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 June 30, 2007


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 June 30, 2007

Common Stock (par value $1.00 per share)		105,974,913



Page 1 of 178		The Exhibit Index is page 50.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEET

TEMPLE-INLAND INC. AND SUBSIDIARIES
Second Quarter-End 2007
Unaudited


	Parent		Financial
	Company		Services		Consolidated
	(In millions)
ASSETS
Cash and cash equivalents	$	26	$	288	$	314
Trade receivables, net of allowance for doubtful accounts of $15		471		––		471
Inventories		420		––		420
Assets held-for-sale		313		––		313
Timber and timberland		59		––		59
Real estate		587		––		587
Loans held for sale		––		20		20
Loans, net of allowance for losses of $72		––		9,470		9,470
Securities available-for-sale		––		888		888
Securities held-to-maturity		––		4,192		4,192
Investment in Federal Home Loan Bank stock		––		211		211
Property and equipment, net		1,624		222		1,846
Goodwill		365		141		506
Other intangible assets		––		23		23
Prepaid expenses and other assets		382		240		575
Investment in financial services		1,034		––		––

TOTAL ASSETS	$	5,281	$	15,695	$	19,895


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other liabilities	$	821	$	132	$	943
Long-term debt and other borrowings		1,642		101		1,743
Deposits		––		9,532		9,526
Federal Home Loan Bank borrowings		––		4,582		4,582
Deferred income taxes		194		––		163
Liability for pension benefits		209		––		209
Liability for postretirement benefits		140		––		140
Subordinated notes payable to trust		––		314		314

TOTAL LIABILITIES		3,006		14,661		17,620


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						462
Accumulated other comprehensive loss, net						(185	)
Retained earnings						2,546

						2,947
Cost of shares held in the treasury: 17,630,431 shares						(672	)

TOTAL SHAREHOLDERS’ EQUITY						2,275

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	19,895

Please read the notes to consolidated financial statements.

CONSOLIDATED BALANCE SHEET
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year-End 2006


	Parent		Financial
	Company		Services		Consolidated
	(In millions)
ASSETS
Cash and cash equivalents	$	38	$	372	$	405
Trade receivables, net of allowance for doubtful accounts of $14		452		—		452
Inventories		435		—		435
Timber and timberland		358		—		358
Real estate		512		—		512
Loans held for sale		—		23		23
Loans, net of allowance for losses of $65		—		9,617		9,617
Securities available-for-sale		—		529		529
Securities held-to-maturity		—		4,853		4,853
Investment in Federal Home Loan Bank stock		—		262		262
Property and equipment, net		1,639		214		1,853
Goodwill		365		141		506
Other intangible assets		—		26		26
Prepaid expenses and other assets		403		214		582
Investment in financial services		1,015		—		—

TOTAL ASSETS	$	5,217	$	16,251	$	20,413


LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other liabilities	$	836	$	126	$	953
Long-term debt and other borrowings		1,628		101		1,729
Deposits		—		9,486		9,479
Federal Home Loan Bank borrowings		—		5,076		5,076
Deferred income taxes		198		—		174
Liability for pension benefits		231		—		231
Liability for postretirement benefits		135		—		135
Subordinated notes payable to trust		—		142		142
Preferred stock issued by subsidiaries		—		305		305

TOTAL LIABILITIES		3,028		15,236		18,224


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						468
Accumulated other comprehensive loss, net						(191	)
Retained earnings						2,501

						2,902
Cost of shares held in the treasury: 18,754,907 shares						(713	)

TOTAL SHAREHOLDERS’ EQUITY						2,189

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY					$	20,413

Please read the notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME

TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions, except per share amounts)
REVENUES
Manufacturing and real estate	$	1,071		$	1,134		$	2,108		$	2,235
Financial services		287			299			571			582

		1,358			1,433			2,679			2,817


COSTS AND EXPENSES
Manufacturing and real estate		(978	)		(993	)		(1,969	)		(1,981	)
Financial services		(245	)		(244	)		(483	)		(481	)

		(1,223	)		(1,237	)		(2,452	)		(2,462	)

OPERATING INCOME		135			196			227			355
Parent company interest		(31	)		(34	)		(62	)		(67	)
Other non-operating income (expense)		1			91			1			91

INCOME BEFORE INCOME TAXES		105			253			166			379
Income tax expense		(39	)		(62	)		(62	)		(109	)

INCOME FROM CONTINUING OPERATIONS		66			191			104			270
Discontinued operations		––			––			––			––

NET INCOME	$	66		$	191		$	104		$	270


WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		106.0			109.8			105.8			110.5
Diluted		108.1			111.8			107.8			112.6

EARNINGS PER SHARE
Basic:
Income from continuing operations	$	0.63		$	1.74		$	0.99		$	2.45
Discontinued operations		––			––			––			––

Net income	$	0.63		$	1.74		$	0.99		$	2.45


Diluted:
Income from continuing operations	$	0.62		$	1.70		$	0.97		$	2.40
Discontinued operations		––			––			––			––

Net income	$	0.62		$	1.70		$	0.97		$	2.40


DIVIDENDS PAID PER SHARE OF COMMON STOCK	$	0.28		$	0.25		$	0.56		$	0.50

Please read the notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited


	First Six Months
	2007			2006
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	104		$	270
Adjustments:
Depreciation and amortization		127			127
Amortization and accretion of financial instrument discounts and premiums and deferred loan fees and origination costs, net		10			10
Provision (credit) for credit losses		(2	)		––
Deferred income taxes		(2	)		7
Non-cash real estate cost of sales		26			27
Real estate development expenditures		(89	)		(60	)
Other		2			6
Changes in:
Receivables		(19	)		(81	)
Inventories		16			11
Accounts payable and accrued expenses		(29	)		(11	)
Prepaid expenses and other		7			22
Loans held for sale:
Originations		(46	)		(131	)
Sales		49			374

		154			571

CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(111	)		(93	)
Reforestation and acquisition of timber and timberland		(6	)		(7	)
Sale of non-strategic assets and operations		14			4
Securities available-for-sale, net		(361	)		65
Securities held-to-maturity, net		648			297
Redemption of Federal Home Loan Bank stock		58			––
Loans originated or acquired, net of principal collected		147			(20	)
Acquisitions, net of cash acquired, and investment in joint ventures		(1	)		(135	)
Other		(6	)		10

		382			121

CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt		27			2
Payments of debt		(447	)		(229	)
Borrowings under accounts receivable securitization facility, net		16			39
Borrowings under revolving credit facility, net		(13	)		47
Changes in book overdrafts		(5	)		––
Deposits, net		46			72
Repurchase agreements and short-term borrowings, net		(60	)		(617	)
Issuance of subordinated notes payable to trust		172			––
Redemption of preferred stock issued by subsidiaries		(305	)		––
Cash dividends paid to shareholders		(59	)		(55	)
Repurchase of common stock		(24	)		(153	)
Exercise of stock options		17			34
Tax benefit on stock options exercised		8			7
Other		––			8

		(627	)		(845	)

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

Net increase (decrease) in cash and cash equivalents		(91	)		(155	)
Cash and cash equivalents at beginning of period		405			441

Cash and cash equivalents at end of period	$	314		$	286

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

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


	(Unaudited)
	Second
	Quarter-End			Year-End
	2007			2006
	(In millions)
ASSETS
Current Assets
Cash and cash equivalents	$	26		$	38
Trade receivables, net of allowance for doubtful accounts of $15 in 2007 and $14 in 2006		471			452
Inventories:
Work in process and finished goods		106			109
Raw materials		195			211
Supplies and other		119			115

Total inventories		420			435
Prepaid expenses and other		94			72
Assets held-for-sale		313			––

Total current assets		1,324			997
Investment in Financial Services		1,034			1,015
Timber and Timberland		59			358
Real Estate		587			512
Property and Equipment
Land and buildings		639			648
Machinery and equipment		3,407			3,402
Construction in progress		96			82
Less allowances for depreciation		(2,518	)		(2,493	)

Total property and equipment, net		1,624			1,639
Goodwill		365			365
Assets held-for-sale		––			20
Other Assets		288			311

TOTAL ASSETS	$	5,281		$	5,217


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	199		$	230
Accrued employee compensation and benefits		89			128
Accrued interest		32			32
Accrued property taxes		25			23
Other accrued expenses		145			134
Liabilities of discontinued operations		5			7
Current portion of long-term debt		23			19
Current portion of pension and postretirement benefits		19			15

Total current liabilities		537			588
Long-Term Debt		1,642			1,628
Deferred Income Taxes		194			198
Liability for Pension Benefits		207			229
Liability for Postretirement Benefits		123			122
Other Long-Term Liabilities		303			263

TOTAL LIABILITIES		3,006			3,028
Shareholders’ Equity		2,275			2,189

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,281		$	5,217

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF INCOME

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


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions)
NET REVENUES	$	1,071		$	1,134		$	2,108		$	2,235

COSTS AND EXPENSES
Cost of sales		(888	)		(907	)		(1,763	)		(1,817	)
Selling		(40	)		(34	)		(80	)		(68	)
General and administrative		(56	)		(58	)		(120	)		(114	)
Other operating income (expense)		6			6			(6	)		18

		(978	)		(993	)		(1,969	)		(1,981	)

		93			141			139			254
FINANCIAL SERVICES PRE-TAX EARNINGS		42			55			88			101


OPERATING INCOME		135			196			227			355
Interest expense		(31	)		(34	)		(62	)		(67	)
Other non-operating income (expense)		1			91			1			91


INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		105			253			166			379
Income tax expense		(39	)		(62	)		(62	)		(109	)


INCOME FROM CONTINUING OPERATIONS		66			191			104			270
Discontinued operations		––			––			––			––

NET INCOME	$	66		$	191		$	104		$	270

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS

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


	First Six Months
	2007			2006
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	104		$	270
Adjustments:
Depreciation and amortization		112			113
Non-cash share-based compensation		34			24
Non-cash pension and postretirement expense		22			28
Cash contribution to pension and postretirement plans		(39	)		(37	)
Deferred income taxes		4			––
Net earnings of financial services		(55	)		(63	)
Dividends from financial services		35			60
Earnings of joint ventures		(5	)		(19	)
Dividends from joint ventures		3			7
Non-cash real estate cost of sales		26			27
Real estate development expenditures		(89	)		(60	)
Changes in:
Receivables		(19	)		(81	)
Inventories		16			11
Accounts payable and accrued expenses		(29	)		(11	)
Prepaid expenses and other		3			22

		123			291

CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures		(88	)		(72	)
Reforestation and acquisition of timber and timberland		(6	)		(7	)
Sales of non-strategic assets and operations and proceeds from the sale of property and equipment		14			13
Acquisitions, net of cash acquired, and investment in joint ventures		(1	)		(134	)
Other		(3	)		––

		(84	)		(200	)

CASH PROVIDED BY (USED FOR) FINANCING
Payments of debt		(13	)		(3	)
Borrowings under accounts receivable securitization facility, net		16			39
Borrowings under revolving credit facility, net		(13	)		47
Change in book overdrafts		(10	)		––
Other additions to debt		27			2
Cash dividends paid to shareholders		(59	)		(55	)
Repurchase of common stock		(24	)		(153	)
Exercise of stock options		17			34
Tax benefit on stock options exercised		8			7
Other		––			5

		(51	)		(77	)


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

Net increase (decrease) in cash and cash equivalents		(12	)		12
Cash and cash equivalents at beginning of period		38			13

Cash and cash equivalents at end of period	$	26		$	25

Please read the notes to consolidated financial statements.

SUMMARIZED BALANCE SHEETS

FINANCIAL SERVICES


	(Unaudited)
	Second
	Quarter-End		Year-End
	2007		2006
	(In millions)
ASSETS
Cash and cash equivalents	$	288	$	372
Loans held for sale		20		23
Loans, net of allowance for losses of $72 in 2007 and $65 in 2006		9,470		9,617
Securities available-for-sale		888		529
Securities held-to-maturity		4,192		4,853
Investment in Federal Home Loan Bank stock		211		262
Property and equipment, net		222		214
Accounts, notes, and accrued interest receivable		103		104
Goodwill		141		141
Other intangible assets		23		26
Other assets		137		110

TOTAL ASSETS	$	15,695	$	16,251


LIABILITIES AND SHAREHOLDER’S EQUITY
Deposits	$	9,532	$	9,486
Federal Home Loan Bank borrowings		4,582		5,076
Other liabilities		132		126
Other borrowings		101		101
Subordinated notes payable to trust		314		142
Preferred stock issued by subsidiaries		––		305

Total Liabilities		14,661		15,236
Shareholder’s Equity		1,034		1,015

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$	15,695	$	16,251

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF INCOME

FINANCIAL SERVICES
Unaudited


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions)
INTEREST INCOME
Loans and loans held for sale	$	175		$	176		$	346		$	342
Securities available-for-sale		10			8			18			16
Securities held-to-maturity		57			64			117			126
Other earning assets		5			5			9			10

Total interest income		247			253			490			494

INTEREST EXPENSE
Deposits		(86	)		(66	)		(169	)		(128	)
Borrowed funds		(66	)		(80	)		(131	)		(155	)

Total interest expense		(152	)		(146	)		(300	)		(283	)

NET INTEREST INCOME		95			107			190			211
Credit for credit losses		––			2			2			––

NET INTEREST INCOME AFTER CREDIT FOR CREDIT LOSSES		95			109			192			211

NONINTEREST INCOME
Insurance commissions and fees		16			19			32			36
Service charges on deposits		13			13			25			24
Operating lease income		2			2			4			4
Loan origination and sale of loans		––			––			––			2
Other		9			12			20			22

Total noninterest income		40			46			81			88

NONINTEREST EXPENSE
Compensation and benefits		(43	)		(46	)		(91	)		(94	)
Insurance operations, other than compensation		(4	)		(5	)		(8	)		(10	)
Occupancy		(6	)		(6	)		(12	)		(12	)
Information systems and technology		(4	)		(4	)		(7	)		(7	)
Charges related to asset impairments and severance		––			(7	)		––			(10	)
Other		(36	)		(32	)		(67	)		(65	)

Total noninterest expense		(93	)		(100	)		(185	)		(198	)

INCOME BEFORE TAXES		42			55			88			101
Income tax expense		(16	)		(21	)		(33	)		(38	)

NET INCOME	$	26		$	34		$	55		$	63

Please read the notes to consolidated financial statements.

SUMMARIZED STATEMENTS OF CASH FLOWS

FINANCIAL SERVICES
Unaudited


	First Six Months
	2007			2006
	(In millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income	$	55		$	63
Adjustments:
Depreciation and amortization		9			8
Depreciation of assets leased to others		3			3
Amortization of core deposit and other intangible assets		3			3
Amortization and accretion of financial instrument discounts and premiums and deferred loan fees and origination costs, net		10			10
Provision (credit) for credit losses		(2	)		––
Deferred income taxes		(6	)		7
Changes in:
Loans held for sale:
Originations		(46	)		(131	)
Sales		49			374
Other		(9	)		(4	)

		66			333


CASH PROVIDED BY (USED FOR) INVESTING
Securities available-for-sale:
Purchases		(425	)		(2	)
Principal payments and maturities		64			67
Securities held-to-maturity:
Purchases		(142	)		(351	)
Principal payments and maturities		790			648
Redemption of Federal Home Loan Bank stock		58			––
Loans originated or acquired, net of collections		147			(20	)
Capital expenditures		(23	)		(21	)
Other		(3	)		––

		466			321


CASH PROVIDED BY (USED FOR) FINANCING
Deposits, net		46			76
Repurchase agreements and short-term borrowings, net		(60	)		(617	)
Payments of long-term Federal Home Loan Bank and other borrowings		(434	)		(226	)
Issuance of subordinated notes payable to trust		172			––
Dividends paid to parent company		(35	)		(60	)
Redemption of preferred stock issued by subsidiaries		(305	)		––
Other		––			3

		(616	)		(824	)


Net increase (decrease) in cash and cash equivalents		(84	)		(170	)
Cash and cash equivalents at beginning of period		372			431

Cash and cash equivalents at end of period	$	288		$	261

Please read the notes to consolidated financial statements.

TEMPLE-INLAND INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 prepare 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 30, 2006.

Note 2 – Transformation

On February 25, 2007, our Board of Directors preliminarily approved a transformation plan that involves separating Temple-Inland into three focused, stand-alone, public companies and selling our strategic timberland. The plan includes:

	•		retaining our manufacturing operations — corrugated packaging and building products,

	•		spinning off our financial services segment to our shareholders,

	•		spinning off our real estate segment to our shareholders, and

	•		selling our strategic timberland.

We are in the process of developing the infrastructure within the financial services and real estate segments to facilitate their transformation into stand-alone public companies.

As a result of the transformation, certain debt agreements, leases, guarantees, and other contracts and agreements will require amendment or renegotiation. We are in the process of reviewing our contracts and agreements to determine which will be affected.

On August 6, 2007, we announced that we entered into a definitive agreement with an investment entity affiliated with The Campbell Group, Inc. to sell 1.55 million acres of timberland for $2.38 billion. The acreage included in the sale consists of 1.38 million acres of land owned in fee and leases covering 175,000 acres. The transaction is expected to close in fourth quarter 2007, subject to customary closing conditions. The total consideration is expected to consist almost entirely of installment notes. Roughly 30 days after the sale is closed, we expect to pledge the installment notes as collateral for a non-recourse loan. The net cash proceeds from these transactions, after current taxes and transaction costs, are anticipated to be approximately $1.8 billion. Following the pledge of installment notes, we expect to use the majority of these proceeds to pay a special dividend, which is currently estimated to be approximately $1.1 billion, or $10.25 per share, to our common stockholders. The remaining approximately $700 million of the cash proceeds will be used to reduce debt. This transaction includes a 20-year fiber supply agreement for pulpwood and a 12-year fiber supply agreement for sawtimber, the terms of which are both subject to extension. Fiber will be purchased at market prices.

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

We expect to complete the transformation plan by year-end 2007.

Note 3 – New Accounting Pronouncements

Beginning January 2007, we adopted three new accounting pronouncements:

Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) – This pronouncement clarifies the accounting for and disclosure of uncertainties associated with certain aspects of measurement and recognition of income taxes. Upon adoption, we increased assets by $2 million, reduced liabilities by $3 million and increased beginning retained earnings by $5 million. We also reclassified $11 million from deferred income taxes to other long-term liabilities. At the beginning of 2007 after adoption of FIN 48, we had $20 million of unrecognized tax benefits, of which $9 million would affect our effective tax rate if recognized.

Statement of Financial Accounting Standard (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — We transitioned to a year-end measurement date for valuing plan assets and obligations for our defined benefit and postretirement benefit plans. Previously we used a measurement date of September 30, as allowed by SFAS No. 87, Employers’ Accounting for Pensions. Upon transition, we reduced 2007 beginning shareholders’ equity by $5 million, representing the net periodic benefit cost of the three month period from the last measurement date to year-end 2006, net of tax, and increased liability for pension benefits.

FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance Activities - Upon adoption at the beginning of 2007 we elected the expense as incurred accounting method for planned major maintenance. We had previously used the acceptable practice of allocating the costs over the interim periods within the year in which they were incurred in accordance with Accounting Principles Board Opinion No.28, Interim Financial Reporting. As a result, the retrospective application of this new pronouncement has no effect on our 2006 annual earnings or financial position. A summary of the quarterly effect of the 2006 retrospective application follows:


												Full
	First		Second			Third			Fourth			Year
	Quarter		Quarter			Quarter			Quarter			2006
	(in millions, except per share data)
Income from Continuing Operations:
As originally reported	$	76	$	192		$	96		$	105		$	469
Effects of AUG AIR-1		3		(1	)		(1	)		(1	)		––

As recast	$	79	$	191		$	95		$	104		$	469


Net Income:
As originally reported	$	76	$	192		$	96		$	104		$	468
Effects of AUG AIR-1		3		(1	)		(1	)		(1	)		––

As recast	$	79	$	191		$	95		$	103		$	468


Earnings Per Share (Diluted):
Income from continuing operations:
As originally reported	$	0.67	$	1.71		$	0.87		$	0.98		$	4.23
Effects of AUG AIR-1		0.03		(0.01	)		(0.01	)		(0.01	)		––

As recast	$	0.70	$	1.70		$	0.86		$	0.97		$	4.23

Net Income:
As originally reported	$	0.67	$	1.71		$	0.87		$	0.97		$	4.22
Effects of AUG AIR-1		0.03		(0.01	)		(0.01	)		(0.01	)		––

As recast	$	0.70	$	1.70		$	0.86		$	0.96		$	4.22

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

The effect on 2007 beginning shareholders’ equity of adopting these new accounting pronouncements was:


2006 ending shareholders’ equity	$	2,189
Adoption of accounting for uncertainty in income taxes		5
Net periodic benefit cost related to transition of defined benefit and postretirement benefit plan measurement date from September 30 to our fiscal year-end, net of tax		(5	)
Adoption of expense as incurred method of accounting for planned major maintenance activities		––

2007 beginning shareholders’ equity	$	2,189

Pending Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits the election of fair value as the initial and subsequent measurement method for many financial assets and liabilities. Subsequent changes in the fair value would be recognized in earnings as they occur. Electing the fair value option requires the disclosure of the fair value of affected assets and liabilities on the balance sheet or in the notes to the financial statements. SFAS No. 159 is effective for our first quarter 2008. We are currently evaluating the impact to our earnings and financial position, if we were to elect the fair value option.

Note 4 – Employee Benefit Plans

Defined benefit and postretirement benefit expense consists of:


	Defined Benefits																Postretirement
	Qualified						Supplemental				Total						Benefits
	2007			2006			2007		2006		2007			2006			2007		2006
	(In millions)																(In millions)
For Second Quarter :
Service costs – benefits earned during the period	$	7		$	7		$	––	$	––	$	7		$	7		$	––	$	1
Interest cost on projected benefit obligation		19			18			1		––		20			18			2		2
Expected return on plan assets		(21	)		(20	)		––		––		(21	)		(20	)		––		––
Amortization of prior service costs		––			1			––		––		––			1			––		(1	)
Amortization of actuarial net loss		3			5			1		1		4			6			––		––

	$	8		$	11		$	2	$	1	$	10		$	12		$	2	$	2


For First Six Months:
Service costs – benefits earned during the period	$	14		$	14		$	––	$	––	$	14		$	14		$	––	$	2
Interest cost on projected benefit obligation		38			36			1		––		39			36			4		4
Expected return on plan assets		(42	)		(40	)		––		––		(42	)		(40	)		––		––
Amortization of prior service costs		––			2			––		––		––			2			––		(2	)
Amortization of actuarial net loss		6			10			2		2		8			12			––		––

	$	16		$	22		$	3	$	2	$	19		$	24		$	4	$	4

In first six months 2007, we made $30 million in voluntary, discretionary contributions to our qualified defined benefit plans, including $15 million in second quarter 2007.

Note 5 – Share-Based Compensation

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

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

Share-based compensation expense consists of:


	Second Quarter				First Six Months
	2007		2006		2007		2006
	(In millions)
Restricted or performance units	$	12	$	5	$	29	$	13
Restricted stock		––		1		––		2
Stock options		3		2		9		9

Total pre-tax share-based compensation expense	$	15	$	8	$	38	$	24

The fair value of awards granted to retirement-eligible employees and expensed at the date of grant was $5 million in first six months 2007 and $7 million in first six months 2006. Fair value of restricted and performance units vary based on changes in share price during the period. Fair value of stock options are determined as of the date of grant using the Black-Scholes-Merton option-pricing model and do not change for subsequent changes in share price.

Pre-tax share-based compensation expense is included in:


	Second Quarter				First Six Months
	2007		2006		2007		2006
	(In millions)
Parent Company
Cost of sales	$	2	$	2	$	5	$	4
Selling expense		1		––		2		1
General and administrative		11		6		27		19

Total Parent Company		14		8		34		24
Financial Services		1		––		4		––

Total pre-tax share-based compensation expense	$	15	$	8	$	38	$	24

Note 6 – Earnings Per Share

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


	Second Quarter				First Six Months
	2007		2006		2007		2006
	(In millions)
Weighted average common shares outstanding – basic		106.0		109.8		105.8		110.5
Dilutive effect of stock options		2.1		2.0		2.0		2.1

Weighted average shares outstanding – diluted		108.1		111.8		107.8		112.6

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

Note 7 – Comprehensive Income

Comprehensive income consists of:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions)
Net income	$	66		$	191		$	104		$	270
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on:
Available-for-sale securities		(1	)		––			(1	)		––
Derivative instruments		––			––			––			––
Foreign currency translation adjustments		2			(5	)		1			(7	)
Defined benefit plans		2			(1	)		6			(1	)

Other comprehensive income (loss)		3			(6	)		6			(8	)

Comprehensive income	$	69		$	185		$	110		$	262

At second quarter-end 2007, the fair value of our interest-rate derivative instruments was a $1 million liability, which is about equally distributed between an interest-rate swap designated as a hedge of interest cash flows anticipated from specific borrowings and an interest-rate swap we did not designate as a hedge. Changes in the fair value of the hedge transaction were not significant in the first six months 2007. Hedge ineffectiveness was not significant in first six months 2007. Changes in the fair value of the instrument not designated as a hedge are included in other non-operating income (expense) and were not significant in first six months 2007. These instruments expire in December 2008.

Note 8 – Contingencies

We are defending three class action claims in California state court alleging violations of that state’s on-duty meal break laws. In second quarter 2007, we reached agreements to settle two of these cases, both of which have been approved by the courts in which these cases are pending. A fourth case alleging violations of these same laws has recently been filed and class certification is pending. While we continue to defend these lawsuits and have established reserves that we believe are adequate, we do not anticipate that the outcome in any or all of these cases should have a material adverse effect on our financial position or long-term results of operations or cash flows.

On July 5, 2007, a class was certified in an action pending in Orange County, California Superior Court alleging a subsidiary violated that state’s laws related to the time in which a mortgage company is required to file a release of lien following payment of a mortgage on residential real estate. The penalty for a violation is $300 for violations prior to January 1, 2001 or $500 for violations after that date. We are currently reviewing the loan files for loans we serviced to determine the extent to which such violations occurred. We exited the mortgage loan servicing business in late 2004. We have established reserves that we believe are adequate for this matter, and we do not anticipate that the outcome in this case should have a material adverse effect on our financial position or long-term results of operations or cash flows.

We are involved in various other legal proceedings that arise from time to time in the ordinary course of doing business. In addition, liabilities in connection with environmental remediation arise from time to time in the ordinary course of doing business. We believe we have established adequate reserves for any probable losses related to these legal proceedings and environmental remediation issues. We do not expect that the eventual outcome of any or all of our pending legal matters would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to our results of operations or cash flows in any one accounting period.

Note 9 – 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 real estate projects that

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

we own directly, including our higher and better use timberland, or indirectly through ventures. Financial services operates a savings bank and an insurance agency.

We evaluate performance based on operating 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, and unusual expenses. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Intersegment sales are recorded at market prices. Intersegment sales and shared service expense allocations are netted in costs and expenses.


									Expenses Not
									Allocated to
	Corrugated		Forest		Real		Financial		Segments and
	Packaging		Products		Estate		Services		Eliminations			Total
	(In millions)
For Second Quarter 2007
Revenues from external customers	$	779	$	249	$	43	$	287	$	––		$	1,358
Depreciation and amortization		35		16		1		8		4			64
Segment operating income or income (loss) before taxes		78		33		19		48		(73	)^(a)		105
Financial services, net interest income		––		––		––		95		––			95
Capital expenditures and reforestation		34		14		1		10		3			62

For First Six Months 2007 or at Second Quarter-End 2007
Revenues from external customers	$	1,540	$	495	$	73	$	571	$	––		$	2,679
Depreciation and amortization		72		32		1		15		7			127
Segment operating income or income (loss) before taxes		142		71		22		97		(166	)^(a)		166
Financial services, net interest income		––		––		––		190		––			190
Total assets		2,274		1,003		603		15,695		320			19,895
Investment in equity method investees and joint ventures		13		22		91		––		––			126
Capital expenditures and reforestation		59		26		1		23		8			117
Goodwill		236		129		––		141		––			506

For Second Quarter 2006
Revenues from external customers	$	758	$	341	$	35	$	299	$	––		$	1,433
Depreciation and amortization		39		14		––		7		4			64
Segment operating income or income (loss) before taxes		66		101		9		62		15	^(a)		253
Financial services, net interest income		––		––		––		107		––			107
Capital expenditures and reforestation		28		16		––		7		3			54

For First Six Months 2006 or at Second Quarter-End 2006
Revenues from external customers	$	1,479	$	674	$	82	$	582	$	––		$	2,817
Depreciation and amortization		77		28		1		14		7			127
Segment operating income or income (loss) before taxes		110		183		35		111		(60	) ^(a)		379
Financial services, net interest income		––		––		––		211		––			211
Total assets		2,336		1,066		485		16,910		336			21,133
Investment in equity method investees and joint ventures		11		21		76		––		––			108
Capital expenditures and reforestation		47		26		––		21		6			100
Goodwill		236		129		––		152		––			517

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


^(a)		Expenses not allocated to segments consist of:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions)
General and administrative	$	(27	)	$	(26	)	$	(52	)	$	(49	)
Share-based compensation		(15	)		(8	)		(38	)		(24	)
Other operating income (expense)		(1	)		(8	)		(15	)		(11	)
Other non-operating income(expense)		1			91			1			91
Parent company interest		(31	)		(34	)		(62	)		(67	)

	$	(73	)	$	15		$	(166	)	$	(60	)


Other operating income (expense) applies to:
Corrugated packaging	$	––		$	(2	)	$	(10	)	$	(4	)
Forest products		8			1			8			1
Real estate		––			––			––			––
Financial services		(5	)		(7	)		(5	)		(10	)
Unallocated		(4	)		––			(8	)		2

	$	(1	)	$	(8	)	$	(15	)	$	(11	)

Note 10 – Real Estate

Our real estate consists of:


	Second
	Quarter-End		Year-
	2007		End 2006
	(In millions)
Entitled, developed, and under development land	$	323	$	255
Land held for investment or future development		149		142
Investment in real estate ventures		91		90
Income producing properties, net of accumulated depreciation		24		25

	$	587	$	512

In first six months 2007, we invested $36 million in four new projects which represent over 2,300 acres. In first six months 2007, we sold 38 acres of commercial real estate and recognized a gain of $10 million. In first six months 2006, we sold five acres of undeveloped commercial real estate and recognized a gain of $8 million.

At second quarter-end 2007, we had ownership interests ranging from 25 to 50 percent in 15 real estate ventures that we account for using the equity method. Our investment in these real estate ventures is included in real estate and our equity in their earnings is included in segment operating income. 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 real estate ventures follows:

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


	Second
	Quarter-End			Year-End
	2007			2006
	(In millions)
Real estate	$	224		$	186
Total assets		287			281
Borrowings, principally non-recourse		67			66
Total liabilities		87			84
Equity		200			197

Our investment in real estate ventures:
Our share of their equity	$	98		$	97
Unrecognized deferred gain^(a)		(7	)		(7	)

Investment in real estate ventures	$	91		$	90


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


	Second Quarter				First Six Months
	2007		2006		2007		2006
			(In millions)
Revenues	$	12	$	20	$	19	$	73
Earnings		3		5		5		25
Our equity in their earnings		2		3		3		13

In first six months 2007, we invested $2 million in the real estate ventures and received $3 million in return of capital distributions, which are classified as investing activities for cash flow purposes. Our equity in earnings reflects our ownership interests ranging from 25 to 50 percent, excluding venture losses that exceed our investment.

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

Note 11 – Assets Held For Sale

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

At second quarter-end 2007, the carrying value of our timber and timberland and related assets held for sale was $300 million. Timber and timberland totaled $296 million representing approximately 1.6 million acres located in Texas, Louisiana, Georgia, and Alabama, and related property and equipment totaled $4 million. They are classified as current assets based on our intent to sell these assets by year-end 2007.

At second quarter-end 2007, discontinued operations primarily consist of the chemical business obtained in the acquisition of Gaylord Container Corporation. The disposition of the chemical business has been delayed primarily due to its class action litigation that was settled in 2004. At second quarter-end 2007, the assets and liabilities of discontinued operations include $7 million of working capital and $1 million of property and equipment. Revenues from discontinued operations were $5 million in second quarter 2007, $6 million in second quarter 2006, $11 million in first six months 2007, and $13 million in first six months 2006.

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

Note 12 – Other Operating Income (Expense)


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions)
Equity in earnings of manufacturing joint ventures	$	1		$	4		$	2		$	6
Equity in earnings of real estate ventures		2			3			3			13
Litigation		––			––			(10	)		––
Transformation plan legal and other advisory fees		(4	)		––			(8	)		––
Gain on sale of non-strategic timber leases		8			––			8			––
Other		(1	)		(1	)		(1	)		(1	)

	$	6		$	6		$	(6	)	$	18

Activity for first six months 2007 within our accruals for exit costs follows:


	Beginning				Cash			End of
	of Period		Additions		Payments			Period
	(In millions)
Involuntary employee terminations	$	1	$	––	$	(1	)	$	––
Demolition and environmental remediation		8		1		(4	)		5

	$	9	$	1	$	(5	)	$	5

Note 13 – Preferred Stock Issued by Subsidiaries and Subordinated Notes payable to Trust

In first six months 2007 we redeemed our $305 million of preferred stock issued by financial services subsidiaries. Funds for these redemptions were provided through the issuances by financial services of $314 million of subordinated notes payable to trust.

Note 14 – Subsequent Event

On July 31, 2007, our real estate segment entered into agreements to facilitate third-party construction and ownership of a resort hotel, spa and golf facilities at our Cibolo Canyons mixed-use development near San Antonio, Texas. Under these agreements, we transferred to the third-party owners about 700 acres of undeveloped land and we agreed to transfer about $38 million ($16 million by year-end 2007; $12 million in 2008-9; and $10 million in 2010-11). In exchange, the third-party owners assigned to us certain rights under an Economic Development Agreement, including the right to receive revenues from hotel occupancy and sales taxes generated within the resort through 2034. In addition, the construction of the resort hotel and golf facilities will satisfy a condition to our right to obtain reimbursement of certain infrastructure costs under an Ad Valorem Tax and Non Resort Sales and Use Tax Public Improvement Financing Agreement between us and a special purpose improvement district.

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

Forward-Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “likely,” “intend,” “may,” “plan,” “expect,” and similar expressions, including references to assumptions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. A variety of factors and uncertainties could cause our actual results to differ significantly from the results discussed in the forward-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 us and that we may pursue;

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

	•		demand for new housing;

	•		accuracy of accounting assumptions related to pension and postretirement costs, impaired assets, and allowance for credit losses;

	•		competitive actions by other companies;

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

	•		our ability to execute certain strategic and business improvement initiatives, including our transformation plan; and

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

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

Non-GAAP Financial Measure

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

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

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

Accounting Policies

Critical Accounting Estimates

In first six months 2007, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for 2006.

New and Pending Accounting Pronouncements

Beginning January 2007, we adopted the expense as incurred accounting method for planned major plant maintenance as contained in Financial Accounting Standards Board (FASB) Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance Activities; FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48); and a fiscal year-end measurement date for valuing plan assets and obligations for our defined benefit and postretirement benefit plans as required by Statement of Financial Accounting Standard (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. Please read Note 3 to the Consolidated Financial Statements for further information about these new pronouncements and other pending accounting pronouncements.

Transformation Plan

	•		retaining our manufacturing operations – corrugated packaging and building products,

	•		spinning off our financial services segment to our shareholders,

	•		spinning off our real estate segment to our shareholders, and

	•		selling our strategic timberland.

We are in the process of developing the infrastructure within the financial services and real estate segments to facilitate their transformation into stand-alone public companies.

The transaction is expected to close in fourth quarter 2007, subject to customary closing conditions. The total consideration is expected to consist almost entirely of installment notes. Roughly 30 days after the sale is closed, we expect to pledge the installment notes as collateral for a non-recourse loan. The net cash proceeds from these transactions, after current taxes and transaction costs, are anticipated to be approximately $1.8 billion. Following the pledge of installment notes, we expect to use the majority of these proceeds to pay a special dividend, which is currently estimated to be approximately $1.1 billion, or $10.25 per share, to our common stockholders. The remaining approximately $700 million of the cash proceeds will be used to reduce debt.

This transaction includes a 20-year fiber supply agreement for pulpwood and a 12-year fiber supply agreement for sawtimber, the terms of which are both subject to extension. Fiber will be purchased at market prices.

We expect to complete the transformation plan by year-end 2007.

Results of Operations for Second Quarter 2007 and 2006

Summary

We manage our operations through four business segments: corrugated packaging, forest products, real estate, and financial services. A summary of the results of operations by business segment follows:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(In millions, except per share)
Revenues
Corrugated packaging	$	779		$	758		$	1,540		$	1,479
Forest products		249			341			495			674
Real estate		43			35			73			82
Financial services		287			299			571			582

Total revenues	$	1,358		$	1,433		$	2,679		$	2,817

Segment Operating Income
Corrugated packaging	$	78		$	66		$	142		$	110
Forest products		33			101			71			183
Real estate		19			9			22			35
Financial services		48			62			97			111

Total segment operating income		178			238			332			439
Expenses not allocated to segments
General and administrative		(27	)		(26	)		(52	)		(49	)
Share-based compensation		(15	)		(8	)		(38	)		(24	)
Other operating income (expense)		(1	)		(8	)		(15	)		(11	)
Other non-operating income (expense)		1			91			1			91
Parent company interest		(31	)		(34	)		(62	)		(67	)

Income before income taxes		105			253			166			379
Income taxes		(39	)		(62	)		(62	)		(109	)

Income from continuing operations		66			191			104			270
Discontinued operations		––			––			––			––

Net income	$	66		$	191		$	104		$	270


Average diluted shares outstanding		108.1			111.8			107.8			112.6

Income from continuing operations, per diluted share	$	0.62		$	1.70		$	0.97		$	2.40

ROI, annualized								10.2	%		15.8	%

In 2007, significant items affecting income from continuing operations included:

	•		We experienced higher prices for our corrugated packaging products.

	•		While we continue to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies, the cost of recycled fiber used at our containerboard mills offset some of the benefits.

	•		We recognized $4 million in business interruption insurance proceeds from a prior year claim related to one of our paper mills.

	•		We experienced lower pricing and volumes for our forest products, principally lumber and gypsum.

	•		We recognized an $8 million gain on sale of non-strategic timber leases.

	•		Our real estate operations incurred a decline in lot sales resulting from the overall slowdown in the housing industry.

	•		Real estate operations benefited from a $10 million gain on the sale of land held for commercial use.

	•		Our financial services operations experienced a $21 million decrease in net interest income due primarily to a decrease in earning assets, offset in part by a reduction in noninterest expense.

	•		We increased litigation reserves by $15 million as a result of a recent California Supreme Court decision and charges related to the mortgage business we exited.

	•		We expensed $10 million of share-based compensation due to the higher share price in 2007 and incurred $8 million of costs associated with our transformation plan, primarily legal and other advisory fees.

	•		We recognized a one-time tax benefit of $3 million related to Texas tax legislation enacted in May 2007.

In 2006, significant items affecting income from continuing operations included:

	•		We experienced improved markets for our corrugated packaging and forest products, principally gypsum and particleboard, and we benefited from the acquisition of our partner’s 50 percent interest in Standard Gypsum LP.

	•		While we continued to see the benefit in our manufacturing operations from our initiatives to lower costs, improve asset utilization and increase operating efficiencies, costs, principally energy and freight, offset much of the benefit.

	•		Real estate operations benefited from an $8 million gain on sale of land held for commercial use.

	•		Financial services operations benefited from improved net interest income attributable to an increase in earning assets, principally mortgage-backed securities, and improved credit conditions.

	•		Actions taken to lower costs in our financial services operation associated with the elimination of our wholesale mortgage and asset-based lending operations resulted in charges of $3 million and goodwill impairment of $7 million.

	•		We recognized an $89 million net pre-tax gain resulting from a tax litigation settlement, most of which was non-taxable.

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. We also own a 50 percent interest in Premier Boxboard Limited LLC, a joint venture that produces light-weight gypsum facing paper and corrugating medium at a mill in Newport, Indiana.

A summary of our corrugated packaging results follows:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(Dollars in millions)
Revenues	$	779		$	758		$	1,540		$	1,479
Costs and expenses		(701	)		(692	)		(1,398	)		(1,369	)

Segment operating income	$	78		$	66		$	142		$	110


Segment ROI								14.1	%		10.7	%

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


	Second Quarter			First Six Months
	2007 versus Second			2007 versus First Six
	Quarter 2006			Months 2006
	Increase (Decrease)
Corrugated packaging
Average prices		3	%		5	%
Shipments, average week		(2	)%		(3	)%
Industry shipments, average week ^(a)		(2	)%		(2	)%

Linerboard
Average prices		3	%		12	%
Shipments, in thousands of tons		29			69


^(a)		Source: Fibre Box Association

Corrugated packaging shipments declined in first six months 2007 primarily due to the sale of Performance Sheets (sheet feeder plant in City of Industry, California) in August 2006.

Compared with first quarter 2007, average corrugated packaging prices were down one percent and actual shipments were up four percent, principally due to normal seasonal fluctuations, while average linerboard prices were up two percent and shipments were down 24,000 tons.

Costs and expenses were up one percent in second quarter 2007 compared with second quarter 2006 and up two percent in first six months 2007 compared with first six months 2006. Higher prices for wood and recycled fiber were partially offset by lower costs attributable to the sale of one converting facility and increased mill reliability and efficiency, which resulted in improved raw material yield and energy usage. In second quarter 2007 we recognized $4 million in business interruption insurance proceeds related to an equipment outage at one of our mills that occurred in 2006.

Fluctuations in our significant cost and expense components included:


	Second Quarter			First Six Months
	2007 versus Second			2007 versus First
	Quarter 2006			Six Months 2006
	Increase (Decrease)
	(In millions)
Wood fiber	$	3		$	6
Recycled fiber		16			37
Freight		(2	)		(3	)
Energy, principally natural gas		2			(4	)
Depreciation		(4	)		(5	)
Pension and postretirement		(3	)		(6	)

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 for the remainder of 2007.

Information about our converting facilities and mills follows:


	Second Quarter						First Six Months
	2007			2006			2007			2006
Number of converting facilities (at quarter-end)		64			65			64			65
Mill capacity, in thousand tons		901			892			1,800			1,784
Mill production, in thousand tons		906			883			1,803			1,773
Percent mill production used internally		92	%		95	%		90	%		94	%
Percent of total fiber requirements sourced from recycled fiber		36	%		34	%		37	%		34	%
Corrugating medium purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		15			23			35			37

Forest Products

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.

As part of our transformation plan we have entered into an agreement to sell our strategic timberland. As a result, the operations of our forest products segment will be significantly affected. Our costs will increase as we purchase fiber for our operations from third parties and our revenues will be negatively affected by the loss of fiber sales and hunting and recreational lease revenues.

A summary of our forest products results follows:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(Dollars in millions)
Revenues	$	249		$	341		$	495		$	674
Costs and expenses		(216	)		(240	)		(424	)		(491	)

Segment operating income	$	33		$	101		$	71		$	183


Segment ROI								15.4	%		37.1	%

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


	Second Quarter			First Six Months
	2007 versus Second			2007 versus First
	Quarter 2006			Six Months 2006
	Increase (Decrease)
Lumber:
Average prices		(16	)%		(20	)%
Shipments		3	%		(2	)%
Gypsum:
Average prices		(25	)%		(17	)%
Shipments		(23	)%		(28	)%
Particleboard:
Average prices		5	%		12	%
Shipments		(18	)%		(16	)%
MDF:
Average prices		4	%		7	%
Shipments		(10	)%		(8	)%

Pricing for lumber and gypsum wallboard declined compared with first six months 2006 and demand for all products moderated due to declines in the housing industry. We expect this trend to continue into 2008.

Compared with first quarter 2007, average prices were up four percent for lumber, down 13 percent for gypsum, and flat for particleboard and MDF. Shipments were up nine percent for lumber, eight percent for gypsum, down six percent for particleboard, and flat for MDF.

Hunting, recreational, and mineral lease income totaled $19 million in first six months 2007 and $28 million in first six months 2006. Mineral lease income is generally derived from lease and royalty interests and fluctuates based on changes in the market price for energy. The decrease is primarily due to lower lease bonus payments in 2007. It is likely income from these leases will continue to fluctuate for the remainder of 2007.

Fluctuations in our significant cost and expense components included:


	Second Quarter			First Six Months
	2007 versus Second			2007 versus First
	Quarter 2006			Six Months 2006
	Increase (Decrease)
	(In millions)
Wood fiber	$	(9	)	$	(19	)
Energy, principally natural gas		(7	)		(17	)
Freight		(3	)		(7	)
Chemical		(1	)		(2	)
Depreciation		2			4

Costs and expenses were down ten percent in second quarter 2007 compared with second quarter 2006 and down 14 percent in first six months 2007 compared with first six months 2006. The decrease in cost is primarily attributable to lower volumes.

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 for the remainder of 2007.

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


	Second Quarter						First Six Months
	2007			2006			2007			2006
Timber harvest, in million tons:
Sawtimber		0.6			0.6			1.2			1.2
Pulpwood		0.8			0.7			1.6			1.5

		1.4			1.3			2.8			2.7


Number of converting and manufacturing facilities (at quarter-end)		17			17			17			17
Average operating rates for all product lines excluding sold or closed facilities:
High		110	%		116	%		100	%		113	%
Low		62	%		88	%		65	%		93	%
Average		85	%		100	%		82	%		100	%
Gypsum facing paper purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		12			21			24			37
Percent of gypsum facing paper supplied by our Premier Boxboard Limited LLC joint venture								71	%		76	%

Real Estate

We entitle and develop real estate that we own directly or participate in through ventures. Currently, we have projects in seven states and 11 markets encompassing about 237,000 acres, including 193,000 acres of higher and better use timberland located in Georgia, principally near Atlanta, and in Texas. We are creating the infrastructure and securing entitlements on these lands for single-family residential, commercial, mixed-use, and multi-family housing site development. Our real estate segment revenues are principally derived from the sale of developed and undeveloped real estate and to a lesser degree, from the sale of timber and operations of commercial income producing properties.

A summary of our real estate results follows:


	Second Quarter						First Six Months
	2007			2006			2007			2006
	(Dollars in millions)
Revenues	$	43		$	35		$	73		$	82
Costs and expenses		(26	)		(29	)		(54	)		(60	)
Our share of real estate ventures’ income		2			3			3			13

Segment operating income	$	19		$	9		$	22		$	35


Segment ROI								8.3	%		17.0	%

Revenue for first six months 2007 includes $12 million related to the sale of 38 acres of commercial real estate on which we recognized a gain of $10 million. Revenue for first six months 2006 includes $14 million related to the sale of five acres of undeveloped commercial real estate on which we recognized a gain of $8 million. Excluding these commercial real estate gains, the decline in segment operating income is primarily due to a decrease in sales of land held for investment or future development, and a decrease in sales of residential real estate resulting from the overall decline in the housing industry. We expect these trends to continue through 2008.

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 available more timely. The one-time effect of eliminating this one-month lag was to increase our equity in their earnings in 2006 by about $1 million.

Revenue consists of:


	Second Quarter				First Six Months
	2007		2006		2007		2006
	(Dollars in millions)
Residential real estate	$	16	$	19	$	34	$	36
Lots sold		316		463		566		805

Commercial real estate	$	14	$	2	$	18	$	18
Acres sold		45		36		56		43

Land held for investment or future development	$	6	$	6	$	8	$	13
Acres sold		886		845		1,154		1,768

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


	$	43	$	35	$	73	$	82

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


	Second Quarter-End
	2007		2006
Owned and consolidated ventures:
Entitled, developed, and under development land
Number of projects		44		31
Residential lots remaining		19,957		11,951
Commercial acres remaining		922		722

Land held for investment or future development
Number of projects		24		20
Acres in entitlement process		26,960		21,950
Acres undeveloped		186,715		196,379

Ventures accounted for using the equity method
Ventures’ lot sales (for first six months)
Lots sold		416		1,122	^(a)
Revenue per lot sold	$	54,505	$	52,098

Ventures’ entitled, developed, and under development land
Number of projects		22		23
Residential lots remaining		9,734		11,789
Commercial acres remaining		721		669

Ventures’ land held for investment or future development
Acres sold (for first six months)		––		75
Acres remaining		6,258		6,519


^(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:


	Second Quarter				First Six Months
	2007		2006		2007			2006
	(Dollars in millions)
Net interest income	$	95	$	107	$	190		$	211
Segment operating income ^(a)		48		62		97			111

Segment ROI						19.1	%		21.8	%


^(a)		Segment operating income excludes share-based compensation, charges related to asset impairments and severance, and litigation charges related to the mortgage business we exited, all of which are reported in financial services’ summarized financial statements.

Net Interest Income and Earning Assets and Deposits

Information about our net interest margin follows:


	Second Quarter										First Six Months
	2007					2006					2007					2006
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
	(Dollars in millions)
Earning assets	$	14,904		6.61	%	$	16,363		6.19	%	$	14,900		6.57	%	$	16,474		6.00	%
Interest-bearing liabilities		13,850		(4.37	)%		15,147		(3.84	)%		13,797		(4.34	)%		15,278		(3.70	)%
Impact of noninterest bearing funds				0.31	%				0.29	%				0.32	%				0.27	%

Net interest margin				2.55	%				2.64	%				2.55	%				2.57	%

Net interest income declined principally due to a decrease in earning assets resulting from a decrease in single-family mortgage loans and mortgage-backed securities.

As our portfolio is 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 table summarizes the composition of our earning assets and deposits:


	Second Quarter-End
	2007			2006
	(Dollars in millions)
Residential housing assets:
Loans held for sale	$	20		$	37
Loans		5,585			6,853
Securities		5,291			6,145

		10,896			13,035
Other earning assets		4,097			3,198	^(a)

Total earning assets	$	14,993		$	16,233

Residential housing assets as a percentage of earning assets		73	%		80	%

Noninterest-bearing deposit accounts	$	724		$	777
Interest-bearing deposit accounts		3,901			3,500
Certificates of deposit		4,907			5,000

Total deposits	$	9,532		$	9,277


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

Residential housing assets were lower at second quarter-end 2007 compared with second quarter-end 2006, because payments on single-family mortgage loans and securities exceeded new single-family mortgage loan production and securities purchases. New loan production was limited in 2006 and first six months 2007 because we eliminated our wholesale mortgage production network in first quarter 2006. We have developed the systems to begin acquiring mortgage loans from some of our correspondent mortgage warehouse borrowers. In second quarter 2007, we began acquiring limited volumes of loans through this channel. However, the correspondent mortgage business is very competitive, and the current interest rate environment is not generally conducive to significant production of adjustable-rate mortgages, which we generally hold. As a result, we expect our single-family mortgage loans will continue to decrease throughout 2007. Additionally, current market pricing for securities remains challenging. In first half 2007, we purchased approximately $560 million in mortgage-backed securities at returns we consider acceptable. However, unless we are able to continue to find similar opportunities, our mortgage-backed securities will continue to decrease. Our commercial loans outstanding increased first six months 2007, and we anticipate they will continue to increase throughout 2007, partially offsetting decreases in single-family mortgage loans and mortgage-backed securities.

A portion of our residential housing loans consists of adjustable-rate mortgages that have various monthly payment amount options (Option ARMs). These loans generally include the ability to select from fully amortizing payments, interest-only payments and payments less than the interest accrual rate, which can result in negative amortization increasing the principal amount of the loan. At second quarter-end 2007, loans included $540 million of Option ARMs down from $853 million at second quarter-end 2006. We recognized $1 million in second quarter 2007 and $3 million first six months 2007 in interest income on loans from borrowers that elected negative amortization payment options. We also hold $3.4 billion of securities that have Option ARMs as the underlying assets, down from $3.5 billion at second quarter-end 2006. At second quarter-end 2007 these securities included $648 million that were issued by U.S. Government Sponsored Enterprises (FNMA, FHLMC) and $2.7 billion that are senior tranches issued by non-agency institutions. The private issuer mortgage-backed securities are considered investment grade quality by nationally recognized rating agencies.

The current environment in the housing industry and mortgage finance markets has resulted in the devaluation of certain securities backed by mortgage assets. At July 31, 2007, our securities portfolio had an amortized cost of $4.943 billion and a fair value of $4.933 billion. We have no plans to sell any of our held-to-maturity securities.

Asset Quality and Allowance for Credit Losses

Various asset quality measures we monitor are:


	Second Quarter-End						Year-End
	2007			2006			2006
	(Dollars in millions)
Non-performing loans	$	29		$	35		$	26
Foreclosed real estate		7			2			5

Non-performing assets	$	36		$	37		$	31


Non-performing loans as a percentage of total loans		0.30	%		0.37	%		0.27	%
Non-performing assets ratio		0.38	%		0.39	%		0.32	%
Allowance for loan losses as a percentage of non-performing loans		248	%		199	%		253	%
Allowance for loan losses as a percentage of total loans		0.75	%		0.73	%		0.68	%
Net charge-offs as a percentage of average loans outstanding		(0.03	)%		(0.12	)%		0.10	%

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


	Second Quarter					First Six Months
	2007		2006			2007			2006
	(Dollars in millions)
Balance at beginning of period	$	78	$	76		$	72		$	81
Provision (credit) for credit losses		––		(2	)		(2	)		––
Net (charge-offs) recoveries		1		4			9			(3	)

Balance at end of period	$	79	$	78		$	79		$	78


Allowance for credit losses:
Loan	$	72	$	71		$	72		$	71
Commitment-related		7		7			7			7

Combined allowance for credit losses	$	79	$	78		$	79		$	78

In first quarter 2007, we recovered a total of $8 million related to two asset-based financing transactions that we had previously charged-off. We sold our asset-based lending operation in 2006, and we do not expect to receive significant future recoveries from asset-based borrowers.

We do not originate or purchase sub-prime loans. At July 31, 2007, we had $10 million in mortgage warehouse loans ($115 million committed) with sub-prime loans pledged as collateral. Our obligations to fund additional advances under these commitments are subject to several conditions including a requirement that the borrower has pre-sold the loans and our approval of the underlying collateral. As a result of these limiting requirements and the current sub-prime market conditions, we do not expect to fund a substantial amount of additional advances under these commitments. In addition, we have a $53 million loan ($65 million committed) to an entity that issues, services and invests in credit-sensitive residential mortgage assets. Recently, this entity announced that it is experiencing liquidity challenges.

Our non-performing loans at second quarter-end 2007 do not include the $53 million loan mentioned above and a previously disclosed $37 million loan ($55 million committed) to a homebuilder that has characteristics indicating potential credit problems. It is possible that these loans could be classified as non-performing in the future.

Over the last several years, our earnings have benefited from favorable credit conditions. There is uncertainty as to how long these favorable conditions will last due in part to concerns about the housing industry and the availability of mortgage financing. Although changes in credit quality are difficult to predict, it is likely that we will recognize higher provisions for credit losses in future periods.

Noninterest Income and Noninterest Expense

Income from loan origination and sale of loans decreased $2 million for the first six months 2007 compared with 2006 primarily due to repositioning our mortgage origination activities. As a result of the repositioning, we do not anticipate significant single-family mortgage loan originations or sales in 2007.

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 effect of a higher share price on our cash-based awards. Based on our current expectations, it is likely that share-based compensation expense for 2007 will be in the range of $50 to $70 million. A significant portion of our share-based awards are cash based, therefore our share price has a direct impact on our share-based compensation expense.

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


	Second Quarter					First Six Months
	2007			2006		2007			2006
	(In millions)
Transformation cost	$	4		$	––	$	8		$	––
Gain on sale of non-strategic timber leases		(8	)		––		(8	)		––
Litigation		5			––		15			––
Elimination of wholesale mortgage origination network		––			––		––			3
Goodwill impairment		––			7		––			7
Other		––			1		––			1

Total	$	1		$	8	$	15		$	11

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 possibly consolidating and closing converting facilities and selling under-performing assets.

The change in parent company interest expense in second quarter and first six months 2007 was due to lower average levels of debt outstanding compared with the same periods in 2006.

Income Taxes

Our effective tax rate was 37 percent in second quarter and first six months 2007. The 2007 rate reflects one-time tax benefit of three percent for second quarter 2007 and two percent for first six months 2007 resulting from Texas tax legislation enacted in May 2007. Our effective tax rate was 25 percent in second quarter 2006 and 29 percent first six months 2006. These 2006 rates reflect one-time tax benefits of 11 percent in second quarter 2006 and seven percent in first six months 2006 resulting from the settlement of tax litigation with the U.S. Government, and of one percent in second quarter 2006 and one percent in first six months 2006 resulting from new Texas tax legislation. Differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, and deferred taxes on unremitted foreign income.

For the full year 2007, we anticipate our annual effective income tax rate, exclusive of any impact associated with the execution of our transformation plan, to be about 39 percent.

Average Shares Outstanding

The change in average shares outstanding was principally due to the issuance of shares related to share-based compensation plans. The change in average diluted shares outstanding was principally due to these issuances and the dilutive effect of employee stock options resulting from the change in the market price of our common stock.

Capital Resources and Liquidity for First Six Months 2007

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 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 regulations including restrictions on the payment of dividends to the parent company.

Sources and Uses of Cash

Consolidated cash from operations was $154 million in first six months 2007 and $571 million in first six months 2006. Consolidated cash from operations represents the sum of parent company and financial services cash from operations, less the dividends from financial services and other intercompany amounts, which are eliminated upon consolidation. In first six months 2007 we received $35 million in dividends from financial services, and in first six months 2006 we received $60 million in dividends from financial services.

Parent Company Sources and Uses of Cash


	First Six Months
	2007			2006
	(In millions)
We received cash from:
Operations	$	180		$	234
Dividends from financial services ^(a)		35			60
Proceeds from tax litigation settlement, net		––			89
Real estate development expenditures, net of non-cash cost of sales		(63	)		(33	)
Working capital changes		(29	)		(59	)

From operations		123			291
Sale of assets and other		14			13
Exercise of options and related tax benefits		25			41
Borrowing, net		17			85

Total sources		179			430


We used cash to:
Return to shareholders through:
Dividends		(59	)		(55	)
Repurchase of common stock		(24	)		(153	)
Reinvest in the business through:
Capital expenditures		(94	)		(79	)
Acquisition, joint ventures, and other		(14	)		(131	)

Total uses		(191	)		(418	)

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


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

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

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.

We issued 841,700 shares of common stock in first six months 2007 and 1,282,291 shares in first six months 2006 to employees exercising options. We paid cash dividends to shareholders of $0.56 per share in first six months 2007 and $0.50 per share in first six months 2006.

We initiated no purchases under our share repurchase authorizations in first six months 2007. We, however, settled in first quarter 2007 $24 million of share purchases that were initiated in fourth quarter 2006. The maximum number of shares available to be purchased under our repurchase plans was 6.6 million shares at second quarter-end 2007.

Capital expenditures and timberland reforestation and acquisition are expected to approximate $220 million to $240 million in 2007 or about 100 percent of expected 2007 depreciation and amortization. Most of the expected 2007 expenditures relate to initiatives to increase reliability and efficiency in our corrugated packaging operations.

Financial Services Sources and Uses of Cash


	First Six Months
	2007			2006
	(In millions)
We received cash from:
Operations	$	72		$	94
Changes in loans held for sale and other		(6	)		239

From operations		66			333
Net repayments on loans and securities		434			342
Redemption of Federal Home Loan Bank stock		58			––

Total sources		558			675


We used cash to:
Pay dividends to the parent company ^(a)		(35	)		(60	)
Fund decreases in deposits and borrowings		(276	)		(767	)
Redeem preferred stock issued by subsidiaries		(305	)		––
Reinvest in the business through capital expenditures, acquisitions, and other		(26	)		(18	)

Total uses		(642	)		(845	)

Change in cash and cash equivalents	$	(84	)	$	(170	)


^(a)		Dividends we pay to the parent company are eliminated in the consolidated statements of cash flows.

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.

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 fund our investments. In first six months 2007, we used cash flow from net repayments on loans and securities to reduce our borrowings. In first six months 2006, we used cash flow from the sale of loans held for sale and from principal payments on mortgage-backed securities to reduce our borrowings.

We anticipate continued commercial loan growth throughout 2007. However, we expect this growth will only partially offset repayments of single-family mortgage loans and mortgage-backed securities.

The anticipated commercial loan growth in the remainder of 2007 will require us to retain most, if not all, of financial services’ earnings. Therefore, we do not anticipate additional significant dividends to the parent company for the remainder of 2007.

Liquidity

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

Parent Company Liquidity

Our sources of short-term funding are our operating cash flows, dividends received from financial services, and borrowings under our existing accounts receivable securitization facility and committed credit agreements. At second quarter-end 2007, we had $916 million in unused borrowing capacity under our credit agreements and accounts receivable securitization facility.


				Accounts
	Committed			Receivable
	Credit			Securitization
	Agreements			Facility			Total
	(In millions)
Committed	$	850		$	250		$	1,100
Less: borrowings and commitments		(4	)		(180	)		(184	)

Unused borrowing capacity at second quarter-end 2007	$	846		$	70		$	916

Our committed credit agreements include a $750 million revolving credit facility that expires in 2011. The remainder of our credit agreements expire in 2008 and 2010. Our accounts receivable securitization facility expires in 2009.

At second quarter-end 2007, the fair value of our interest rate derivative instruments was a $1 million liability. The interest rate instruments expire in December 2008. These instruments are non-exchange traded and are valued using either third-party resources or models.

We lease our particleboard and MDF facilities in Mt. Jewett, Pennsylvania, under an operating lease that expires in 2019. If our long-term debt were to be rated below investment grade, the terms of this lease require us to provide letter of credit support for a portion of our obligations under the lease.

Financial Services Liquidity

Our sources of short-term funding are our operating cash flows, new deposits, borrowings under our existing agreements and, if necessary, sales of assets. Assets that can be readily converted to cash, or against which we can readily borrow, include short-term investments, loans, mortgage loans held for sale, and securities. At second quarter-end 2007, we had available liquidity of $4.5 billion.

In second quarter 2007, we redeemed all of the preferred stock issued by subsidiaries with the proceeds from subordinated notes payable to trust.

Contractual Obligations and Off-Balance Sheet Arrangements

Parent Company

At second quarter-end 2007, there were no significant changes in parent company contractual obligations and off-balance sheet arrangements from that disclosed in our Annual Report on Form 10-K for the year 2006 except for the following:

On July 31, 2007, our real estate segment entered into agreements to facilitate third-party construction and ownership of a resort hotel, spa and golf facilities at our Cibolo Canyons mixed-use development near San Antonio, Texas. Under these agreements, we transferred to the third-party owners about 700 acres of undeveloped land and we agreed to transfer about $38 million ($16 million by year-end 2007; $12 million in 2008-9; and $10 million in 2010-11). To support our commitment, we have guaranteed or issued letters of credit totaling $30 million. Prior to the spin-off of our real estate segment, any unfunded guarantees or letters of credit will be replaced with letters of credit issued under a credit facility of the new real estate company.

In exchange, the third-party owners assigned to us certain rights under an Economic Development Agreement, including the right to receive revenues from hotel occupancy and sales taxes generated within the resort through 2034. In addition, the construction of the resort hotel and golf facilities will satisfy a condition to our right to obtain reimbursement of certain infrastructure costs under an Ad Valorem Tax and Non Resort Sales and Use Tax Public Improvement Financing Agreement between us and a special purpose improvement district.

Financial Services

A comparison of our second quarter-end 2007 unfunded loan commitments with those disclosed in our Annual Report on Form 10-K for 2006 follows:


	Second
	Quarter-End		Year-End
	2007		2006
	(In millions)
Single-family mortgage loans	$	92	$	91
Unused lines of credit		2,073		2,109
Unfunded portion of credit commitments		4,482		4,421
Commitments to originate commercial loans		439		655
Letters of credit		363		386

	$	7,449	$	7,662

Capital Adequacy and Other Regulatory Matters

At second quarter-end 2007, Guaranty 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 regulatory capital data for Guaranty and its consolidated subsidiaries follows:


				Regulatory			For Categorization as
	Actual			Minimum			“Well Capitalized”
Regulatory capital ratios:
Tangible capital		8.07	%		>2.00	%		N/A
Leverage capital		8.07	%		>4.00	%		> 5.00	%
Risk-based capital		10.61	%		>8.00	%		>10.00	%

In first six months 2007, Guaranty redeemed $305 million of outstanding preferred stock issued by subsidiaries, which qualified as regulatory capital up to a maximum of 25% of regulatory capital. Funds for these redemptions were provided through the issuance by financial services of $314 million of subordinated notes payable to trust. We obtained OTS approval to include similar amounts of our subordinated notes payable to trust in regulatory capital subject to the same limitations as our preferred stock issued by subsidiaries.

Pension and Postretirement Matters

We made voluntary, discretionary contributions of $30 million to our defined benefit pension plans in first six months 2007, and it is likely that we will make additional voluntary, discretionary contributions in the remainder of 2007 of $15 million per quarter.

Energy

Energy costs were $151 million in first six months 2007 compared with $172 million in first six months 2006. 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 continue to reduce our dependency on natural gas. We hedge very little of our energy needs. It is likely that these costs will continue to fluctuate for the remainder of 2007.

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 flows. 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 2006, there have been no material developments in pending legal proceedings other than as disclosed in Part II, Item 1 of this report.

Calculation of Non-GAAP Financial Measure


	Parent			Corrugated			Forest			Real			Financial
	Company			Packaging			Products			Estate			Services
	(Dollars in millions)
First Six Months 2007
Return:
Operating income or segment operating income determined in accordance with GAAP	$	227	^(a)	$	142		$	71		$	22		$	97
Adjustments for significant unusual items		––			N/A			N/A			N/A			N/A

	$	227		$	142		$	71		$	22		$	97


Investment:
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,217		$	2,284		$	1,011		$	544		$	1,015
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(554	)		(271	)		(87	)		(11	)		N/A
Assets held for sale		(20	)		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

	$	4,455		$	2,013		$	924		$	533		$	1,015


ROI, annualized		10.2	%		14.1	%		15.4	%		8.3	%		19.1	%


First Six Months 2006
Return:
Operating income or segment operating income determined in accordance with GAAP	$	355	^(a)	$	110		$	183		$	35		$	111
Adjustments for significant unusual items		––			N/A			N/A			N/A			N/A

	$	355		$	110		$	183		$	35		$	111


Investment:
Beginning of year total assets, segment assets or investment in financial services determined in accordance with GAAP	$	5,001		$	2,318		$	866		$	422		$	1,017
Adjustments:
Current liabilities (excluding current portion of long-term debt)		(492	)		(269	)		(76	)		(11	)		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		196			N/A			196			N/A			N/A

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


ROI, annualized		15.8	%		10.7	%		37.1	%		17.0	%		21.8	%


^(a)		Net of expenses not allocated to segments of $105 million in 2007 and $84 million in 2006.

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

STATISTICAL AND OTHER DATA

Parent Company

Manufacturing

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


	Second Quarter				First Six Months
	2007		2006		2007		2006
	(Dollars in millions)
*Revenues*
Corrugated Packaging
Corrugated packaging	$	744	$	737	$	1,461	$	1,435
Linerboard		35		21		79		44

Total	$	779		758	$	1,540	$	1,479


Forest Products
Pine lumber	$	67	$	76	$	126	$	160
Gypsum wallboard		67		116		137		228
Particleboard		49		58		101		107
Medium density fiberboard		17		19		34		35
Fiberboard		14		22		28		43
Hunting, mineral and recreational leases		10		14		19		28
Fiber and other		25		36		50		73

Total	$	249	$	341	$	495		674


*Unit sales*
Corrugated Packaging
Corrugated packaging, thousands of tons		866		884		1,696		1,753
Linerboard, thousands of tons		76		47		176		107

Total, thousands of tons		942		931		1,872		1,860


Forest Products
Pine lumber, million board feet		222		216		425		434
Gypsum wallboard, million square feet		414		537		796		1,100
Particleboard, million square feet		134		164		277		329
Medium density fiberboard, million square feet		37		41		74		80
Fiberboard, million square feet		79		106		153		208

Real Estate

A summary of real estate projects in the entitlement process ^(a) at second quarter-end 2007 follows:


Project	County	Project Acres^(b)
California
Hidden Creek Estates	Los Angeles		700
Terrace at Hidden Hills	Los Angeles		30

Georgia
Ball Ground	Cherokee		500
Burt Creek	Dawson/Lumpkin		990
Cedar Creek Preserve	Coweta		200
Corinth Landing	Coweta		800
Crossing	Coweta		230
Euharlee II West	Bartow		360
Fincher Road	Cherokee		950
Friendship Road	Cherokee		110
Garland Mountain	Cherokee/Bartow		350
Genesee	Coweta		750
Grove Park	Coweta		160
Jackson Park	Jackson		690
Lithia Springs	Haralson		260
Mill Creek	Coweta		780
Overlook	Cherokee		510
Pickens School	Pickens		420
Serenity	Carroll		400
Wolf Creek	Carroll		12,180
Yellow Creek	Cherokee		1,100

Texas
Lake Houston	Harris/Liberty		3,630
Entrada^(c)	Travis		240
Woodlake Village^(c)	Montgomery		620


Total			26,960


^(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)		Acreage is for the total project and is approximate. The actual number of acres entitled may vary.

^(c)		We own a 50 percent interest in these projects.

A summary of activity within our entitled,^(a) developed, and under development projects at second quarter-end 2007 follows:


					Residential Lots^(c)				Commercial Acres^(d)
					Lots Sold				Acres Sold
		Interest			Since		Lots		Since		Acres
Project	County	Owned^(b)			Inception		Remaining		Inception		Remaining
Projects we own
Colorado
Buffalo Highlands	Weld		100	%		––		645		––		––
Johnstown Farms	Weld		100	%		115		699		––		––
Pinery West	Douglas		100	%		––		––		––		115
Stonebraker	Weld		100	%		––		600		––		––
Texas
Arrowhead Ranch	Hays		100	%		––		232		––		5
Caruth Lakes	Rockwall		100	%		245		629		––		––
Cibolo Canyons	Bexar		100	%		462		1,287		64		81
Harbor Lakes	Hood		100	%		190		388		––		13
Harbor Mist	Calhoun		100	%		––		1,393		––		36
Hunter’s Crossing	Bastrop		100	%		266		311		19		95
Katy Freeway	Harris		100	%		––		––		38		––
La Conterra	Williamson		100	%		––		509		––		60
Maxwell Creek	Collin		100	%		567		456		––		––
Oakcreek Estates	Comal		100	%		––		648		––		––
The Colony	Bastrop		100	%		347		1,078		22		50
The Gables at North Hill	Collin		100	%		193		89		––		––
The Preserve at Pecan Creek	Denton		100	%		111		708		––		9
The Ridge at Ribelin Ranch	Travis		100	%		––		––		126		77
Other projects (6)	Various		100	%		2,171		127		62		39
Georgia
Towne West	Bartow		100	%		––		2,550		––		121
Other projects (7)	Various		100	%		––		1,264		––		40
Missouri and Utah
Other projects (3)	Various		100	%		760		257		––		––

						5,427		13,870		331		741


Projects in entities we consolidate
Texas
City Park	Harris		75	%		689		612		36		129
Lantana	Denton		55	% ^(e)		285		2,065		––		––
Light Ranch	Collin		65	%		––		2,461		––		––
Timber Creek	Collin		88	%		––		654		––		––
Other projects (5)	Various	Various				286		295		13		52

						1,260		6,087		49		181

Total owned and consolidated						6,687		19,957		380		922

Projects in ventures that we account for using the equity method
Georgia
Seven Hills	Paulding		50	%		601		479		26		––
The Georgian	Paulding		38	%		284		1,101		––		––
Other projects (5)	Various	Various				1,843		249		3		––
Texas
Bar C Ranch	Tarrant		50	%		170		1,011		––		––
Fannin Farms West	Tarrant		50	%		224		219		––		––
Lantana	Denton	Various ^(e)				1,726		122		1		79
Long Meadow Farms	Fort Bend		19	%		583		1,601		24		186
Southern Trails	Brazoria		40	%		201		858		––		––
Stonewall Estates	Bexar		25	%		85		166		––		––
Summer Creek Ranch	Tarrant		50	%		793		1,695		––		374
Summer Lakes	Fort Bend		50	%		294		850		48		3
Village Park	Collin		50	%		313		256		––		5
Waterford Park	Fort Bend		50	%		––		493		––		37
Other projects (3)	Various	Various				268		262		––		37
Florida
Other projects (3)	Various	Various				473		372		––		––

Total in ventures						7,858		9,734		102		721

Combined Total						14,545		29,691		482		1,643


^(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)		Lots are for the total project.

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

^(e)		The Lantana project consists of a series of 19 partnerships in which our interests range from 25 percent to 55 percent. We account for eight of these partnerships using the equity method and we consolidate the remaining partnerships.

Financial Services

Information about financial services loan portfolio follows:


	Second Quarter-End						Year-End
	2007			2006			2006
	(In millions)
Single-family mortgage	$	1,915		$	2,748		$	2,323
Single-family mortgage warehouse		583			699			795
Single-family construction		1,817			2,039			1,782
Multifamily and senior housing		1,270			1,367			1,270

Total residential housing		5,585			6,853			6,170
Commercial real estate		1,519			901			1,227
Commercial and business		1,086			881			1,012
Energy lending		1,218			758			1,117
Asset-based lending and leasing		––			93			––
Consumer and other		134			155			156

Total loans		9,542			9,641			9,682
Less allowance for loan losses		(72	)		(71	)		(65	)

Loans, net	$	9,470		$	9,570		$	9,617

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 parent company variable-rate, long-term debt. The following table illustrates the estimated effect on our pre-tax income of immediate, parallel, and sustained shifts in interest rates for the next 12 months at second quarter-end 2007, with comparative year-end 2006 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. 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 Taxes
	Second Quarter-End 2007						Year-End 2006
	Parent			Financial			Parent			Financial
	Company			Services			Company			Services
	(In millions)
Change in Interest Rates
+2%	$	(3	)	$	(34	)	$	(2	)	$	(45	)
+1%		(2	)		(13	)		(1	)		(17	)
-1%		2			(21	)		1			(18	)
-2%		3			(53	)		2			(38	)

Parent company interest rate risk is related to our variable-rate, long-term debt and our interest rate swaps. Interest rate changes impact earnings due to the resulting increase or decrease in the cost of our variable-rate, long-term debt. The parent company interest rate sensitivity change from year-end 2006 is due to an increase in variable- rate debt. Additionally, changes in interest rates will affect the value of our interest rate swap agreements (currently $50 million notional amount) which expire in December 2008. We believe that any changes in the value of these agreements would not be significant.

Our financial services segment is subject to interest rate risk to the extent interest-earning assets and interest-bearing liabilities repay or reprice at different times or in differing amounts or both. The change in our interest rate sensitivity from year-end 2006 is principally due to a reduction in our adjustable rate mortgage assets and a related decline in short-term borrowings.

Foreign Currency Risk

In second quarter 2007, there were no significant changes in foreign currency risk from that disclosed in our Annual Report on Form 10-K for 2006.

Commodity Price Risk

In second quarter 2007, there were no significant changes in commodity price risk from that disclosed in our Annual Report on Form 10-K for 2006, except as noted below.

Our transformation plan includes the sale of our strategic timberlands. As a result, we will be sourcing all of our fiber requirements from the open market. Our fiber costs will be more correlated with open market fiber prices after the sale.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

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

(b) Changes in internal control over financial reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Since we filed our Annual Report on Form 10-K for 2006, there have been no material developments in pending legal proceedings, except as noted below.

We are defending three class action claims in California state court alleging violations of that state’s on-duty meal break laws. We reached agreements to settle two of these cases that were approved by the courts in which these cases are pending in second quarter 2007. A fourth case alleging violations of these same laws has recently been filed and class certification is pending. While we continue to defend these lawsuits and have established reserves that we believe are adequate, we do not anticipate that the outcome in any or all of these cases should have a material adverse effect on our financial position or long-term results of operations or cash flows.

violations prior to January 1, 2001 or $500 for violations after that date. We are currently reviewing the loan files for loans we serviced to determine the extent to which such violations occurred. We exited the mortgage loan servicing business in late 2004. We have established reserves that we believe are adequate for this matter, and we do not anticipate that the outcome in this case should have a material adverse effect on our financial position or long-term results of operations or cash flows.

We do not expect that the eventual outcome of any or all of our pending legal matters would have a significant adverse effect on our financial position, long-term results of operations, or cash flows. It is possible, however, that charges related to these matters could be significant to the results of operations or cash flows in any one accounting period.

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 2006, except as set forth below:

Risks Relating to the Transformation Plan

The cost to complete the transactions contemplated by the transformation plan could be significant.

Management estimates that costs to complete the transformation plan will be significant and could have a material adverse effect on our results of operations and cash flows.

We may be unable to complete the transactions.

There is no guarantee that we will complete the transactions contemplated by the transformation plan. Completion of the transformation plan is subject to a number of factors and conditions, including:

	•		changes in business, political, and economic conditions;

	•		changes in governmental regulations and policies and actions of regulatory bodies;

	•		changes in our operating performance;

	•		required changes to existing financings, factors that could influence establishing the appropriate capital structure for each company, and changes in credit ratings, including those that may result from the transformation plan;

	•		the ability to attract a buyer for our strategic timberlands; and

	•		our ability to satisfy certain conditions precedent, including final approval by our Board of Directors, receipt of certain tax rulings, necessary opinions of counsel, and the filing and effectiveness of registration statements with the SEC.

Increased demands on our management team as a result of the transformation plan could distract management’s attention from operating our business.

Management is preparing marketing materials related to the timberland sale and expects to file registration statements in connection with the spin-offs contemplated by the transformation plan during third quarter 2007. The complexity of the transactions will require a substantial amount of management and operational resources, as well as the use of several cross-functional project teams. Our business or results of operations may be adversely affected during the transition period.

Each of the independent companies resulting from the completion of the transformation plan may be unable to achieve some or all of the benefits that we expect will be achieved from the separation transactions.

Each of the independent companies may not be able to achieve the full strategic and financial benefits we expect will result from the separation of real estate and financial services segments into independent public companies or such benefits may be delayed or may not occur at all. For example, there can be no assurance that analysts and investors will regard the corporate structures of each of the independent companies as more clear and

simple than our current corporate structure or place values on the independent companies that total to a value greater than our company has today.

If certain internal restructuring transactions and the distribution relating to the transformation plan are determined to be taxable for U.S. federal income tax purposes, we and our stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities.

We anticipate that certain internal restructuring transactions will be undertaken in preparation for the transformation plan. These transactions are complex and could cause us to incur significant tax liabilities. We anticipate requesting private letter rulings from the IRS regarding the tax-free nature of these transactions and the distributions. We have also requested or may request opinions of tax counsel confirming the favorable tax treatment of these transactions. The rulings and opinions will rely on certain facts, assumptions, representations, and undertakings, from us regarding the past and future conduct of our businesses and other matters. If any of these are incorrect or not otherwise satisfied, then we and our stockholders may not be able to rely on the rulings or opinions and could be subject to significant tax liabilities. Notwithstanding the rulings and opinions, the IRS could determine on audit that the distributions or the internal restructuring transactions should be treated as taxable transactions if it determines that any of these facts, assumptions, representations, or undertakings are not correct or have been violated, or if the distributions should become taxable for other reasons, including as a result of significant changes in stock ownership after the distribution.

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

Issuer Purchases of Equity Securities ^(a)


							Maximum
					Total Number		Number of
					of Shares		Shares That
					Purchased as		May Yet be
			Average		Part of Publicly		Purchased
	Total Number		Price		Announced		Under the
	of Shares		Paid per		Plans or		Plans
Period	Purchased		Share		Programs		or Programs
Month 1 (4/1/2007 – 4/30/2007)		—	$	—		—		6,650,000
Month 2 (5/1/2007 – 5/31/2007)		—	$	—		—		6,650,000
Month 3 (6/1/2007 – 6/30/2007)		—	$	—		—		6,650,000

Total		—	$	—		—		6,650,000


^(a)		On August 4, 2006, we announced that our Board of Directors authorized the repurchase of up to 6,000,000 shares of our common stock, of which 1,650,000 remain to be purchased. On February 2, 2007, we announced that our Board of Directors authorized the purchase of up to an additional 5,000,000 shares of our common stock, increasing the maximum number of shares yet to be purchased under our repurchase plans to 6,650,000 shares. The August 4, 2006 and February 2, 2007 plans have no expiration dates. We have no plans or programs that expired during the period covered by the table above and no plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.

Item 3. Defaults Upon Senior Securities

None.

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

We held our annual meeting of stockholders on May 4, 2007, at which a quorum was present. The table below sets forth the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes for each matter voted upon at that meeting, as certified by the independent inspector of elections.


					Abstentions
			Against or		and Broker
Matter	For		Withheld		Non-votes
1. Election of four directors
(a) Donald M. Carlton		90,705,399		988,161		––
(b) E. Lynn Draper, Jr.		90,442,347		1,251,213		––
(c) Kenneth M. Jastrow, II		89,835,153		1,858,407		––
(d) James A. Johnson		88,489,468		3,204,092		––

2. Amend Article III, Section 2 of our Bylaws to provide that directors will be elected by the majority vote of our stockholders.		85,702,232		5,317,609		673,719

3. Amend Article V of our Certificate of Incorporation to eliminate certain super-majority vote requirements.		89,880,810		1,007,640		805,110

4. Amend Article VI, Section 3 of our Certificate of Incorporation to provide that directors appointed to fill vacancies or newly created directorships will be subject to election at the next annual meeting.		90,762,360		225,558		705,642

5. Ratification of appointment of Ernst & Young LLP		90,332,862		682,128		678,570

Item 5. Other Information

None.

Item 6. Exhibits


Exhibits.
2.1	–	Purchase Agreement, dated as of August 3, 2007, among TIN Inc., Campbell/Southern Parent, LLC, and the other entities named as buyers in the agreement

3.1	–	Amended and Restated Certificate of Incorporation of the Company.

3.2	–	Amended and Restated Bylaws of the Company.

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.

INDEX TO EXHIBITS


Exhibit No.	Description	Page No.

2.1	Purchase Agreement, dated as of August 3, 2007, among TIN Inc., Campbell/Southern Parent, LLC, and the other entities named as buyers in the agreement		51

3.1	Amended and Restated Certificate of Incorporation of the Company		133

3.2	Amended and Restated Bylaws of the Company		151

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		173

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		175

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		177

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		178


			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			22

Item 3. Quantitative and Qualitative Disclosures About Market Risk			44

Item 4. Controls and Procedures			45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			45

Item 1A. Risk Factors			46

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			48

Item 6. Exhibits			48

SIGNATURES			49
Purchase Agremeent
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906


	TEMPLE-INLAND INC. (Registrant)
Dated: August 7, 2007	By /s/ Randall D. Levy
	Randall D. Levy
	Chief Financial Officer


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