash from operations		203			440
Sale of non-strategic assets and other		2			4
Exercise of stock options and related tax benefit		5			3
Total sources		210			447

Cash used to:
Reduce borrowings, net		(1	)		(299	)
Return to shareholders through dividends		(35	)		(32	)
Reinvest in the business through:
Capital expenditures		(144	)		(81	)
Joint ventures and other		(15	)		(34	)
Total uses		(195	)		(446	)
Effect of exchange rate changes on cash and cash equivalents		1			––
Change in cash and cash equivalents	$	16		$	1

_____________

(a) Includes $30 million of voluntary, discretionary contributions to our qualified defined benefit plan.

(b) Includes $121 million of alternative fuel mixture credits, net of related costs and tax payments.

Our cash from operations in first nine months 2010 decreased compared with first nine months 2009, primarily due to the impact of alternative fuel mixture credits received in 2009, net of $14 million received in 2010, lower earnings, higher cash payments for share-based awards and increased working capital needs.

We issued 436,092 and 391,623 shares of common stock in first nine months 2010 and 2009 to employees exercising options and for vesting of share-settled units. We paid cash dividends to shareholders of $0.33 per share in first nine months 2010 and $0.30 per share in first nine months 2009. On October 22, 2010, we purchased and retired $10 million of our 7.875% Senior Notes due in 2012. The purchase was at a premium, which will result in a loss of $1 million in fourth quarter 2010. On November 5, 2010, our Board of Directors declared a regular dividend of $0.11 per share payable on December 15, 2010.

Capital expenditures are expected to approximate $230 million in 2010, a significant portion of which is related to Box Plant Transformation II.

Liquidity

Credit Agreements

Our sources of short-term funding are our operating cash flows and borrowings under our credit agreements and accounts receivable securitization facility. At third quarter-end 2010, we had $760 million of unused borrowing capacity under our committed credit agreements and accounts receivable securitization facility.

		Committed Credit Agreements				Accounts Receivable Securitization Facility				Total
	(In millions)
Committed	$		680		$		250		$		930
Less: Borrowings and commitments			(45	)			(125	)			(170	)
Unused borrowing capacity at third quarter-end 2010	$		635		$		125		$		760

On June 25, 2010 we replaced our existing $750 million revolving credit facility, which would have matured in July 2011, with a new credit facility that matures on June 25, 2014. The new credit facility provides for a $600 million unsecured revolving line of credit with a $100 million sublimit for the issuance of letters of credit. The remaining $80 million of our committed credit agreements are bilateral agreements that mature from 2010 to 2012. At third quarter-end 2010, we had $16 million of letters of credit issued under our new credit facility and $29 million of borrowings outstanding under our bilateral agreements. Subsequent to third quarter-end, we entered into a new bilateral agreement for $20 million and one of our existing bilateral agreements was increased from $15 million to $25 mi llion, increasing our committed credit agreements to $710 million.

Our accounts receivable securitization facility expires in 2012. At third quarter-end 2010, our borrowing base for this facility, which is determined by the level of our trade receivables, exceeded $250 million, the maximum committed amount of the facility. Subsequent to third quarter-end 2010 the maturity of our accounts receivable securitization facility was extended to 2013.

Our unused borrowing capacity in third quarter 2010 ranged from a high of $760 million to a low of $698 million. This fluctuating capacity results primarily from activity on our accounts receivable securitization facility. This facility is used primarily to fund our operating cash needs, which fluctuate due to timing of collection of receivables, payment of payables and expenses, capital expenditures, and dividends, and to a lesser extent, to seasonal fluctuations in our operations.

Our debt agreements contain terms, conditions, and financial covenants customary for such agreements, including minimum levels of interest coverage and limitations on leverage. We are currently in compliance with these covenants and do not currently anticipate any change in circumstances that would impair our ability to continue to comply with these covenants.

We believe the amount available under our credit facilities along with our existing cash and cash equivalents and expected cash flows from operations will provide us sufficient funds to meet our operating needs for the foreseeable future. In light of the current conditions in financial markets, we closely monitor the banks in our credit facilities. To date, we have experienced no difficulty in borrowing under the facilities and have not received any indications that any of the participating banks would not be able to honor their commitments under these facilities.

Financial Assets and Nonrecourse Financial Liabilities of Special Purpose Entities

In 2009, we arranged for the substitution of two banks issuing letters of credit securing the notes we received in connection with the 2007 sale of our timberland. In each case, the credit ratings of the letter of credit bank had been reduced below the required minimums. In first six months 2010, we entered into two separate three-year agreements, one with JP Morgan Chase Bank, National Association and one with Crédit Agricole Corporate and Investment Bank, whereby each of these banks agrees to issue up to $1.4 billion in irrevocable letters of credit in substitution for letters of credit issued by a bank whose credit ratings get reduced below the required minimums. For each agreement, we paid an upfront fee, which is being amortized over the three-year term of the agreement, and also

agreed to pay a quarterly fee on the unused commitment. The aggregate expense related to the amortization of the upfront fees and the quarterly fees for both agreements totals about $1 million per quarter.

Off-Balance Sheet Arrangements

At third quarter-end 2010, there were no significant changes in off-balance sheet arrangements from that disclosed in our Annual Report on Form 10-K for the year 2009.

Pension and Postretirement Matters

Due to credit balances we have accumulated from our voluntary, discretionary contributions in prior years, we have no funding requirement under ERISA in 2010. We made $30 million in voluntary, discretionary contributions to our qualified defined benefit pension plan in first nine months 2010.

The Patient Protection and Affordable Care Act was enacted in first quarter 2010. As a result, our tax expense in first nine months 2010 includes a one-time tax charge of $3 million due to elimination of the tax deduction for our expenses reimbursed under the Medicare Part D subsidy program. The Patient Protection and Affordable Care Act will affect the health care benefits we offer to substantially all of our employees. We are studying the provisions of this legislation and are awaiting the issuance of implementing regulations. As a result, at this time, we are unable to determine the specific effects this legislation will have on the health care benefits we provide to our employees and any related financial impact.

Energy

Energy costs were $222 million in first nine months 2010 compared with $205 million in first nine months 2009. Our energy costs fluctuate based on the market prices we pay for these commodities and on the amount and mix of fuels we may use. We continue to reduce our dependency on natural gas. We hedge very little of our energy needs. It is likely that these costs will continue to fluctuate for the remainder of 2010.

Litigation, Contingencies, 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. In third quarter 2010, there were no material developments in pending legal proceedings other than as disclosed in Part II, Item 1 of this report.

In first nine months 2010 we closed our Phoenix, Arizona box plant. Certain of the plant’s employees participated in a multi-employer pension plan. We may incur a claim for additional contributions due to the plan’s unfunded pension obligations. At this time we are unable to predict if such a claim will be made and if so, the amount that might be claimed.

We do not believe that the outcome of any of these matters should have a material adverse effect on our financial position or long-term results of operations or cash flows.

Calculation of Non-GAAP Financial Measure

							Consolidated					Corrugated Packaging					Building Products
					(In millions)
	First Nine Months 2010
		Return:
			Segment operating income determined in accordance with GAAP		$		226			$		230			$		(4		)
			Items not included in segments:
			General and administrative expense				(54		)			N/A					N/A
			Share-based and long-term incentive compensation				(20		)			N/A					N/A
					$		152			$		230			$		(4		)

		Investment:
			Beginning of year total assets or segment assets determined in accordance with GAAP		$		5,709			$		2,295			$		545
			Adjustments:
				Current liabilities (excluding current portion of long-term debt)			(471		)			(276		)			(44		)
				Financial assets of special purpose entities			(2,475		)			N/A					N/A
				Municipal bonds related to capital leases included in other assets			(188		)			N/A					N/A
					$		2,575			$		2,019			$		501

		ROI, annualized					7.9		%			15.2		%			(1.1		)%

	First Nine Months 2009
Return:
			Segment operating income determined in accordance with GAAP		$		281			$		290			$		(9		)
			Items not included in segments:
			General and administrative expense				(53		)			N/A					N/A
			Share-based and long-term incentive compensation				(39		)			N/A					N/A
					$		189			$		290			$		(9		)

Investment:
			Beginning of year total assets or segment assets determined in accordance with GAAP		$		5,869			$		2,366			$		580
			Adjustments:
				Current liabilities (excluding current portion of long-term debt)			(445		)			(257		)			(45		)
				Financial assets of special purpose entities			(2,474		)			N/A					N/A
				Municipal bonds related to capital leases included in other assets			(188		)			N/A					N/A
					$		2,762			$		2,109			$		535

ROI, annualized						9.1		%			18.3		%			(2.2		)%

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

STATISTICAL AND OTHER DATA

Revenues and unit sales, excluding joint venture operations, follows:

		Third Quarter				First Nine Months
		2010		2009		2010		2009
		(Dollars in millions)
Revenues
Corrugated Packaging
Corrugated Packaging	$	746	$	699	$	2,195	$	2,177
Paperboard (a)		63		35		152		109
	$	809	$	734	$	2,347	$	2,286

Building Products
Lumber	$	51	$	48	$	172	$	139
Gypsum wallboard		42		38		115		109
Particleboard		30		35		104		108
Medium density fiberboard		17		16		56		49
Fiberboard		7		8		23		18
Other		10		6		30		23
	$	157	$	151	$	500	$	446

Unit sales
Corrugated Packaging
Corrugated packaging, thousands of tons		815		825		2,499		2,490
Paperboard, thousands of tons (a)		120		89		306		264
		935		914		2,805		2,754

Building Products
Lumber, million board feet		197		183		560		555
Gypsum wallboard, million square feet		347		328		979		870
Particleboard, million square feet		89		103		306		309
Medium density fiberboard, million square feet		30		31		101		96
Fiberboard, million square feet		37		41		116		95

_______

(a) Paperboard includes containerboard and light-weight gypsum facing paper.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our interest rate exposure is primarily related to our variable-rate, long-term debt and to the financial assets and nonrecourse financial liabilities of special purpose entities. This exposure is the result of changes in interest rates and also the use of different base rates and the timing of the quarterly interest rate resets on the financial assets and nonrecourse financial liabilities of special purpose entities.

Our variable-rate debt was $154 million at third quarter-end 2010 and $155 million at year-end 2009. A one percent change in interest rates would change our annual interest expense on variable-rate debt by $2 million.

Our $2.38 billion of notes receivable included in financial assets of special purpose entities require quarterly interest payments based on variable rates that reset quarterly. A one percent change in interest rates would change the annual interest income on these assets $24 million.

Our $2.14 billion of nonrecourse financial liabilities of special purpose entities require quarterly interest payments based on variable interest rates. The interest rates on these liabilities reflect the lenders’ pooled commercial paper issuance rates plus a margin and reset daily. A one percent change in interest rates would change the annual interest expense on these borrowings $21 million.

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 third quarter-end 2010 on our variable-rate debt and our net financial assets and nonrecourse financial liabilities of special purpose entities, with comparative year-end 2009 information.

	Increase (Decrease)
	Third Quarter-End 2010			Year-End 2009
	Variable Rate Debt	Special Purpose Entities - Net	Total	Variable Rate Debt	Special Purpose Entities - Net	Total
	(In millions)
Change in Interest Rates
+2%	$ (3)	$ 5	$ 2	$ (3)	$ 5	$ 2
+1%	(2)	3	1	(2)	3	1
-1%	2	N/A	2	2	N/A	2
-2%	N/A	N/A	N/A	N/A	N/A	N/A

The down two percent scenario is not applicable due to the current low interest rate environment. The down one percent scenario is not applicable to our special purpose entities due to the current low interest rate environment.

Foreign Currency Risk

In first nine months 2010, there were no significant changes in foreign currency risk from that disclosed in our Annual Report on Form 10-K for the year 2009.

Commodity Price Risk

In first nine months 2010, there were no significant changes in commodity price risk from that disclosed in our Annual Report on Form 10-K for the year 2009.

Item 4.

Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates 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

In third quarter 2010, there were no material developments in pending legal proceedings other than as set forth below.

For other developments in Legal Proceedings since we filed our Annual Report on Form 10-K for the year 2009, please see our Quarterly Report on Form 10-Q for the period ended July 3, 2010.

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 2009.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (a)

Period

Total Number of Shares

Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares That May Yet be Purchased Under the Plans

or Programs

Month 1 (7/1/2010 – 7/31/2010)

––

$ ––

––

6,650,000

Month 2 (8/1/2010 – 8/30/2010)

––

$ ––

––

6,650,000

Month 3 (9/1/2010 – 9/31/2010)

1,036

(b)

$ 19.34

––

6,650,000

Total

1,036

$ 19.34

––

_________

(a) On August 4, 2006, we announced that our Board of Directors authorized the repurchase of up to 6,000,000 shares of our common stock. We have purchased 4,350,000 shares under this authorization, which has no expiration date. On February 2, 2007, we announced that our Board of Directors authorized the purchase of up to an additional 5,000,000 shares of our common stock, increasing the maximum number of shares yet to be purchased under our repurchase plans to 6,650,000 shares. 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.

(b) Represents shares purchased from employees to pay taxes related to the vesting of restricted shares.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

[Removed and Reserved]

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.
101.1	–	The following materials from Temple-Inland's Quarterly Report on Form 10-Q for the quarter ended October 2, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

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: November 8, 2010	By:	/s/ Randall D. Levy
		Name: Randall D. Levy
		Title: Chief Financial Officer

	By:	/s/ Troy L. Hester
		Name: Troy L. Hester
		Title: 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	35
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	37
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	39
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	40
101.1	The following materials from Temple-Inland's Quarterly Report on Form 10-Q for the quarter ended October 2, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

Date: November 8, 2010		/s/ Doyle R. Simons
		Doyle R. Simons
		Chief Executive Officer

Date: November 8, 2010		/s/ Randall D. Levy
		Randall D. Levy
		Chief Financial Officer