e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

		For the Quarterly Period Ended April 1, 2006


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

		For the Transition Period From to

Commission File Number: 001-08634

Temple-Inland Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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

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


		Number of common shares outstanding
Class		as of April 1, 2006

Common Stock (par value $1.00 per share)		110,491,122

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEET

TEMPLE-INLAND INC. AND SUBSIDIARIES

First Quarter-End 2006

Unaudited


	Parent		Financial
	Company		Services		Consolidated
	(In millions)
ASSETS
Cash and cash equivalents	$	11	$	338	$	349
Trade receivables, less allowances of $14		472		––		472
Inventories		422		––		422
Timber and timberland		386		––		386
Real estate		412		––		412
Loans held for sale		––		49		49
Loans, net of allowance for loan losses of $69		––		10,037		10,037
Securities available-for-sale		––		621		621
Securities held-to-maturity		––		5,616		5,616
Investment in Federal Home Loan Bank stock		––		303		303
Property, premises, and equipment		1,675		203		1,878
Goodwill		365		159		524
Other intangible assets		––		30		30
Prepaid expenses and other assets		433		214		595
Investment in financial services		1,050		––		––

TOTAL ASSETS	$	5,226	$	17,570	$	21,694


LIABILITIES
Accounts payable, accrued expenses, and other liabilities	$	716	$	166	$	860
Long-term debt and other borrowings		1,834		101		1,935
Deposits		––		9,284		9,273
Obligations to settle trade date securities		––		356		356
Federal Home Loan Bank borrowings		––		6,308		6,308
Deferred income taxes		167		––		148
Pension liability		266		––		266
Postretirement benefits		137		––		137
Preferred stock issued by subsidiaries		––		305		305

TOTAL LIABILITIES		3,120		16,520		19,588


SHAREHOLDERS’ EQUITY
Preferred stock — par value $1 per share:
authorized 25,000,000 shares; none issued						––
Common stock — par value $1 per share: authorized 200,000,000 shares; issued 123,605,344 shares, including shares held in the treasury						124
Additional paid-in capital						454
Accumulated other comprehensive loss						(191	)
Retained earnings						2,190

						2,577

Cost of shares held in the treasury: 13,114,222 shares						(471	)

TOTAL SHAREHOLDERS’ EQUITY						2,106

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	21,694

Please read the notes to consolidated financial statements.

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


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

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


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

TOTAL LIABILITIES		2,921		16,674		19,550


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

						2,521

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

TOTAL SHAREHOLDERS’ EQUITY						2,080

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	21,630

Please read the notes to consolidated financial statements.

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


	First Quarter
	2006			2005
	(In millions, except per share)
REVENUES
Manufacturing and real estate	$	1,101		$	999
Financial services		283			222

		1,384			1,221


COSTS AND EXPENSES
Manufacturing and real estate		(992	)		(939	)
Financial services		( 237	)		(180	)

		(1,229	)		(1,119	)

OPERATING INCOME		155			102
Parent company interest		(33	)		(29	)
Other non-operating income (expense)		––			1

INCOME BEFORE INCOME TAXES		122			74
Income tax expense		(46	)		(29	)

INCOME FROM CONTINUING OPERATIONS		76			45
Discontinued operations		––			––

NET INCOME	$	76		$	45


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		111.1			112.5
Diluted		113.4			115.7

EARNINGS PER SHARE
Basic:
Income from continuing operations	$	0.68		$	0.40
Discontinued operations		––			––

Net income	$	0.68		$	0.40


Diluted:
Income from continuing operations	$	0.67		$	0.39
Discontinued operations		––			––

Net income	$	0.67		$	0.39


DIVIDENDS PAID PER SHARE OF COMMON STOCK	$	0.25		$	0.225

Please read the notes to consolidated financial statements.

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


	First Quarter
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	76		$	45
Adjustments:
Depreciation and amortization		61			62
Amortization and accretion of financial instruments discounts and premiums, net		7			4
Provision for credit losses		2			2
Deferred income taxes		6			10
Non-cash real estate cost of sales		14			12
Real estate development expenditures		(10	)		(11	)
Other non-cash charges and (credits), net		––			4
Other		6			15
Changes in:
Receivables		(43	)		(65	)
Inventories		9			(6	)
Prepaid expenses and other		31			9
Accounts payable and accrued expenses		(61	)		50
Loans held for sale:
Originations		(116	)		(575	)
Sales		347			694
Collections on loans serviced for others, net		––			(117	)

		329			133


CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(46	)		(63	)
Sale of non-strategic assets and operations		3			9
Securities available-for-sale, net		33			47
Securities held-to-maturity, net		293			281
Loans originated or acquired, net of principal collected		(194	)		(144	)
Proceeds from sale of loans and mortgage servicing rights		––			42
Acquisitions, net of cash acquired, and joint ventures		(136	)		(33	)
Other		1			(4	)

		(46	)		135


CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt		(372	)		(214	)
Additions to debt		277			134
Borrowings under accounts receivable securitization facility, net		139			––
Deposits, net		79			165
Repurchase agreements and short-term borrowings, net		(453	)		(332	)
Cash dividends paid to shareholders		(27	)		(25	)
Repurchase of common stock		(51	)		(104	)
Exercise of stock options		27			30
Tax benefit on stock options exercised		6			––
Settlement of equity purchase contracts		––			26
Other		––			(58	)

		(375	)		(378	)


Discontinued operations, principally operating activities		––			(2	)

Net increase (decrease) in cash and cash equivalents		(92	)		(112	)
Cash and cash equivalents at beginning of period		441			372

Cash and cash equivalents at end of period	$	349		$	260

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

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

Unaudited


	First
	Quarter-End			Year-End
	2006			2005
	(In millions)
ASSETS
Current Assets
Cash and cash equivalents	$	11		$	13
Trade receivables, less allowance for doubtful accounts of $14 in 2006 and 2005		472			411
Inventories:
Finished goods and work in process		99			95
Raw materials		211			224
Supplies and other		112			106

Total inventories		422			425
Prepaid expenses and other		67			94

Total current assets		972			943
Investment in Financial Services		1,050			1,017
Timber and Timberland		386			394
Real Estate		412			403
Property and Equipment
Land and buildings		644			619
Machinery and equipment		3,409			3,337
Construction in progress		66			62
Less allowances for depreciation		(2,444	)		(2,385	)

Total property and equipment		1,675			1,633
Goodwill		365			236
Assets Held for Sale		34			34
Other Assets		332			341

TOTAL ASSETS	$	5,226		$	5,001


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	192		$	200
Accrued employee compensation and benefits		64			101
Accrued interest		32			19
Accrued property taxes		15			27
Other accrued expenses		142			136
Liabilities of discontinued operations		9			9
Current portion of long-term debt		9			12

Total current liabilities		463			504
Long-Term Debt		1,834			1,599
Deferred Income Taxes		167			165
Pension Liability		266			270
Postretirement Benefits		137			137
Other Long-Term Liabilities		253			246

Total liabilities		3,120			2,921
Shareholders’ Equity		2,106			2,080

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,226		$	5,001

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS

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

Unaudited


	First Quarter
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	76		$	45
Adjustments:
Depreciation and amortization		56			56
Non-cash share-based compensation		16			10
Non-cash pension and postretirement expense		14			15
Cash contribution to pension and postretirement plans		(18	)		(17	)
Deferred income taxes (benefit)		2			8
Net earnings of financial services		(29	)		(26	)
Earnings of joint ventures		(12	)		(12	)
Dividends of earnings from joint ventures		1			7
Non-cash real estate cost of sales		14			12
Real estate development expenditures		(10	)		(11	)
Other non-cash charges (credits)		––			4
Other		(3	)		(1	)
Changes in:
Receivables		(43	)		(65	)
Inventories		9			(6	)
Prepaid expenses and other		31			9
Accounts payable and accrued expenses		(61	)		50

		43			78


CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(32	)		(56	)
Sales of non-strategic assets and operations and proceeds from sale of property and equipment		3			1
Acquisitions, net of cash acquired, and joint ventures		(135	)		(14	)

		(164	)		(69	)


CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt		(241	)		(32	)
Additions to debt		277			134
Borrowings under accounts receivable securitization facility, net		139			––
Cash dividends paid to shareholders		(27	)		(25	)
Repurchase of common stock		(51	)		(104	)
Exercise of stock options		27			30
Tax benefit on stock options exercised		6			––
Settlement of equity purchase contracts		––			26
Other		(11	)		(37	)

		119			(8	)


Discontinued operations, principally operating cash flows		––			(2	)

Net increase (decrease) in cash and cash equivalents		(2	)		(1	)
Cash and cash equivalents at beginning of period		13			22

Cash and cash equivalents at end of period	$	11		$	21

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

FINANCIAL SERVICES

Unaudited


	First
	Quarter-End		Year-End
	2006		2005
	(In millions)
ASSETS
Cash and cash equivalents	$	338	$	431
Loans held for sale		49		280
Loans, net of allowance for losses of $69 in 2006 and $74 in 2005		10,037		9,845
Securities available-for-sale		621		654
Securities held-to-maturity		5,616		5,558
Investment in Federal Home Loan Bank stock		303		300
Premises and equipment, net		203		193
Accounts, notes, and accrued interest receivable		115		120
Goodwill		159		159
Other intangible assets		30		31
Other assets		99		120

TOTAL ASSETS	$	17,570	$	17,691


LIABILITIES AND STOCKHOLDER’S EQUITY
Deposits	$	9,284	$	9,201
Federal Home Loan Bank borrowings		6,308		6,892
Obligations to settle trade date securities		356		––
Other liabilities		166		175
Other borrowings		101		101
Preferred stock issued by subsidiaries		305		305

TOTAL LIABILITIES		16,520		16,674
Shareholder’s Equity		1,050		1,017

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	17,570	$	17,691

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF INCOME

FINANCIAL SERVICES

Unaudited


	First Quarter
	2006			2005
	(In millions)
Interest Income
Loans and loans held for sale	$	166		$	129
Securities available-for-sale		11			15
Securities held-to-maturity		62			34
Other earning assets		2			1

Total interest income		241			179

Interest Expense
Deposits		(62	)		(39	)
Borrowed funds		(75	)		(45	)

Total interest expense		(137	)		(84	)

Net Interest Income		104			95
Provision for credit losses		(2	)		(2	)

Net Interest Income After Provision For Credit Losses		102			93

Noninterest Income
Loan origination and sale of loans		2			6
Insurance commissions and fees		14			13
Service charges on deposits		11			10
Operating lease income		2			1
Other		13			13

Total noninterest income		42			43

Noninterest Expense
Compensation and benefits		(48	)		(46	)
Insurance operations, other than compensation		(4	)		(4	)
Occupancy		(6	)		(6	)
Information systems and technology		(3	)		(4	)
Charges related to asset impairments and severance		(3	)		––
Other		(34	)		(34	)

Total noninterest expense		(98	)		(94	)

Income Before Income Taxes		46			42
Income tax expense		(17	)		(16	)


Net Income	$	29		$	26

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS

FINANCIAL SERVICES

Unaudited


	First Quarter
	2006			2005
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	29		$	26
Adjustments:
Depreciation		3			5
Depreciation of leased assets		2			1
Provision for credit losses		2			2
Amortization and accretion of financial instrument discounts and premiums, net		7			4
Deferred income taxes		4			2
Changes in:
Loans held for sale:
Originations		(116	)		(575	)
Sales		347			694
Collections on loans serviced for others, net		––			(117	)
Other		8			13

		286			55


CASH PROVIDED BY (USED FOR) INVESTING
Securities available-for-sale:
Purchases		(1	)		––
Principal payments and maturities		34			47
Securities held-to-maturity:
Purchases		––			(3	)
Principal payments and maturities		293			284
Loans originated or acquired, net of collections		(194	)		(144	)
Collection of mortgage servicing rights sale receivables		––			42
Acquisitions, net of cash acquired		(1	)		(19	)
Capital expenditures		(14	)		(7	)
Other		1			4

		118			204


CASH PROVIDED BY (USED FOR) FINANCING
Deposits, net		84			165
Repurchase agreements and short-term borrowings, net		(453	)		(332	)
Payments of long-term FHLB and other borrowings		(131	)		(182	)
Other		3			(21	)

		(497	)		(370	)


Net increase (decrease) in cash and cash equivalents		(93	)		(111	)
Cash and cash equivalents at beginning of period		431			350

Cash and cash equivalents at end of period	$	338		$	239

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

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

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

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

In conjunction with the classification of a fourth business segment, real estate, beginning first quarter 2006, we transferred about $300 million in real estate assets and $110 million of related borrowings that had been included in our financial services summarized financial statements to our parent company summarized financial statements. Within the parent company summarized financial statements, we reclassified about $100 million of timber and timberland into real estate. As a result, we have reclassified prior period parent company and financial services summarized financial statements to reflect this transfer and reclassification as if they occurred at the beginning of the earliest period presented. The transferred and reclassified assets and liabilities and their related operating results and cash flows were reclassified at their carrying value or historical amounts. Please read Notes 8 and 9 to the Consolidated Financial Statements for further information.

Note 2 – New Accounting Pronouncements

Share-Based Compensation

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

	•		The fair value of awards granted to retirement eligible employees is expensed at the date of grant because our stock option awards and some of our other awards provide for accelerated or continued vesting upon retirement. Previously, the fair value of these awards was expensed over the expected service period. The change accelerated about $7 million of expense into first quarter 2006 related to awards granted in 2006. We will continue to expense the fair value of awards granted prior to 2006 over the expected service period.

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

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

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

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

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

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


	First Quarter
	2005
	(In millions,
	except per share)
Net income, as reported	$	45
Add: Share-based compensation expense, net of related tax effects, included in the determination of reported net income		6
Deduct: Total share-based compensation expense, net of related tax effects, determined under the fair value based method for all awards		(7	)

Pro forma net income	$	44


Earnings per share:
Basic, as reported	$	0.40
Basic, pro forma	$	0.39

Diluted, as reported	$	0.39
Diluted, pro forma	$	0.38

Pending Accounting Pronouncements

Beginning second quarter 2006, we will begin applying EITF Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty, to new inventory exchange arrangements. As a result, we will begin valuing non-monetary exchanges of similar inventory at the carrying value of the inventory exchanged instead of the fair value of the inventory received. We do not expect the effect of this change to significantly affect our earnings or financial position. We include these transactions in cost of sales.

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

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

Note 3 – Employee Benefit Plans

Defined benefit expense for first quarter consists of:


							Postretirement
	Defined Benefits						Benefits
	2006			2005			2006			2005
	(In millions)
Service costs – benefits earned during the period	$	7		$	7		$	1		$	1
Interest cost on projected benefit obligation		18			18			2			2
Expected return on plan assets		(20	)		(18	)		––			––
Amortization of prior service costs		1			––			(1	)		(1	)
Amortization of actuarial net loss		6			6			––			––

Defined benefit expense	$	12		$	13		$	2		$	2

In each of first quarter 2006 and 2005, we made $15 million in voluntary, discretionary contributions to our defined benefit plans.

Note 4 – Share-Based Compensation

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

Restricted or performance units

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


				Weighted
				Average
				Grant Date		Aggregate
				Fair Value		Current
	Shares			Per Share		Value
	(In thousands)					(In millions)
Not vested beginning first quarter 2006		744		$	32
Granted		682			46
Vested and settled		––			––
Forfeited		(14	)		32

Not vested first quarter-end 2006		1,412			39	$	63


Not vested first quarter-end 2006 subject to
Time vesting requirements		828				$	37
Performance requirements		584					26

Total		1,412				$	63


Not vested first quarter-end 2006 to be settled in
Cash		880				$	39
Stock		532					24

Total		1,412				$	63

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

No restricted or performance units vested in first quarter 2006. The fair value of units vested in first quarter 2005 was less than $1 million.

Restricted stock

Restricted stock awards generally vest ratably over three to six years, provide for accelerated or continued vesting upon retirement or if there is a change in control, and are included in outstanding shares. There were no restricted stock awards granted in first quarter 2006. There were 687,550 restricted stock awards outstanding at first quarter-end 2006 with a weighted average grant date fair value of $32.27 per share and an aggregate current value of $31 million. The fair value of restricted stock vested was $1 million in first quarter 2006 and $2 million in first quarter 2005.

Stock options

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


						Weighted		Aggregate
				Weighted		Average		Intrinsic Value
				Average		Remaining		(Current value
				Exercise Price		Contractual		less exercise
	Shares			Per Share		Term		price)
	(In thousands)					(In years)		(In millions)
Outstanding beginning first quarter 2006		6,832		$	28
Granted		1,097			46
Exercised		(1,041	)		27
Forfeited		(73	)		31

Outstanding end of first quarter 2006		6,815			31		7	$	90


Exercisable end of first quarter 2006		3,903			28		6	$	66

The intrinsic value of options exercised was $18 million in first quarter 2006 and $14 million in first quarter 2005.

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


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

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

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

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

Share-based compensation expense

Pre-tax share-based compensation expense consists of:


	First Quarter
	2006		2005
	(In millions)
Restricted or performance units	$	8	$	3
Restricted stock		1		1
Stock options		7		2

Total pre-tax share-based compensation expense	$	16	$	6

In first quarter 2006, $13 million of share-based compensation expense was included in general and administrative expense, $1 million was included in selling expense, and $2 million was included in cost of sales. In first quarter 2005, $5 million of share-based compensation expense was included in general and administrative expense and $1 million was included in cost of sales. The amount of share-based compensation capitalized was not significant.

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

Unrecognized share-based compensation for all awards not vested was $29 million at first quarter-end 2006. It is likely that this cost will be recognized as expense over the next 3 years.

Other information


	First Quarter
	2006		2005
	(In millions)
Cash paid to settle restricted or performance units	$	––	$	––
Cash received from the exercise of stock options		27		30
Income tax benefit recognized from employee exercise of options		6		––

Note 5 – Earnings Per Share

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


	First Quarter
	2006		2005
	(In millions)
Weighted average common shares outstanding – basic		111.1		112.5
Dilutive effect of equity purchase contracts (settled in first and second quarter of 2005)		––		1.5
Dilutive effect of stock options		2.3		1.7

Weighted average shares outstanding – diluted		113.4		115.7

We have adjusted the first quarter 2005 share and per share information to reflect our two-for-one stock split on April 1, 2005.

In first quarter 2006, we repurchased 1.5 million shares of common stock for $65 million, including $14 million in other current liabilities that was settled after first quarter-end. The repurchased shares were added to treasury shares at an average cost of $43.66 per share. These repurchases were made under an August 5, 2005 Board of Directors’ authorization to repurchase up to six million shares. At first quarter-end 2006, we had repurchased four million shares of common stock for $165 million under this authorization.

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

Note 6 – Comprehensive Income

Comprehensive income consists of:


	First Quarter
	2006			2005
	(In millions)
Net income	$	76		$	45
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on:
Available-for-sale securities		––			(3	)
Derivative instruments		––			––
Foreign currency translation adjustments		(2	)		––

Other comprehensive income (loss)		(2	)		(3	)

Comprehensive income	$	74		$	42

At first quarter-end 2006, the fair value of our interest-rate derivative instruments was a $2 million liability, of which $1 million is related to an interest-rate swap designated as a hedge of interest cash flows anticipated from specific borrowings and $1 million is related to an interest-rate swap we did not designate as a hedge. Changes in the fair value of the hedge transaction decreased other comprehensive income by less than $1 million in first quarter 2006. Hedge ineffectiveness was not significant in first quarter 2006. Changes in the fair value of the instrument not designated as a hedge are included in other non-operating income (expense) and resulted in income of less than $1 million in first quarter 2006.

Note 7 – Contingencies

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

Note 8 – Segment Information

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

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

As previously announced, beginning January 2006, we classified into a real estate business segment our real estate operations that were previously included within our forest products and financial services segments. As a result, we have reclassified the first quarter 2005 segment information to reflect four business segments.

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


											Expenses
											Not
											Allocated to
											Segments
	Corrugated		Forest			Real		Financial			and
	Packaging		Products			Estate		Services			Eliminations			Total
For First Quarter 2006 or at First Quarter-End 2006:
(In millions)
Revenues from external customers	$	721	$	333		$	47	$	283		$	––		$	1,384
Depreciation and amortization		38		14			1		5			3			61
Segment operating income or income (loss) before taxes		40		82			26		49			(75	)^(a)		122
Financial services, net interest income		––		––			––		104			––			104
Total assets		2,314		1,071			435		17,570			304			21,694
Capital expenditures		19		10			––		14			3			46
Goodwill		236		129			––		159			––			524

For First Quarter 2005 or at First Quarter-End 2005:
(In millions)
Revenues from external customers
As reported	$	718	$	249		$	––	$	236		$	––		$	1,203
Reclassification		1		2			29		(14	)		––			18	^(b)

As reclassified		719		251			29		222			––			1,221
Depreciation and amortization
As reported		40		13			––		7			2			62
Reclassification		––		––			1		(1	)		––			––

As reclassified		40		13			1		6			2			62
Segment operating income or income (loss) before taxes
As reported		50		54			––		47			(77	)		74
Reclassification		––		(3	)		9		(5	)		(1	)		––

As reclassified		50		51			9		42			(78	)^(a)		74
Financial services, net interest income
As reported		––		––			––		94			––			94
Reclassification		––		––			––		1			––			1

As reclassified		––		––			––		95			––			95
Total assets
As reported		2,473		1,024			––		15,979			259			19,735
Reclassification		––		(97	)		398		(336	)		26			(9	)^(c)

As reclassified		2,473		927			398		15,643			285			19,726
Capital expenditures
As reported		39		14			––		7			4			64
Reclassification		––		(1	)		––		––			––			(1	)^(d)

As reclassified		39		13			––		7			4			63
Goodwill, as reported		236		––			––		158			––			394


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

^(b)		Revenues increased because we reclassified some revenue that had previously been reported as a reduction of cost of sales, principally minerals and other lease revenues.

^(c)		Total assets decreased primarily because we are now including a deferred tax asset within the deferred tax liability caption.

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

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

Expenses not allocated to segments consists of:


	First Quarter
	2006			2005
	(In millions)
General and administrative	$	(23	)	$	(20	)
Share-based compensation		(16	)		(6	)
Other operating income (expense)		(3	)		(24	)
Other non-operating income (expense)		––			1
Parent company interest		(33	)		(29	)

	$	(75	)	$	(78	)


Other operating income (expense) applies to:
Corrugated packaging	$	(2	)	$	(18	)
Forest products		––			––
Real estate		––			––
Financial services		(3	)		––
Unallocated		2			(6	)

	$	(3	)	$	(24	)

Note 9 – Real Estate

Real estate consists of:


	First
	Quarter-End		Year-End
	2006		2005
	(In millions)
Developed land and land under development	$	201	$	199
Land held for investment or future development		113		104
Investment in real estate ventures		74		76
Income producing properties, net of accumulated depreciation		24		24

Total	$	412	$	403

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

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


	First
	Quarter-End			Year-End
	2006			2006
	(In millions)
Real estate	$	168		$	184
Total assets		236			240
Borrowings, principally non-recourse		77			76
Total liabilities		83			77
Equity		153			163

Our investment in real estate ventures:
Our share of their equity	$	82		$	84
Unrecognized deferred gain ^(a)		(8	)		(8	)

Investment in real estate ventures	$	74		$	76


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

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


	First Quarter
	2006		2005
	(In millions)
Revenues	$	53	$	45
Earnings		20		14
Our equity in their earnings		10		4

In first quarter 2006, we contributed $2 million to the ventures and received $14 million in return of capital distributions.

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

Note 10 – Assets Held For Sale

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

At first quarter-end 2006, discontinued operations consist of the chemical business obtained in the acquisition of Gaylord. The disposition of the Gaylord chemical business has been delayed primarily due to its class action litigation that was settled in 2004. At first quarter-end 2006, the assets and liabilities of discontinued operations include $7 million of working capital and $6 million of property and equipment. Revenues from discontinued operations were $7 million in first quarter 2006 and $5 million in first quarter 2005.

At first quarter-end 2006, the carrying value of non-strategic assets held for sale was $12 million.

Note 11 – Other Operating Income (Expense)


	First Quarter
	2006			2005
	(In millions)
Equity in earnings of manufacturing joint ventures	$	2		$	8
Equity in earnings of real estate ventures		10			4
Closure of production and converting facilities and sale of non-strategic assets		––			(11	)
Antitrust litigation		––			(7	)
Proxy contest		––			(4	)
Other		(1	)		(2	)

	$	11		$	(12	)

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

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

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


	Beginning				Cash			End of
	of Period		Additions		Payments			Period
	(In millions)
Involuntary employee terminations	$	1	$	––	$	––		$	1
Contract termination penalties		2		––		(2	)		––
Environmental remediation		2		––		(2	)		––
Demolition		7		––		(1	)		6

Total	$	12	$	––	$	(5	)	$	7

In addition, our financial services segment incurred $3 million in severance and other exit costs in first quarter 2006 related to the elimination of its wholesale mortgage origination network. At year-end 2005, accruals for severance and exit costs were $6 million, of which $3 million was paid in first quarter 2006. At first quarter-end 2006, financial services accruals for severance and exit costs were $6 million, of which $3 million of severance will be paid in second and third quarters 2006.

Note 12 – Acquisitions and Other Items

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

We are now including all of the assets and liabilities, results of operations and cash flows of Standard Gypsum in our consolidated financial statements and parent company summarized financial statements. Previously we had accounted for our interest in Standard Gypsum using the equity method. We allocated the purchase price to the 50 percent of the assets acquired and liabilities assumed based on our estimates of their fair value at the date of acquisition. We based these estimates of fair values on independent appraisals and other information that reflect our current intentions. The other 50 percent of the assets and liabilities, which we already owned, were included at their carrying value. A summary of the net assets at the date of acquisition (50 percent at fair value and 50 percent at carrying value) follows:


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

Total assets		238

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

Total liabilities		(69	)

Net assets at date of acquisition	$	169

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

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

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


	2005
	First
	Quarter		Year
	(In millions, except per share)
Parent company revenues	$	1,045	$	4,175
Income from continuing operations		48		190
Income from continuing operations, per diluted share	$	0.41	$	1.66

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

In first quarter 2005, financial services acquired an insurance agency for $18 million cash with potential additional consideration of up to $7 million. This acquisition did not materially affect our financial position, results of operations or cash flows.

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

Forward-Looking Statements

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

	•		general economic, market or business conditions;

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

	•		the availability and price of raw materials we use;

	•		fluctuations in the cost of purchased energy;

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

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

	•		assumptions related to accounting for impaired assets;

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

	•		competitive actions by other companies;

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

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

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

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

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

Non-GAAP Financial Measure

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

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

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

Accounting Policies

Critical Accounting Estimates

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

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

New and Pending Accounting Pronouncements

Beginning January 2006, we adopted the modified prospective application method of accounting for share-based payments contained in SFAS No 123 (revised December 2004), Share-Based Payment. Please read Note 2 to the Consolidated Financial Statements for further information about this and about two pending accounting pronouncements.

Results of Operations for First Quarter 2006 and 2005

Summary

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


	First Quarter
	2006			2005
	(In millions, except per share)
Revenues
Corrugated packaging	$	721		$	719
Forest products		333			251
Real estate		47			29
Financial services		283			222

Total revenues	$	1,384		$	1,221

Segment operating income
Corrugated packaging	$	40		$	50
Forest products		82			51
Real estate		26			9
Financial services		49			42

Total segment operating income		197			152

Expenses not allocated to segments
General and administrative		(23	)		(20	)
Share-based compensation		(16	)		(6	)
Other operating income (expense)		(3	)		(24	)
Other non-operating income (expense)		––			1
Parent company interest		(33	)		(29	)

Income before income taxes		122			74
Income tax expense		(46	)		(29	)

Income from continuing operations		76			45
Discontinued operations		––			––

Net income	$	76		$	45


Average diluted shares outstanding		113.4			115.7

Income from continuing operations, per diluted share	$	0.67		$	0.39

ROI, annualized		13.8	%		9.6	%

Significant items affecting income from continuing operations included:

	•		In 2006, we experienced improved markets for our forest products, principally lumber and gypsum, and we benefited from the acquisition of our partner’s 50 percent interest in Standard Gypsum LP. While we continued to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization and increase operating efficiencies, costs, principally energy and freight, offset much of the benefit. In addition, we began classifying real estate as our fourth business segment. As a result, we have reclassified prior period parent company and financial services summarized financial statements and segment information to reflect the transfer and reclassifications as if they occurred at the beginning of the earliest period presented. Real estate operations benefited from an $8 million gain on sale of land held for commercial use. Financial services operations benefited from improved net interest income attributable to an increase in earning assets, principally mortgage-backed securities. Actions taken to lower costs in our financial services operation associated with the elimination of the wholesale mortgage operation resulted in charges of $3 million. In addition, we accelerated the expensing of $7 million of share-based compensation as a result of the adoption of the new share-based compensation accounting pronouncement related to awards granted to retirement eligible employees.

	•		In 2005, we continued to see the benefits in our manufacturing operations of our initiatives to lower costs, improve asset utilization and increase operating efficiencies. In addition, market demand strengthened, resulting in higher prices and shipments for most of our manufactured products. Our financial services operations were negatively impacted by lower net interest income resulting from a decrease in average earning assets. Actions taken to lower costs and improve asset utilization and operating efficiencies included the announced closure of our Antioch, California converting facility and

other workforce reductions, which resulted in $11 million in charges and expenses. In addition, we incurred $13 million in charges principally associated with antitrust litigation and a proxy contest.

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

Corrugated Packaging

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

A summary of our corrugated packaging results follows:


	First Quarter
	2006			2005
	(Dollars in millions)
Revenues	$	721		$	719
Costs and expenses		(681	)		(669	)

Segment operating income	$	40		$	50


Segment ROI		7.8	%		9.5	%

Corrugated packaging pricing, which includes freight and is net of discounts and returns and allowances, was down slightly in first quarter 2006 while shipments were essentially flat.


	First Quarter 2006
	versus
	First Quarter 2005
	Increase/(Decrease)
Corrugated packaging
Average prices		(1	)%
Shipments, average week		––	%
Industry shipments, average week ^(a)		––	%

Linerboard
Average prices		(10	)%
Shipments, tons		(13	)%


(a)		Source: Fibre Box Association

Corrugated packaging shipments were generated with four fewer converting facilities at first quarter-end 2006 compared with first quarter-end 2005.

Linerboard shipments to third parties in first quarter 2006 were down because more of our production was used in our converting facilities, which is consistent with our strategy to convert more of the linerboard we produce in our own converting facilities.

Compared with fourth quarter 2005, average corrugated packaging prices were up three percent and shipments were down three percent, while average linerboard prices were up 13 percent and shipments were up 14 percent. We announced a $50 per ton increase in the price of linerboard effective March 15, 2006.

Costs and expenses were up two percent in first quarter 2006 compared with first quarter 2005. Higher volumes and prices for most raw materials were partially offset by lower costs attributable to the closure of four converting

facilities, workforce reductions and increased mill reliability and efficiency, which resulted in lower maintenance costs and improved raw material yield and energy usage.

Fluctuations in our significant cost and expense components included:


	First Quarter 2006
	versus
	First Quarter 2005
	Increase (Decrease)
	In millions
Wood fiber	$	––
Recycled fiber		(11	)
Freight		11
Energy, principally natural gas		9
Depreciation		(2	)
Pension and postretirement		(1	)

The costs of our outside purchases of wood and recycled fiber, energy and freight fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate in 2006.

Information about our converting facilities and mills follows:


	First Quarter
	2006			2005
Number of converting facilities (at quarter-end)		65			69
Mill capacity, in thousand tons		892			892
Mill production, in thousand tons		890			875
Percent mill production used internally		93	%		92	%
Percent of total fiber requirements sourced from recycled fiber		34	%		36	%
Corrugating medium purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		14			15

Forest Products

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

A summary of our forest products results follows:


	First Quarter
	2006			2005
	Actual			Actual			Pro forma*
	(Dollars in millions)
Revenues	$	333		$	251		$	297
Costs and expenses		(251	)		(200	)		(239	)

Segment operating income	$	82		$	51		$	58


Segment ROI		32.7	%		24.0	%		22.0	%


*		Pro forma to reflect the consolidation of Standard Gypsum LP.

Pricing, which includes freight and is net of discounts and returns and allowances, improved for gypsum, and shipments improved for both gypsum and lumber due to the continued strength in the residential construction and remodeling markets.


	First Quarter 2006
	versus
	First Quarter 2005
	Increase/(Decrease)
Lumber:
Average prices		(2	)%
Shipments		12	%
Gypsum:
Average prices		30	%
Shipments		172	%
Particleboard:
Average prices		(3	)%
Shipments		(5	)%
MDF:
Average prices		(7	)%
Shipments		(43	)%

Compared with fourth quarter 2005, average prices were flat for lumber and up two percent for particleboard, eight percent for gypsum and one percent for MDF. Shipments were up twelve percent for lumber, eight percent for particleboard, five percent for MDF, and 161 percent for gypsum.

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

Segment operating results also include:


	First Quarter
	2006		2005
	(In millions)
Our share of joint venture operating income	$	––	$	6
Hunting, mineral and recreational lease revenue		14		6

	$	14	$	12

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

Costs and expenses were up twenty-five percent in first quarter 2006 compared with first quarter 2005. Higher volumes and prices for most raw materials and the increase in reported cost attributable to the consolidation of Standard Gypsum LP beginning January 2006 offset cost reductions attributable to the sale of our Pembroke MDF facility in June 2005.

We purchased 16,000 tons of gypsum facing paper from our Premier Boxboard Limited LLC joint venture in first quarter 2006 and 8,000 tons in first quarter 2005. Approximately 68 percent of our gypsum facing paper requirements in first quarter 2006 were supplied by Premier.

Fluctuations in our significant cost and expense components included:


	First Quarter 2006
	versus
	First Quarter 2005
	Increase (Decrease)
	In millions
Wood fiber	$	(1	)
Energy, principally natural gas		11
Freight		8
Chemical		(2	)
Depreciation		1
Pension and postretirement		(1	)

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

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


	First Quarter
	2006			2005
Timber harvest, in million tons:
Sawtimber		0.6			0.5
Pulpwood		0.8			0.8

Total		1.4			1.3


Number of converting and manufacturing facilities (at quarter-end)		17			18
Average operating rates for all product lines excluding sold or closed facilities:
High		110	%		100	%
Low		93	%		91	%
Average		100	%		96	%

Real Estate

We own or, through our venture interests, participate in the entitlement and/or development of real estate projects in eight states and eleven markets encompassing about 240,000 acres, including 204,000 acres of high-value lands located in Georgia, principally near Atlanta, and in Texas. We are creating the infrastructure and securing entitlements on these lands for single-family residential, commercial, mixed-use and multi-family housing site development. Our real estate segment revenues are principally derived from the sale of developed and undeveloped real estate and to a lesser degree, from the sale of timber and operations of commercial income producing properties.

A summary of our real estate results follows:


	First Quarter
	2006			2005
	(Dollars in millions)
Revenues	$	47		$	29
Costs and expenses		(31	)		(24	)
Our share of real estate ventures’ income		10			4

Segment operating income	$	26		$	9


Segment ROI		25.3	%		9.5	%

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

Revenue consists of:


	First Quarter
	2006		2005
	(Dollars in millions)
Residential real estate revenue	$	17	$	9
Lots sold		342		193

Commercial real estate revenue	$	16	$	10
Acres sold		7		126

Land held for investment or future development revenue	$	7	$	4
Acres sold		923		448

Income producing properties, timber and other revenues	$	7	$	6

Total revenues	$	47	$	29

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

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


	First Quarter
	2006
Owned and consolidated ventures:
Developed land and land under development, (at quarter-end)
Number of projects		29
Residential lots remaining		11,415
Commercial acres remaining		564

Land held for investment or future development, (at quarter-end)
Number of projects		20
Acres in entitlement process		21,950
Acres undeveloped		197,224

Ventures accounted for using the equity method:
Ventures’ lot sales
Lots sold		719	^(a)
Revenue per lot sold	$	49,357

Ventures’ developed land and land under development, (at quarter-end)
Number of projects		24
Residential lots remaining		13,191
Commercial acres remaining		701

Land held for investment or future development, in acres (at quarter-end)		6,594


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

Financial Services

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

A summary of our financial services results follows:


	First Quarter
	2006			2005
	(Dollars in millions)
Net interest income	$	104		$	95
Segment operating income		49			42

Segment ROI		19.3	%		18.1	%

Net Interest Income and Earning Assets and Deposits

Net interest income increased in 2006 principally as a result of our purchases of mortgage-backed securities in late 2005 and early 2006.

Information concerning our net interest margin follows:


	First Quarter
	2006					2005
	Average		Yield/			Average		Yield/
	Balance		Rate			Balance		Rate
			(Dollars in millions)
Earning assets	$	16,585		5.80	%	$	14,962		4.78	%
Interest-bearing liabilities		15,410		(3.55	)%		13,965		(2.40	)%
Impact of noninterest bearing funds				0.25	%				0.16	%

Net interest margin				2.50	%				2.54	%

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

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


	First Quarter-End
	2006			2005
	(Dollars in millions)
Residential housing assets
Loans held for sale	$	49		$	391
Loans		7,012			7,061
Securities		6,540			4,650

Total residential housing assets		13,601			12,102
Other earning assets		3,280			2,890

Total earning assets	$	16,881		$	14,992

Residential housing assets as a percentage of total earning assets		81	%		81	%

Noninterest bearing deposit accounts	$	782		$	667
Interest bearing deposit accounts		3,585			4,084
Certificates of deposit		4,917			4,378

Total deposits	$	9,284		$	9,129

Earning assets were higher at first quarter-end 2006 compared with first quarter-end 2005, because increases in commercial loans and purchases of mortgage-backed securities more than offset declines in loans held for sale and decreases in our single-family mortgage loans. Loans held for sale declined due to the repositioning of our mortgage origination activities. We anticipate our commercial loans will increase somewhat from first quarter-end 2006 levels throughout 2006. We anticipate our single-family mortgage loans will decrease because we previously retained some of the loans originated by the wholesale mortgage production network that we eliminated. In first quarter

2006, we agreed to purchase $0.4 billion in single-family mortgage-backed securities, and we expect to acquire additional mortgage-backed securities during the remainder of 2006.

A portion of our loans consists of adjustable-rate mortgages that have various monthly payment amount options (Option ARMs). These payment options generally include the ability to select from fully amortizing payments, interest-only payments and payments less than the interest accrual rate, which can result in negative amortization increasing the principal amount of the loan. At first quarter-end 2006, loans included $0.9 billion of Option ARMs and securities included $3.4 billion that had Option ARMs as the underlying assets. Of these securities, $0.6 billion are U.S. Government Sponsored Enterprise issued and $2.8 billion are senior tranches of private-label offerings. All of these securities bear AAA ratings from nationally recognized securities rating organizations. Interest income recognized and added to the principal balance of the Option ARM loans was $3 million in first quarter 2006 and was not significant in first quarter 2005.

Asset Quality and Allowance for Credit Losses

Various asset quality measures we monitor are:


	First Quarter-End						Year-End
	2006			2005			2005
	(Dollars in millions)
Non-performing loans	$	41		$	63		$	35
Restructured operating lease assets		––			35			––
Foreclosed real estate		2			4			2

Non-performing assets	$	43		$	102		$	37


Non-performing loans as a percentage of total loans		0.40	%		0.64	%		0.35	%
Non-performing assets ratio		0.43	%		1.03	%		0.37	%
Allowance for loan losses as a percentage of non-performing loans		170	%		130	%		213	%
Allowance for loan losses as a percentage of total loans		0.69	%		0.83	%		0.75	%

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


	First Quarter
	2006			2005
	(Dollars in millions)
Loans:
Balance at beginning of period	$	74		$	85
Provision for loan losses		2			2
Net charge-offs		(7	)		(5	)

Balance at end of period		69			82


Unfunded credit commitments:
Balance at beginning of period		7			7
Provision for commitment-related credit losses		––			––
Net charge-offs		––			(1	)

Balance at end of period		7			6


Combined allowances for credit losses at period end	$	76		$	88


Provision for:
Loan losses	$	2		$	2
Commitment-related credit losses		––			––

Combined provision for credit losses	$	2		$	2


Net charge-offs as a percentage of average loans outstanding		0.28	%		0.28	%

In first quarter 2006, we recorded provisions for incurred losses on an asset-based loan to a chemical producer and on a lease to an automobile parts manufacturer that filed for bankruptcy protection. We are in the process of re-negotiating the terms of the lease with the lessee and recorded a partial charge-off based on anticipated lower lease payments. At first quarter-end the lease had a remaining carrying value of $1 million, its estimated fair value. Although changes in credit quality are difficult to predict, it is likely that we will recognize provisions for credit losses in future periods.

Noninterest Income and Noninterest Expense

Loan origination and sale of loans decreased $4 million primarily due to repositioning our mortgage origination activities in late 2005 and late 2004. As a result of these repositionings, we do not anticipate significant single-family loan originations or sales through the rest of 2006.

Expenses Not Allocated to Segments

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

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

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


	First Quarter
	2006			2005
	(In millions)
Closure of converting and production facilities and sale of non-strategic assets	$	––		$	(11	)
Elimination of wholesale mortgage origination network		(3	)		––
Antitrust litigation		––			(7	)
Proxy contest		––			(4	)
Other		––			(2	)

Total	$	(3	)	$	(24	)

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

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

Income Taxes

Our effective tax rate, which is income tax expense expressed as a percentage of income from continuing operations before taxes, was 38 percent in first quarter 2006 and 39 percent in first quarter 2005. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, foreign operating losses, and other items for which no financial benefit is recognized until realized.

Average Shares Outstanding

The change in average shares outstanding was principally due to the exercise of employee stock options and the net effect and timing of the repurchases of common stock and the 2005 settlement of the equity purchase contracts. The change in average diluted shares outstanding was principally due to the above factors and the dilutive effect of employee stock options resulting from the increase in the market price of our common stock.

Capital Resources and Liquidity for First Quarter 2006

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

Sources and Uses of Cash

Consolidated cash from operations was $329 million in first quarter 2006 and $133 million in first quarter 2005. Consolidated cash from operations represents the sum of parent company and financial services cash from operations, less the dividends from financial services, which are eliminated upon consolidation. In first quarter 2006 and 2005 we received no dividends from financial services.

Parent Company Sources and Uses of Cash


	First Quarter
	2006			2005
	(In millions)
We received cash from:
Operations	$	107		$	88
Working capital changes		(64	)		(12	)

From operations		43			76
Sale of non-strategic and other assets		3			1
Exercise of options and related tax benefits, and in 2005 the settlement of equity purchase contracts		33			56
Borrowing, net		175			102

Total sources		254			235


We used cash to:
Return to shareholders through:
Dividends		(27	)		(25	)
Repurchase of common stock		(51	)		(104	)
Reinvest in the business through:
Capital expenditures		(32	)		(56	)
Acquisition, joint ventures, and other		(146	)		(51	)

Total uses		(256	)		(236	)

Change in cash and cash equivalents	$	(2	)	$	(1	)

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

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

In 2006 and 2005, many of our employees took advantage of the increasing spread between the market price of our common stock and the exercise price of employee stock options and exercised their stock options. As a result, we issued 1,027,453 shares of common stock in first quarter 2006 and 1,145,058 shares in first quarter 2005 to employees exercising options. In addition, in first quarter 2005, we issued 826,240 shares of our common stock and received $26 million in cash in conjunction with the settlement of our equity purchase contracts. The remainder of the equity purchase contracts were settled in second quarter 2005.

We paid cash dividends to shareholders of $0.25 per share in first quarter 2006 and $0.225 per share in first quarter 2005.

In August 2005, we announced that our Board of Directors approved a repurchase program of up to six million shares. In first quarter 2006, we repurchased 1.5 million shares for $65 million, at an average price of $43.66 per share including $14 million that was settled after first quarter-end 2006. Through first quarter-end 2006, under this authorization, we have repurchased four million shares for $165 million, at an average price of $41.37 per share.

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

Capital expenditures and timberland reforestation and acquisition are expected to approximate $195 million in 2006 or about 87 percent of expected 2006 depreciation and amortization. Most of the expected 2006 expenditures relate to initiatives to increase reliability and efficiency at our linerboard mills.

Financial Services Sources and Uses of Cash


	First Quarter
	2006			2005
	(In millions)
We received cash from:
Operations	$	47		$	40
Changes in loans held for sale, and other		239			15
Net repayments on loans and securities		132			184

From operations		418			239
Collection of mortgage servicing rights sale receivables		––			42

Total sources		418			281


We used cash to:
Change in deposits and borrowings		(500	)		(349	)
Reinvest in the business through capital expenditures, acquisitions and other uses		(11	)		(43	)

Total uses		(511	)		(392	)

Change in cash and cash equivalents	$	(93	)	$	(111	)

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

The changes in deposits and borrowings and the amounts invested in loans and securities generally move in tandem because we use deposits and borrowings to finance these investments. In first quarter 2006, we used cash flow from the sale of loans held for sale and from principal payments on mortgage-backed securities to repay some of our borrowings. In first quarter 2005, we completed the acquisition of an insurance agency for $18 million cash.

Increases in our loans and loan commitments in first quarter 2006 increased our regulatory capital requirements. We anticipate continued commercial loan commitment growth throughout 2006, however we expect this growth will be more than offset by repayments of single-family mortgage loans.

Liquidity

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

Parent Company Liquidity

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

At first quarter-end 2006, we had $755 million in unused borrowing capacity under our credit agreements and accounts receivable securitization facility.


				Accounts
				Receivable
	Credit			Securitization
	Agreements			Facility			Total
	(In millions)
Committed	$	850		$	250		$	1,100
Less: borrowings		(175	)		(170	)		(345	)

Unused borrowing capacity at first quarter-end 2006	$	675		$	80		$	755

Our committed credit agreements include a $750 million revolving credit facility that expires in 2010. The remainder of our credit agreements expire in 2006 ($25 million) through 2008. Our accounts receivable securitization facility expires in 2008. As a result of the current discussions related to settling the audit of certain tax exempt bonds, it is likely that in second quarter 2006, we will refinance $30 million of currently outstanding tax exempt bonds. Please read Part II. Item 1. Legal Proceedings for further information.

At first quarter-end 2006, the fair value of our interest rate derivative instruments was a $2 million liability. The interest rate instruments expire in 2008. These instruments are non-exchange traded and are valued using either third-party resources or models.

Financial Services Liquidity

Our sources of short-term funding are our operating cash flows, new deposits, borrowings and, if necessary, sales of assets. Assets that can be readily converted to cash, or against which we can readily borrow, include short-term investments, loans, mortgage loans held for sale, and securities. At first quarter-end 2006, we had available liquidity of $3.5 billion.

Off-Balance Sheet Arrangements

Parent Company

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

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

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

Financial Services

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


	First
	Quarter-End		Year-End
	2006		2005
	(In millions)
Single-family mortgage loans	$	101	$	204
Unused lines of credit		1,993		2,209
Unfunded portion of loan commitments		4,270		4,141
Commitments to originate commercial loans		686		571
Letters of credit		386		373

Total	$	7,436	$	7,498

Capital Adequacy and Other Regulatory Matters

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

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


	First
	Quarter-End		Year-End
	2006		2005
	(In millions)
Balance sheet data:
Total assets	$	17,531	$	17,652
Total deposits		9,285		9,201
Shareholder’s equity		1,128		1,099


				Regulatory			For Categorization as
	Actual			Minimum			“Well Capitalized”
Regulatory capital ratios:
Tangible capital		7.15	%		2.00	%		N/A
Leverage capital		7.15	%		4.00	%		5.00	%
Risk-based capital		10.75	%		8.00	%		10.00	%

As we previously disclosed, in 2004 the OTS and Guaranty entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist for Affirmative Relief (or Consent Order) related to findings and required corrective actions associated with Guaranty’s mortgage origination activities. Guaranty has implemented the corrective actions necessitated by the Consent Order. As a result, in April 2006 the OTS terminated the Consent Order.

Pension and Postretirement Matters

We made voluntary, discretionary contributions of $15 million to the defined benefit pension plans in first quarter 2006, and it is likely that we will make additional voluntary, discretionary contributions to the defined benefit plans in the remainder of 2006 of $45 million, $15 million per quarter.

Energy

Energy costs were $94 million in first quarter 2006 compared with $74 million in first quarter 2005. Our energy costs fluctuate based on the market prices we pay for these commodities and on the amount and mix of the types of fuel we may use. We hedge very little of our energy needs. It is likely that these costs will continue to fluctuate during 2006.

Litigation and Related Matters

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

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

Calculation of Non-GAAP Financial Measure


	Parent			Corrugated			Forest			Real			Financial
	Company			Packaging			Products			Estate			Services
	(Dollars in millions)
First Quarter 2006
Return
Operating income or segment operating income determined in accordance with GAAP	$	155	^(a)	$	40		$	82		$	26		$	49
Adjustments for significant unusual items		––			N/A			N/A			N/A			N/A

As defined	$	155		$	40		$	82		$	26		$	49


Investment
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,001		$	2,318		$	866		$	422		$	1,017
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(492	)		(269	)		(76	)		(11	)		N/A
Assets held for sale		(34	)		N/A			N/A			N/A			N/A
Municipal bonds related to capital leases included in other assets		(188	)		N/A			N/A			N/A			N/A
Acquisition of Standard Gypsum, LP in January 2006		213			––			213			––			––

As defined	$	4,500		$	2,049		$	1,003		$	411		$	1,017


ROI, annualized		13.8	%		7.8	%		32.7	%		25.3	%		19.3	%


First Quarter 2005 ^(b)
Return
Operating income or segment operating income determined in accordance with GAAP	$	102	^(a)	$	50		$	51		$	9		$	42
Adjustments for significant unusual items		––			N/A			N/A			N/A			N/A

As defined	$	102		$	50		$	51		$	9		$	42


Investment
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,006		$	2,431		$	920		$	388		$	928
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(519	)		(326	)		(71	)		(10	)		N/A
Assets held for sale		(34	)		N/A			N/A			N/A			N/A
Municipal bonds related to capital leases included in other assets		(188	)		N/A			N/A			N/A			N/A

As defined	$	4,265		$	2,105		$	849		$	378		$	928


ROI, annualized		9.6	%		9.5	%		24.0	%		9.5	%		18.1	%


^(a)		Net of expenses not allocated to segments of $42 million in 2006 and $50 million in 2005.

^(b)		2005 information has been reclassified to reflect the new real estate business segment.

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

STATISTICAL AND OTHER DATA

Parent Company

Manufacturing

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


	First Quarter
	2006		2005
	(Dollars in millions)
*Revenues*
Corrugated Packaging
Corrugated packaging	$	698	$	691
Linerboard		23		28

Total	$	721	$	719


Forest Products^(a)
Pine lumber	$	84	$	75
Gypsum wallboard^(b)		112		31
Particleboard		49		54
Medium density fiberboard^(b)		16		31
Fiberboard		21		20
Hunting, mineral and recreational leases		14		6
Fiber and other		37		34

Total	$	333	$	251


*Unit sales*
Corrugated Packaging
Corrugated packaging, thousands of tons		869		857
Linerboard, thousands of tons		60		69

Total, thousands of tons		929		926


Forest Products
Pine lumber, million board feet		218		193
Gypsum wallboard, million square feet^(b)		563		207
Particleboard, million square feet		165		173
Medium density fiberboard, million square feet^(b)		39		69
Fiberboard, million square feet		102		107


^(a)		We have reclassified 2005 revenue to reflect the new real estate business segment and the reclassification of certain revenues previously reflected as a reduction of cost of sales.

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

Real Estate

Information about our real estate activities follows:

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


Project	County	Project Acres^(b)
Projects we own
California
Hidden Creek Estates	Chatsworth		700
Terrace at Hidden Hills	Calabasas		30

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

Total			21,950


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

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

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


					Residential Lots				Commercial Acres
									Acres
					Lots Sold				Sold
		Interest			Since		Lots		Since		Acres
Project	County	Owned^(b)			Inception		Remaining		Inception		Remaining
Projects we own
Colorado
Buffalo Highlands	Weld		100	%		––		645		––		––
Johnstown Farms	Weld		100	%		115		699		––		––
Stonebraker	Weld		100	%		––		600		––		––
Texas
Caruth Lakes	Rockwall		100	%		245		629		––		––
Cibolo Canyons	Bexar		100	%		200		1,549		––		145
Harbor Lakes	Hood		100	%		170		402		––		13
Hunter’s Crossing	Bastrop		100	%		168		441		19		95
Maxwell Creek	Collin		100	%		468		555		––		––
Oakcreek Estates	Comal		100	%		––		630		––		––
The Colony	Bastrop		100	%		305		1,187		22		50
The Gables at North Hill	Collin		100	%		109		173		––		––
The Preserve at Pecan Creek	Nueces		100	%		––		819		––		9
Other Texas Projects (8)	Various		100	%		2,419		250		104		64
Missouri, Tennessee, and Utah
Other Projects (4)	Various		100	%		788		416		––		––

						4,987		8,995		145		376


Projects in entities we consolidate
Texas
City Park	Harris		75	%		315		949		35		125
Lantana	Denton		55	% ^(c)		53		1,215		––		––
Other Texas Projects (4)	Various	Various				210		256		2		63

						578		2,420		37		188


Total owned and consolidated						5,565		11,415		182		564


Projects in ventures that we account for using the equity method
Georgia
Seven Hills	Paulding		50	%		420		597		5		46
The Georgian	Paulding		38	%		268		1,118		––		––
Other Georgia Projects (6)	Various	Various				2,006		711		––		––
Texas
Bar C Ranch	Tarrant		50	%		65		1,116		––		––
Fannin Farms West	Tarrant		50	%		224		220		––		––
Lantana	Denton	Various		^(c)		1,505		1,427		1		79
Long Meadow Farms	Fort Bend		19	%		292		2,420		––		134
Southern Trails	Brazoria		40	%		121		938		––		––
Stonewall Estates	Bexar		25	%		––		386		––		––
Summer Creek	Fort Bend		50	%		––		525		––		37
Summer Creek Ranch	Tarrant		50	%		712		1,733		––		374
Summer Lakes	Fort Bend		50	%		294		850		42		9
Village Park	Collin		30	%		221		348		––		8
Other Texas Projects (5)	Various	Various				719		388		––		14
Florida
Other Projects (3)	Various	Various				431		414		––		––

Total in ventures						7,278		13,191		48		701


Combined Total						12,843		24,606		230		1,265


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

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

^(c)		The Lantana project consists of a series of 16 partnerships in which our interests range from 25% to 55%. We account for eight of these partnerships in which our interests range from 25% to 50% using the equity method and we consolidate the remaining partnerships.

Financial Services

Information about financial services loan portfolio follows:


	First Quarter-End						Year-End
	2006			2005			2005
	(In millions)
Single-family mortgage	$	2,987		$	3,598		$	3,112
Single-family mortgage warehouse		670			573			757
Single-family construction		1,924			1,515			1,665
Multifamily and senior housing		1,431			1,375			1,469

Total residential housing		7,012			7,061			7,003
Commercial real estate		865			665			758
Commercial and business		857			762			843
Energy lending		815			729			756
Asset-based lending and leasing		386			410			395
Consumer and other		171			213			164

Total loans		10,106			9,840			9,919
Less allowance for loan losses		(69	)		(82	)		(74	)

Loans receivable, net	$	10,037		$	9,758		$	9,845

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

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


	Increase (Decrease) in Income Before Income Taxes
	First Quarter-End 2006						Year-End 2005
	Parent			Financial			Parent	Financial
	Company			Services			Company	Services
	(In millions)
Change in Interest Rates
+2%	$	(6	)	$	(26	)	$ ––	$	(31	)
+1%		(3	)		(9	)	––		(12	)
–1%		3			(22	)	––		(20	)
–2%		6			(57	)	––		(49	)

Parent company interest rate risk is related to our variable-rate long-term debt and our interest rate swaps. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable rate long-term debt. Parent company interest rate sensitivity has changed due to an increase in variable-rate long-term debt since year-end 2005. Changes in interest rates will affect the value of the interest rate swap agreements (currently $50 million notional amount). We believe that any changes in the value of these agreements would not be significant.

Our financial services segment is subject to interest rate risk to the extent interest-earning assets and interest-bearing liabilities repay or reprice at different times or in differing amounts or both. The change in our interest rate sensitivity is principally due to a shift in the mix of our adjustable rate mortgage assets. Paydowns from our portfolio of adjustable-rate mortgages that have interest rates that reset after a fixed rate period of up to five years have been reinvested primarily in Option ARMs that have interest rates that reset on a monthly basis.

Foreign Currency Risk

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

Commodity Price Risk

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

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

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

(b) Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Tax-Exempt Bonds

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

Indiana Environmental Matter

We previously reported that on July 22, 2002, a delivery driver for a chemical supply company overfilled a storage tank for caustic soda at our converting facility in Tipton, Indiana. The excess caustic soda drained through an overflow pipe into the city sewer system, resulting in a temporary shutdown of the city wastewater treatment plant and killing approximately 2,000 fish in a local creek. We removed the fish, assisted in restoring operations at the wastewater treatment plant, and took other measures to assure no ongoing effect to human health or the environment. The incident was investigated in 2002 by the U.S. Environmental Protection Agency and the Indiana Department of Natural Resources, with the cooperation of the Company.

We had received no communication following the completion of this investigation until April 2006 when we received a notice that the Department of Justice was authorized to file a felony indictment against one of our subsidiaries related to this matter. At this time, we are considering certain pre-indictment actions and are not able to predict whether we will be subject to any monetary sanctions arising out of this indictment or the amount of any such monetary sanctions. We, however, do not expect that any such monetary sanctions would have a significant effect on our financial position or long-term results of operations or cash flow.

Item 1A. Risk Factors

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

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

Issuer Purchases of Equity Securities⁽¹⁾

Maximum

Total Number

Number of

of Shares

Shares That

Purchased as

May Yet be

Part of Publicly

Purchased

Total Number

Announced

Under the

of Shares

Average

Plans or

Plans

Period

Purchased

Price Paid per Share

Programs

or Programs

Month 1 (1/1/2006 –1/31/2006)

3,500,000

Month 2 (2/1/2006 – 2/28/200)

649,000

43.64

649,000

2,851,000

Month 3 (3/1/2006 – 3/31/2006)

851,000

43.68

851,000

2,000,000

Total

1,500,000

43.66

1,500,000


⁽¹⁾		On August 5, 2005, we announced that our Board of Directors authorized the repurchase of up to 6,000,000 shares of our common stock. The plan has no expiration date. Through first quarter 2006, we had repurchased 4,000,000 shares at an average price per share of $41.37 under this authorization. We have no other repurchase plans or programs. We have no plans or programs that expired during the period covered by the table above and no plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.

Item 3. Defaults Upon Senior Securities

None.

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

None.

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.


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

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

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

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

Notes to the Consolidated Financial Statements		13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

Item 3. Quantitative and Qualitative Disclosures About Market Risk		45

Item 4. Controls and Procedures		46

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		46

Item 1A. Risk Factors		47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3. Defaults Upon Senior Securities		47

Item 4. Submission of Matters to a Vote of Security Holders		47

Item 5. Other Information		47

Item 6. Exhibits		47

SIGNATURES		48
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification of Chief Executive Officer Pursuant to Section 906
Certification of Chief Financial Officer Pursuant to Section 906


	TEMPLE-INLAND INC. (Registrant)
Dated: May 9, 2006	By	/s/ Louis R. Brill
		Louis R. Brill
		Vice President and Chief Accounting Officer


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		50

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		52

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		54

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		55