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Article by DailyStocks_admin    (12-15-08 03:37 AM)

Filed with the SEC from Nov 27 to Dec 03:

Temple-Inland (TIN)
The billionaire investor Carl Icahn lowered his stake in Temple-Inland to 5,312,995 shares (4.99%), by selling 2,079,098 on Nov. 25 and 26 at prices ranging from $2.98 to $3.02.


BUSINESS OVERVIEW

Introduction

Temple-Inland Inc. is a Delaware corporation that was organized in 1983. We manufacture corrugated packaging and building products, which we report as separate operating segments. The following chart presents our corporate structure at year-end 2007. It does not contain all our subsidiaries, many of which are dormant or immaterial entities. A list of our subsidiaries is filed as an exhibit to this Annual Report on Form 10-K. All subsidiaries shown are 100 percent owned by their immediate parent company listed in the chart, unless indicated otherwise.Our principal executive offices are located at 1300 MoPac Expressway South, 3 rd Floor, Austin, Texas 78746. Our telephone number is (512) 434-5800.

Financial Information

Financial information about our principal operating segments and revenues by geographic areas are shown in our notes to financial statements contained in Item 8, and revenues and unit sales by product line are contained in Item 7 of this Annual Report on Form 10-K.

Transformation Plan

On February 25, 2007, our board of directors unanimously authorized a transformation plan that included the spin-off of our real estate business and our financial services business. The spin-offs were completed on December 28, 2007 through distributions to our stockholders of all of the shares of common stock of Forestar Real Estate Group Inc., which holds all of the assets and liabilities formerly associated with our real estate business, and Guaranty Financial Group Inc., which holds all of the assets and liabilities formerly associated with our financial services business. Our consolidated financial statements contained in this Annual Report on Form 10-K have been reclassified for all periods presented to report Forestar and Guaranty as discontinued operations.

As part of the transformation plan, we also sold our strategic timberland on October 31, 2007 for approximately $2.38 billion. The total consideration consisted almost entirely of notes due in 2027, which are secured by irrevocable standby letters of credit. In December 2007, we pledged the notes as collateral for nonrecourse loans. The net cash proceeds from the nonrecourse loans, after current taxes and transaction costs, were approximately $1.8 billion. We used these proceeds to pay a special dividend to our shareholders of $10.25 per share and reduce debt by approximately $700 million.

Narrative Description of the Business

Corrugated Packaging. Our corrugated packaging segment provided 77.5 percent of our 2007 consolidated net revenues. Our vertically integrated corrugated packaging operation includes:


• five linerboard mills,

• one corrugating medium mill, and

• 64 converting facilities.

We manufacture containerboard and convert it into a complete line of corrugated packaging. We sold eight percent of the containerboard we produced in 2007 in the domestic and export markets. We converted the remaining internal production, in combination with containerboard we purchased from other producers, into corrugated containers at our converting facilities. While we have the capacity to convert more containerboard than we produce, we routinely buy and sell various grades of containerboard depending on our product mix.

Our nationwide network of converting facilities produces a wide range of products from commodity brown boxes to intricate die cut containers that can be printed with multi-color graphics. Even though the corrugated packaging business is characterized by commodity pricing, each order for each customer is a custom order. Our corrugated packaging is sold to a variety of customers in the food, paper, glass containers, chemical, appliance, and plastics industries, among others. We also manufacture bulk containers constructed of multi-wall corrugated board for extra strength, which are used for bulk shipments of various materials.

We serve over 9,500 corrugated packaging customers with 17,000 shipping destinations. We have no single customer to which sales equal ten percent or more of consolidated revenues or the loss of which would have a material adverse effect on our corrugated packaging segment.

Sales of corrugated packaging track changing population patterns and other demographics. Historically, there has been a correlation between the demand for corrugated packaging and orders for nondurable goods.

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.

Building Products. Our building products segment provided 20.5 percent of our 2007 consolidated net revenues. We manufacture a wide range of building products, including:


• lumber,

• gypsum wallboard,

• particleboard,

• medium density fiberboard (or MDF), and

• fiberboard.

We sell building products throughout the continental United States, with the majority of sales occurring in the southern United States. We have no single customer to which sales equal ten percent or more of consolidated revenues or the loss of which would have a material adverse effect on our building products segment. Most of our products are sold by account managers and representatives to distributors, retailers, and original equipment manufacturers. Sales of building products are heavily dependent upon the level of residential housing expenditures, including the repair and remodeling market.

We also own a 50 percent interest in Del-Tin Fiber LLC, a joint venture that produces MDF at a facility in El Dorado, Arkansas.

Raw Materials

Wood fiber, in various forms, is the principal raw material we use in manufacturing our products. In October 2007, in conjunction with our transformation plan, we sold our 1.5 million acres of strategic timberland and entered into long-term fiber supply agreements with the purchaser. During 2007, owned timberland supplied approximately 41 percent of our virgin wood fiber requirements. The balance of our virgin wood fiber requirements was purchased from numerous landowners and other timber owners, as well as other producers of wood by-products. In 2008, we currently expect that we will purchase at market prices approximately 50 percent of our wood fiber requirements under our long-term fiber supply agreements, the most significant of which were entered into in connection with our timberland sale. The remainder of our virgin wood fiber requirements will be purchased at market prices from numerous landowners and other timber owners, as well as other producers of wood by-products.

Linerboard and corrugating medium are the principal materials used to make corrugated boxes. Our mills at Rome, Georgia and Bogalusa, Louisiana, only manufacture linerboard. Our Ontario, California; Maysville, Kentucky; and Orange, Texas, mills are traditionally linerboard mills, but can also manufacture corrugating medium. Our New Johnsonville, Tennessee, mill only manufactures corrugating medium. The principal raw material used by the Rome, Georgia; Orange, Texas; and Bogalusa, Louisiana, mills is virgin wood fiber, but each mill is also able to use recycled fiber for up to 15 percent of its wood fiber requirements. The Ontario, California, and Maysville, Kentucky, mills use only recycled fiber. The mill at New Johnsonville, Tennessee, uses a combination of virgin wood and recycled fiber.

In 2007, recycled fiber represented approximately 36 percent of the total wood fiber needs of our containerboard operations. We purchase recycled fiber at market prices on the open market from numerous suppliers. We generally produce more linerboard and less corrugating medium than is used by our converting facilities. The deficit of corrugating medium is filled through open market purchases and/or trades, and we sell any excess linerboard in the open market.

We obtain gypsum for our wallboard operations in Fletcher, Oklahoma, from one outside source through a long-term purchase contract at market prices. At our gypsum wallboard plants in West Memphis, Arkansas, and Cumberland City, Tennessee, synthetic gypsum is used as a raw material. Synthetic gypsum is a by-product of coal-burning electrical power plants. We have a long-term supply agreement for synthetic gypsum produced at a Tennessee Valley Authority electrical plant located adjacent to our Cumberland City plant. Synthetic gypsum acquired pursuant to this agreement supplies all the synthetic gypsum required by our Cumberland City and West Memphis plants. In 2007, our gypsum wallboard plant in McQueeney, Texas, primarily used gypsum obtained from its own quarry and gypsum acquired from the same source that supplies the Fletcher, Oklahoma, plant. In 2008, we expect the McQueeney plant will use synthetic gypsum and gypsum from our quarry.

We believe the sources outlined above will be sufficient to supply our raw material needs for the foreseeable future. We hedge very little of our raw material costs. The wood fiber market is difficult to predict and there can be no assurance of the future direction of prices for virgin wood or recycled fiber. Future increases in wood fiber prices could adversely affect our results of operations.

Energy

Electricity and steam requirements at our manufacturing facilities are either supplied by a local utility or generated internally through the use of a variety of fuels, including natural gas, fuel oil, coal, petroleum coke, tire derived fuel, wood bark, and other waste products resulting from the manufacturing process. By utilizing these waste products and other wood by-products as a biomass fuel to generate electricity and steam, we were able to generate approximately 84 percent of our energy requirements in 2007 at our mills in Rome, Georgia; Bogalusa, Louisiana; and Orange, Texas. In some cases where natural gas or fuel oil is used, our facilities possess a dual capacity enabling the use of either fuel as a source of energy.

The natural gas needed to run our natural gas fueled power boilers, package boilers, and turbines is acquired pursuant to a multiple vendor solicitation process that provides for the purchase of gas, primarily on a firm basis with a few operations on an interruptible basis, at rates favorable to spot market rates. It is likely that prices of natural gas will continue to fluctuate in the future. We hedge very little of our energy costs.

Environmental Protection

We are committed to protecting the health and welfare of our employees, the public, and the environment and strive to maintain compliance with all state and federal environmental regulations in a manner that is also cost effective. When we construct new facilities or modernize existing facilities, we generally use state of the art technology for air and water emissions. This forward-looking approach is intended to minimize the effect that changing regulations have on capital expenditures for environmental compliance.

Our operations are subject to federal, state, and local provisions regulating discharges into the environment and otherwise related to the protection of the environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water Act, Comprehensive Environmental Response, Compensation and Liability Act of 1980 (or CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (or SARA), and Resource Conservation and Recovery Act (or RCRA), requires us to invest substantial funds to modify facilities to assure compliance with applicable environmental regulations. Capital expenditures directly related to environmental compliance totaled $12 million in 2007. This amount does not include capital expenditures for environmental control facilities made as a part of major mill modernizations and expansions or capital expenditures made for another purpose that have an indirect benefit on environmental compliance.

Future expenditures for environmental control facilities will depend on new laws and regulations and other changes in legal requirements and agency interpretations thereof, as well as technological advances. We expect the prominence of environmental regulation and compliance to continue for the foreseeable future. Given these uncertainties, we currently estimate that capital expenditures for environmental purposes, excluding expenditures related to the Maximum Achievable Control Technology (or MACT) programs and landfill closures discussed below, will be $9 million in 2008, $16 million in 2009, and $9 million in 2010. The estimated expenditures could be significantly higher if more stringent laws and regulations are implemented.

The U.S. Environmental Protection Agency (or EPA) has issued extensive regulations governing air and water emissions from the forest products industry. Compliance with these MACT regulations will be required as they become enacted.

On September 13, 2004, EPA published the Boiler MACT, regulations affecting industrial boilers and process heaters burning all fuel types with the exception of small gas-fired units. On July 30, 2007, the U.S. Court of Appeals for the D.C. Circuit remanded and vacated the Boiler MACT. In order to accurately gauge our liability regarding future related regulations, we continue to monitor and are actively engaged in the process the EPA is undertaking to develop new standards for industrial boilers and process heaters.

The Plywood and Composite Wood Panel (or PCWP) MACT standards were published July 30, 2004. Compliance with PCWP MACT was required by October 1, 2008. On June 19, 2007, the U.S. Court of Appeals for the D.C. Circuit rejected the PCWP MACT “low risk option” and the one-year compliance extension previously granted by EPA. As a result, the PCWP MACT compliance date reverted back to the October 1, 2007 deadline contained in the standards published in 2004. We have 12 building products facilities affected by the regulation. In a limited number of cases, one year extension requests were submitted to state regulatory agencies to allow for installation of appropriate PCWP MACT pollution control equipment. All of our extension requests were granted and we anticipate full compliance. Capital expenditures to comply with PCWP MACT are estimated at $6 million, of which we spent $2 million in 2007.

We use company-owned landfills for disposal of non-hazardous waste at three containerboard mills and two building products facilities. We also have two additional sites that we are remediating. Based on third-party cost estimates, we expect to spend, on an undiscounted basis, $27 million over the next 25 years to ensure proper closure of these landfills and remediation of these two additional sites for which we have established a reserve.

At one of these sites, we continue to work with environmental consultants and the Louisiana Department of Environmental Quality (DEQ) to remediate the source of contaminated water discovered in a manhole adjacent to our facility in Bogalusa, Louisiana. Phase II of the investigation process, which involved drilling more and deeper test wells in the affected area, is complete. Our investigation report, including a final remediation plan, was approved by the Louisiana DEQ in December 2007. We have incurred $2 million in costs to date and estimate that we will incur additional remediation expenses of about $10 million, for which we have established a reserve.

In addition to these capital expenditures, we spend a significant amount on ongoing maintenance costs to continue compliance with environmental regulations. We do not believe, however, that these capital expenditures or maintenance costs will have a material adverse effect on our earnings. In addition, expenditures for environmental compliance should not have a material effect on our competitive position because our competitors are also subject to these regulations.

Our facilities are periodically inspected by environmental authorities. We are required to file with these authorities periodic reports on the discharge of pollutants. Occasionally, one or more of these facilities may operate in violation of applicable pollution control standards, which could subject the company to fines or penalties. We believe that any fines or penalties that may be imposed as a result of these violations will not have a material adverse effect on our earnings or competitive position. No assurance can be given, however, that any fines levied in the future for any such violations will not be material.

Under CERCLA, liability for the cleanup of a Superfund site may be imposed on waste generators, site owners and operators, and others regardless of fault or the legality of the original waste disposal activity. While joint and several liability is authorized under CERCLA, as a practical matter, the cost of cleanup is generally allocated among the many waste generators. We are named as a potentially responsible party in five proceedings relating to the cleanup of hazardous waste sites under CERCLA and similar state laws, excluding sites for which our records disclose no involvement or for which our potential liability has been finally determined. In all but one of these sites, we are either designated as a de minimus potentially responsible party or believe our financial exposure is insignificant. We have conducted investigations of all five sites, and currently estimate that the remediation costs to be allocated to us are about $2 million and should not have a material effect on our earnings or competitive position. There can be no assurance that we will not be named as a potentially responsible party at additional Superfund sites in the future or that the costs associated with the remediation of those sites would not be material.

Competition

We operate in highly competitive industries. The commodity nature of our manufactured products gives us little control over market pricing or market demand for our products. The level of competition in a given product or market may be affected by economic factors, including interest rates, housing starts, home repair and remodeling activities, and the strength of the dollar, as well as other market factors including supply and demand for these products, geographic location, and the operating efficiencies of competitors. Our competitive position is influenced by varying factors depending on the characteristics of the products involved. The primary factors are product quality and performance, price, service, and product innovation.

The corrugated packaging industry is highly competitive with over 1,350 box plants in the United States. Our box plants accounted for approximately 12.5 percent of total industry shipments in 2007, making us the third largest producer of corrugated packaging in the United States. Although corrugated packaging is dominant in the national distribution process, our products also compete with various other packaging materials, including products made of paper, plastics, wood, and metals.

In building products markets, we compete with many companies that are substantially larger and have greater resources in the manufacturing of building products.

CEO BACKGROUND

Doyle R. Simons became Chairman of the Board and Chief Executive Officer on December 29, 2007. He was previously named Executive Vice President in February 2005 following his service as Chief Administrative Officer since November 2003. Since joining the Company in 1992, Mr. Simons has served as Vice President, Administration from November 2000 to November 2003 and Director of Investor Relations from 1994 through 2000.

J. Patrick Maley III became President and Chief Operating Officer on December 29, 2007. He was previously named Executive Vice President — Paper in November 2004 following his appointment as Group Vice President in May 2003. Prior to joining the Company, Mr. Maley served in various capacities from 1992 to 2003 at International Paper.

Bart J. Doney became Group Vice President in February 2000. Mr. Doney has served as an officer of our corrugated packaging segment since 1990.

Jack C. Sweeny became Group Vice President in May 1996. Since November 1982, Mr. Sweeny has served in various capacities in our building products segment.

Dennis J. Vesci became Group Vice President in August 2005. Mr. Vesci has served as an officer of our corrugated packaging segment since 1998.

Grant F. Adamson became Chief Governance Officer in May 2006. Mr. Adamson joined the Company in 1991 and has served in various capacities including Assistant General Counsel.

J. Bradley Johnston became Chief Administrative Officer in February 2005. Prior to that, Mr. Johnston served as General Counsel from August 2002 through May 2006 and in various capacities in our former financial services segment since 1993.

Randall D. Levy became Chief Financial Officer in May 1999. Mr. Levy joined the Company in 1989 serving in various capacities in our former financial services segment before being named Chief Financial Officer.

Scott Smith became Chief Information Officer in February 2000. Prior to that, Mr. Smith served in various capacities within our former financial services segment since 1988.

Leslie K. O’Neal was named Vice President in August 2002 and became Secretary in February 2000 after serving as Assistant Secretary since 1995. Ms. O’Neal also serves as Assistant General Counsel, a position she has held since 1985.

Carolyn C. Sloan was named Vice President, Internal Audit, in August 2005. Ms. Sloan joined the Company in 2001 as Director, Internal Audit.

C. Morris Davis became General Counsel in May 2006. Mr. Davis joined Temple-Inland after 39 years with the law firm of McGinnis, Lochridge & Kilgore in Austin, where he served seven years as the firm’s managing partner.

Troy L. Hester was named Principal Accounting Officer in August 2006. Mr. Hester has been with Temple-Inland since 1999 and has served in various capacities including Controller-Financial Services, Vice President Accounting Center, and was named Corporate Controller in May 2006.

David W. Turpin has served as Treasurer since joining the Company in June 1991.

The Board of Directors annually elects officers to serve until their successors have been elected and have qualified or as otherwise provided in our Bylaws.

MANAGEMENT DISCUSSION FROM LATEST 10K

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 risk and uncertainties. We note that 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 impaired assets, pension and postretirement costs, and contingency reserves;

• competitive actions by other companies;

• changes in laws or regulations;

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

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

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

Non-GAAP Financial 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 total segment operating income, less general and administrative expenses and share-based compensation not allocated to segments; divided by total assets, less certain assets and certain current liabilities. As a result of our transformation in 2007, we modified the return portion of this calculation. The ROI for all prior years has been recalculated to reflect this change. 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 preparing our financial statements, we follow generally accepted accounting principles, which in many cases require us to make assumptions, estimates, and judgments that affect the amounts reported. Our significant accounting policies are included in Note 1 to the Consolidated Financial Statements. Many of these principles are relatively straightforward. There are, however, a few accounting policies that are critical because they are important in determining our financial condition and results, and they are difficult for us to apply. They include asset impairments, contingency reserves, and pension accounting. The difficulty in applying these policies arises from the assumptions, estimates and judgments that we have to make currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations, as well as our intentions. As the difficulty increases, the level of precision decreases, meaning actual results can, and probably will, be different from those currently estimated. We base our assumptions, estimates, and judgments on a combination of historical experiences and other factors that we believe are reasonable. We have discussed the selection and disclosure of these critical accounting estimates with our Audit Committee.


• Measuring assets for impairment requires estimating intentions as to holding periods, future operating cash flows and residual values of the assets under review. Changes in our intentions, market conditions, or operating performance could require us to revise the impairment charges we previously provided.

• The expected long-term rate of return on pension plan assets is an important assumption in determining pension expense. In selecting that rate, currently 6.875 percent, particular consideration is given to our asset allocation because approximately 80 percent of our plan assets are debt related with a duration that closely matches that of our benefit obligation. Another important consideration is the discount rate used to determine the present value of our benefit obligation, currently 6.125 percent. Differences between actual and expected rates of return and changes in the discount rate will affect future pension expense and funded status. For example, a 25 basis point change in the discount rate would affect the projected benefit obligation by about $42 million and the interest cost on the projected benefit obligation by about $5 million. However, due to our move in late 2007 to a more matched position between our plan assets and our projected benefit obligation, we would expect a 25 basis point change in the discount rate to affect the funded status of our plan by only $12 million and the total net periodic benefit expense by only $2 million.

• Contingency reserves are established for potential losses related to litigation, environmental remediation, and disputes with taxing authorities, among other items. Estimating these reserves requires us to make certain judgments and assumptions regarding actual or potential claims, interpretations to be made by courts or regulatory bodies, and other factors and events that are outside our control. Changes and inaccuracies in our interpretations and actions of others could require us to revise the reserves we previously provided.

New Accounting Pronouncements and Change in Measurement Date of our Defined Benefit and Postretirement Plans

In the last three years, we adopted a number of new accounting pronouncements, including in 2007, FASB Staff Position No. AUG AIR-1, Accounting for Planned Major Maintenance Activities; FIN 48, Accounting for Uncertainty in Income Taxes ; and a fiscal year-end measurement date for valuing plan assets and obligations for our defined benefit and postretirement benefit plans as required by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans . In addition, there are four new accounting pronouncements that we will be required to adopt in 2008 and 2009, none of which we expect to have a significant effect on our financial position, results of operations or cash flows. Please read Note 1 to the Consolidated Financial Statements for additional information.

Transformation

On December 28, 2007, we completed our transformation plan that was approved by our board of directors in February 2007. A summary of the significant elements of the transformation plan follows:


• On October 31, 2007, we sold 1.55 million acres of timberland for $2.38 billion to an investment entity affiliated with The Campbell Group, LLC and recognized a pre-tax gain of $2.053 billion, which is included in other operating income. The acreage sold consisted of 1.38 million acres owned in fee and leases covering 175,000 acres. The total consideration consisted almost entirely of notes due in 2027 that are secured by irrevocable letters of credit issued by independent financial institutions. We also entered into a 20-year fiber supply agreement for pulpwood and a 12-year fiber supply agreement for sawtimber. Both agreements are at market prices and are subject to extension.

• We contributed the notes and irrevocable letters of credit received in connection with the sale of our timberland to two wholly-owned, bankruptcy-remote special purpose entities. On December 3, 2007, the special purpose entities pledged the notes received from the sale of the timberland as collateral for $2.14 billion nonrecourse loans payable in 2027. The net cash proceeds, after alternative minimum and other taxes related to sale of the timberland and transactions costs, were $1.8 billion. We used $1.1 billion of the net cash proceeds to pay a $10.25 per share special cash dividend to our shareholders in December 2007. The remaining $700 million was used to reduce debt. We have concluded that we are the primary beneficiary of these special purpose entities. As a result, we include these special purpose entities in our consolidated financial statements.

• On December 28, 2007, we completed the spin-off of our real estate segment, Forestar Real Estate Group Inc. (Forestar), and our financial services segment, Guaranty Financial Group Inc. (Guaranty). These spin-offs were effected through tax-free distributions of one share of Forestar and one share of Guaranty for every three shares of Temple-Inland common stock. These spin-offs reduced retained earnings by $1.6 billion. Our financial information has been reclassified to reflect Forestar and Guaranty as discontinued operations for all periods presented.

The transformation plan significantly changed our capital structure and operations. At year-end 2007, Temple-Inland is a manufacturing company focused on corrugated packaging and building products.

Results of Operations for the Years 2007, 2006, and 2005

Summary

Our two key objectives are:


• Maximizing ROI and

• Profitably growing our business
We will accomplish our key objectives through execution of our strategic initiatives. Our key strategic initiatives in corrugated packaging are:


• Maintaining full integration,

• Driving for low cost through asset utilization and manufacturing excellence,

• Improving mix and margins through sales excellence, and

• Growing our business.

Our key strategic initiatives in building products are:


• Delivering a tailored portfolio of building products,

• Driving for low cost through manufacturing excellence,

• Serving growing markets with favorable demographics, and

• Promoting sales excellence.

In 2007, consistent with our key strategic initiatives:


• We had record production in our containerboard mills through manufacturing excellence.

• We continued to drive for low cost.

• We improved asset utilization in our box plants through manufacturing excellence.

• We grew our box shipments by one percent through sales excellence (excluding shipments from Performance Sheets, which was sold in August 2006).

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


• In connection with our transformation plan, we recognized a $2.053 billion gain on sale of our strategic timberland, and we incurred $109 million in expenses primarily related to early repayment of debt, change of control agreements and other employee payments, and legal and advisory services.

• We experienced higher prices for our corrugated packaging products; however, we experienced lower prices and volumes for most of our building 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 higher cost of recycled fiber used at our containerboard mills offset some of the benefits.

• We recognized $120 million in charges, including $64 million as a result of the decision to cease production permanently at our Mt. Jewett particleboard facility and $56 million for the settlement of antitrust and other litigation.

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


• We continued to see benefits in our manufacturing operations from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies.

• We experienced improved markets for our corrugated packaging and building products, principally gypsum wallboard and particleboard. We acquired our partner’s 50 percent interest in Standard Gypsum LP in January.

• Charges related to facility closures and environmental remediation at a paper mill site totaled $12 million.

• We realized one-time cash gains of $89 million related to the settlement of tax litigation and $42 million related to the Softwood Lumber Agreement entered into between the U.S. and Canada.

In 2005, significant items affecting income from continuing operations included:


• We continued to see benefits in our manufacturing operations from our initiatives to lower costs, improve asset utilization, and increase operating efficiencies.

• Charges related to facility closures were $58 million.

• In connection with the sale of our Canadian MDF facility, we recognized a one-time tax benefit of $16 million.

• Hurricanes Katrina and Rita adversely affected segment operating income by about $11 million due to production downtime and re-start expenses.

• Hurricane related losses and other unusual expenses related to litigation and the early repayment of debt totaled $32 million.

Business Segments

As a result of the transformation plan, at year-end 2007, we have two ongoing business segments: corrugated packaging and building products. Timber and timberland, which managed our timber resources, is no longer an active segment as a result of the sale of our timberlands in fourth quarter 2007. Our financial information has been reclassified to reflect the spun-off entities, Forestar and Guaranty, as discontinued operations.

Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar. Given the commodity nature of our manufactured products, we have little control over market pricing or market demand.

Corrugated Packaging

We manufacture linerboard and corrugating medium 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.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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;

• changes in interest rates;

• current conditions in financial markets could adversely affect our ability to finance our operations;

• demand for new housing;

• accuracy of accounting assumptions related to impaired assets, pension and postretirement costs, and contingency reserves;

• competitive actions by other companies;

• changes in laws or regulations;

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

• the accuracy of certain judgments and estimates concerning the integration of acquired operations; 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. Except as required by law, we expressly disclaim any obligation to publicly revise any forward-looking statements contained in this report to reflect the occurrence of events after the date of this report.
Non-GAAP Financial Measures
Return on investment (ROI) is an important internal measure for us because it is a key component of our evaluation of overall performance and the performance of our business segments. Studies have shown that there is a direct correlation between shareholder value and ROI and that shareholder value is created when ROI exceeds the cost of capital. ROI allows us to evaluate our performance on a consistent basis as the amount we earn relative to the amount invested in our business segments. A significant portion of senior management’s compensation is based on achieving ROI targets.
In evaluating overall performance, we define ROI as total segment operating income, less general and administrative expenses and share-based compensation not included in segments, divided by total assets, less certain assets and certain current liabilities. We do not believe there is a comparable GAAP financial measure to our definition of ROI. The reconciliation of our ROI calculation to amounts reported under GAAP is included in a later section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Despite its importance to us, ROI is a non-GAAP financial measure that has no standardized definition and as a result may not be comparable with other companies’ measures using the same or similar terms. Also there may be limits in the usefulness of ROI to investors. As a result, we encourage you to read our consolidated financial statements in their entirety and not to rely on any single financial measure.

Accounting Policies
Critical Accounting Estimates
In first nine months 2008, there were no changes in our critical accounting estimates from those we disclosed in our Annual Report on Form 10-K for the year 2007.
New and Pending Accounting Pronouncements
Beginning January 2008, we adopted two new accounting pronouncements neither of which had a significant effect on our earnings or financial position. In addition, there are three new accounting pronouncements that we will be required to adopt in 2009 none of which are expected to have a significant effect on our earnings or financial position.
Please read Note 2 to the Consolidated Financial Statements for further information.

Results of Operations for Third Quarter and First Nine Months 2008 and 2007
Summary
We manage our operations through two business segments: corrugated packaging and building products. Timber and timberland is no longer an active segment as a result of the sale of our timberland in fourth quarter 2007.

(a) Income per diluted share is not applicable for first nine months 2008 due to our loss from continuing operations.
In first nine months 2008, significant items affecting income (loss) from continuing operations included:
• We experienced lower volumes and higher pricing for our corrugated packaging products, lower volumes for most of our building products and lower pricing for gypsum wallboard.

• While we continued to see the benefits in our manufacturing operations from our initiative to lower costs, improve asset utilization, and increase operating efficiencies, the increased cost of energy, freight, chemicals, and fiber more than offset these benefits.

• Share-based compensation decreased due to the effect of the lower share price on our cash-settled awards.

• We incurred $20 million of costs primarily related to our transformation plan, of which $15 million is related to the settlement of supplemental retirement benefits. We also decreased litigation reserves by $5 million due to the settlement of the remaining claim related to our antitrust litigation.

• Interest expense decreased primarily due to the December 2007 early retirement of $286 million of 6.75% Notes and $213 million of 7.875% Senior Notes.

• In July 2008, we purchased the remaining 50 percent interest in Premier Boxboard Limited LLC for $62 million. Subsequent to the purchase we incurred a penalty of $4 million from the prepayment of $50 million in joint venture debt.
In first nine months 2007, significant items affecting income from continuing operations included:
• We experienced higher prices for our corrugated packaging products and lower prices and volumes for our building products, principally lumber and gypsum wallboard.

• While we continued 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, energy and freight 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 and an $8 million gain on sale of non-strategic timber leases.

• We incurred $10 million of costs associated with our transformation plan, primarily legal and advisory fees.

• We recognized a one-time tax benefit of $3 million related to Texas tax legislation enacted in May 2007.
Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in energy costs, interest rates, new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar. Given the commodity nature of our manufactured products, we have little control over market pricing or market demand.
Corrugated Packaging
We manufacture linerboard and corrugating medium (collectively referred to as containerboard) that we convert into corrugated packaging. In July 2008, we purchased our partner’s 50 percent interest in Premier Boxboard Limited LLC (PBL), a joint venture that manufactures containerboard and light-weight gypsum facing paper at a mill in Newport, Indiana. We have integrated the PBL operations into our corrugated packaging system. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging and, to a lesser degree, from the sale of containerboard and light-weight gypsum facing paper (collectively referred to as paperboard).

(a) Source: Fibre Box Association

(b) The increase includes 18,000 tons of light-weight gypsum facing paper and 9,000 tons of containerboard shipped by PBL since its purchase in July 2008.
Current economic conditions have had a negative effect on our shipments. We anticipate that this weakness will continue until economic conditions improve.
Compared with second quarter 2008, average corrugated packaging prices were up two percent and shipments were down five percent, principally due to normal seasonal fluctuations and current economic conditions, while average paperboard prices were up two percent and shipments were up 78,000 tons partially as a result of including the results from our purchase of PBL in July 2008.

Costs and expenses were up 10 percent in third quarter 2008 compared with third quarter 2007 and up seven percent in first nine months 2008 compared with first nine months 2007. These increased costs were primarily the result of higher prices for recycled fiber, energy, chemicals, freight, and the inclusion of PBL since its purchase in July 2008.

Items Not Included in Segments
Items not included in segments are income and expenses that are managed on a company-wide basis and include corporate general and administrative expense, share-based compensation, other operating and non-operating income (expense), and interest income and expense.
The change in share-based compensation was principally due to the effect of share price on our cash-based awards. A significant portion of our share-based awards are cash-settled awards. As a result, changes in our share price have a direct impact on our share-based compensation expense. Please read Note 5 to the Consolidated Financial Statements for further information.

Other operating expense not included in business segments totaled $16 million in first nine months 2008, principally related to the lump-sum settlements of supplemental pension benefits made as part of our 2007 transformation plan.
Other non-operating expense totaled $1 million in first nine months 2008, of which $4 million is a penalty associated with the prepayment of the $50 million PBL joint venture debt, offset with $3 million in interest and other income.
We are continuing our efforts to enhance return on investment by lowering costs, improving operating efficiencies and increasing asset utilization. As a result, we will continue to review operations that are unable to meet return objectives and determine appropriate courses of action, including consolidating and closing converting facilities.
Net interest income (expense) on financial assets and nonrecourse liabilities of special purpose entities relates to interest income on the $2.38 billion of notes received from the sale of our timberland in 2007 and interest expense on the $2.14 billion of borrowings secured by a pledge of the notes received. The notes receivable were contributed to and the borrowings were made by two wholly-owned, bankruptcy-remote special purpose entities, which we consolidate. The borrowings are nonrecourse beyond these two entities. At third quarter-end 2008, the interest rate on our financial assets was 2.84 percent and the interest rate on our nonrecourse financial liabilities was 3.36 percent. These interest rates reset quarterly based on different base rates and may not always reflect the same net interest spread.
The decrease in interest expense in first nine months 2008 was primarily due to the December 2007 early retirement of our $286 million of 6.75% Notes payable in 2009 and $213 million of 7.875% Senior Notes payable in 2012, offset by an increase in interest expense related to the increase in debt primarily associated with our purchase of the remaining 50 percent interest in the PBL joint venture.
Income Taxes
In third quarter 2008, we increased our estimated annual effective tax rate for 2008 to 89 percent from 64 percent based on our current estimate of 2008 income. As a result, we recognized an additional $4 million tax benefit in third quarter 2008. Our estimated annual effective tax rate was 44 percent in first nine months 2007.
Differences between the effective tax rate and the statutory rate are primarily due to state taxes, nondeductible items, and deferred taxes on unremitted foreign income. At the current level of earnings or losses, these differences have a significant effect on our estimated annual effective tax rate.
Average Shares Outstanding
The increase in average basic shares outstanding was principally due to the issuance of shares related to stock-based compensation plans. The decrease in average diluted shares outstanding was due to the decrease in the dilutive effect of stock options as a result of our lower share price.
Capital Resources and Liquidity for First Nine Months 2008
Sources and Uses of Cash
We operate in cyclical industries and our operating cash flows vary accordingly. Our principal operating cash requirements are for compensation, wood and recycled fiber, energy, freight, interest, and taxes. Pricing improved for our corrugated packaging and most of our building products in first nine months 2008, but shipments continued to decline. 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.

CONF CALL

Chris Mathis

Good morning. My name is Chris Mathis Director of Investor Relations for Temple-Inland, and I would like to welcome each of you who have joined us by conference call or web cast this morning to discuss the results for third quarter 2008.

Joining me this morning are Doyle Simons, Chairman and Chief Executive Officer of Temple-Inland; Pat Maley, President and Chief Operating Officer and Randy Levy, Chief Financial Officer.

Please read the warning statements in our press release and our slides concerning forward-looking statements, as we will make forward-looking statements during this presentation. In addition, this presentation includes non-GAAP financial measures. The required reconciliation to GAAP financial measures can be found on our website at www.templeinland.com.

This morning, we will give a presentation on the results for third quarter 2008. After the completion of this presentation, we will be happy to take your questions.

Thank you for your interest in Temple-Inland and I would now like to turn the call over to Doyle Simons.

Doyle Simons

Thanks Chris. Good morning and welcome everyone. Third quarter 2008 and more specifically the month of September was a challenging period for Temple-Inland. The first challenge was hurricanes. In September, as previously reported, our operations were directly impacted by both hurricanes Gustav and Ike. While we were fortunate and pleased that no employees were injured due to the hurricanes, and none of our facilities sustained significant damage, the force curtailments that resulted were extremely disruptive to our system and significantly impacted our earnings in the quarter.

The good news is that the hurricanes are now behind us. The second challenge that clearly accelerated in September is the weakening of the U.S. economy. After having stable demand for our products in July and August, we experienced a significant decline in demand for both corrugated packaging and building products in September.

With that backdrop let me now turn to the numbers.

This morning we reported net income of $0.03 per share. Excluding special items we reported a net loss of $0.03 per share. This compares with net income excluding special items of $0.17 per share in third quarter 2007 and $0.07 per share in second quarter 2008.

Turning to corrugated packaging, segment operating income was $50 million compared with $70 million in third quarter 2007 and $52 million in second quarter 2008. Third quarter 2008 included approximately two months of revenue, costs and operating income from the purchase of the remaining 50% interest in Premier Boxboard Limited from Caraustar. The third quarter earnings impact from the hurricanes was approximately $13 million resulting from 38,000 tons of downtime and shut down and start up expenses at both our Bogalusa and Orange container board mills.

Following unprecedented cost push in the first half of the year, input cost escalation moderated in the third quarter. The cost chart on page five includes the addition of the costs associated with the PBL mill for two months in the quarter. Compared with second quarter 2008, virgin fiber total cost was down approximately $6 million. The reason for the decrease in virgin fiber cost was not price. Price per ton was actually up slightly quarter-to-quarter but the fact we purchased less fiber in the quarter due to the downtime associated with the hurricanes.

Total OCC cost was up in the quarter due to the increased amount of OCC purchased in connection with the PBL mill. OCC prices were actually down $16 per ton in the quarter. Energy was up $4 million in the quarter. Chemicals were up $2 million and freight was flat.

Compared with third quarter 2007, virgin fiber was down slightly, again due to the fact that we purchased less fiber in the quarter. OCC was up slightly and energy, chemicals and freight were up by $23 million, $7 million and $10 million respectively due to the unprecedented cost push earlier in the year.

In terms of box price, we began to see the benefit of the August price increase in the quarter and our average box price was up approximately $16 per ton versus second quarter 2008 and up $43 per ton versus third quarter 2007.

October box prices through the first three weeks of the month are up an additional $27 per ton versus the third quarter 2008 average price.

On an average week basis our box shipments were down 3% in third quarter 2008 versus third quarter 2007. Industry box volumes for the same period were also down 3%. Compared with second quarter 2008 our box shipments were down 57,000 tons or 6.5% due to seasonality, the weakening economy and pricing stands we took on low margin business.

Looking forward to the fourth quarter, the August box price increase went well and we will see continued benefits from this box price increase in the fourth quarter. October box prices are up $46 per ton versus the July 2008 average price and as mentioned earlier up $27 per ton versus third quarter 2008 average. In terms of input costs, OCC, energy and freight costs are trending lower. Current OCC prices are down approximately $13 per ton versus the third quarter average and natural gas prices are currently down approximately $2.50 versus the third quarter average.

We continue to make progress on our strategic initiative of lowering costs in our converting facilities through improved asset utilization. We currently have ten of our larger box plants undergoing total transformation, most of which will be completed by year end. In addition, we recently announced the closure of our Rome, Georgia box plant to drive up asset utilization. We continue to be encouraged by the significant structural cost reduction and ROI improvement opportunities in our box plant system.

In the fourth quarter 2008 we have a scheduled maintenance outage at our Orange, Texas linerboard mill that will impact production approximately 25,000 tons. The slowing economy impacted our box shipments in September and that trend has continued into October. The impact of the weakening economy on demand in the fourth quarter is uncertain and difficult to predict at this time.

Building products: Building products lost $6 million in the quarter compared with a loss of $4 million in third quarter 2007 and income of $1 million in second quarter 2008. Third quarter 2008 earnings included approximately $1 million from downtime and expenses associated with the hurricanes and approximately $1 million of severance expense as we continue to reduce our headcount to lower costs in this business.

Lumber prices were up $9 in third quarter 2008 compared with second quarter 2008 and up $19 compared with third quarter 2007. Lumber volumes were down 7% in the third quarter 2008 compared with the second quarter 2008 and down 12% compared with third quarter year ago levels.

Gypsum prices were up $9 in third quarter 2008 versus second quarter 2008 but down $9 versus third quarter 2007. Gypsum volumes were down 8% versus second quarter 2008 and down 31% versus third quarter 2007.

Particle board prices were up $18 in the third quarter 2008 versus second quarter 2008 and up $31 versus third quarter 2007. Particle board volumes were down 13% in third quarter 2008 versus second quarter 2008 and down slightly versus third quarter 2007.

We continue to believe building product markets will be very difficult for the balance of 2008 and into 2009. As a result, we will continue to match our production to our demand and be prepared for the seasonal slowdown in the fourth quarter.

We will also maintain our focus on cost and we have reduced our headcount in this business by over 20% through the first nine months of 2008.

Let me now turn it over to Randy to discuss our financial highlights.

Randy Levy

Thanks Doyle and good morning to everyone. I have a few topics that I would like to discuss this morning. On the P&L Doyle covered the segments in detail and I will touch on a couple of other income related items.

First, general and administrative expenses not included in the segments were $17 million for the quarter. That is down $6 million or 26% from a year ago on a comparable basis and down $4 million from the prior quarter. For the first nine months these G&A expenses were $59 million, down $16 million or 21% as compared to a year ago.

On our previous earnings call in July we anticipated that for the full-year 2008 this number would be in the $88-90 million range. Based on our progress to date and our current pace being ahead of our earlier expectations we anticipate this full year number to be in the $80-82 million range. That is down 18-20% from 2007 and as you will recall 2007 was down 7% from 2006.

G&A expense for the entire company on a comparable basis and this excludes share based compensation was $102 million for the first nine months. That is down $27 million or 21% as compared to a year ago. This company-wide G&A as a percent of our cost base was 3.6% for the first nine months. That is down a full percentage point compared to a year ago. As a reminder, when I say cost base I mean company-wide G&A, excluding share based compensation, plus cost of sales plus selling expense.

Next let me make a quick comment regarding our effective tax rate. Differences between the effective tax rate and the statutory rate are primarily due to state taxes, nondeductible items and deferred taxes on un-remitted foreign income. At the current level of earnings or losses these differences have a significant effect on our estimated annual effective tax rate. In the third quarter of 2008 we increased our estimated effective tax rate for the full year of 2008 to 89% from 64% based on our current estimate of 2008 full-year taxable income.

Now moving to the balance sheet, net debt was up $113 million as compared to second quarter end. The components are as follows: Long-term debt including $1 million of current portion was $1.193 billion at third quarter end, up $119 million from second quarter end. Cash and equivalents was $50 million at third quarter end, up $6 million from second quarter end. Included in net debt at third quarter end is $62 million related to the purchase of our partner’s 50% interest in Premier Boxboard Limited and $54 million related to refinancing the venture debt. Adjusting for this acquisition net debt was actually down $3 million as compared to second quarter end.

Finally, let me take a few minutes to discuss our liquidity profile. I’ll touch on the following key topics: Cash generation, term debt maturities and committed credit facilities.

First a few comments on cash flow. For the third quarter total cash provided by operations was $46 million which includes $31 million of final payments related to our 2007 transformation plan. The operations portion which can be thought of as funds from operations was $66 million but that includes $11 million of the final payments related to our 2007 transformation plan. Adjusting for these one-time payments the number becomes $77 million. The working capital portion was up $20 million but that includes $20 million of the one-time final payments related to our 2007 transformation plan. So again adjusting for these one-time payments the number is unchanged for the quarter.

For the first nine months I would mention that the operations portion or FFO was $142 million but that includes $50 million of one-time 2007 transformation plan related payments and a $15 million voluntary discretionary pension contribution. Adjusting for these two items the number becomes $207 million.

Now earlier I mentioned that our total debt at third quarter end was $1.193 billion. That breaks down into two distinct types, our term debt of $842 million and our borrowings under committed credit facilities of $351 million. Looking at our term debt maturity profile you can see that as a result of the early debt retirement associated with our 2007 transformation plan we have no significant debt maturities until 2012.

Moving to our committed credit facilities, you can see that our committed credit facilities at third quarter end remain unchanged at $1 billion and $85 million. Our unused borrowing capacity at third quarter end was $716 million with no limitations. We have no facilities with a final maturity in 2009. Our AR securitization facility matures in September 2010 and our $750 million revolver doesn’t mature until July 2011. Our financial covenants are customary for these types of facilities and at third quarter end we are in compliance with those covenants.

This concludes my financial highlights this morning.

Doyle Simons

Thank you Randy. Before I open it up for questions let me make a few closing comments. Looking ahead to the fourth quarter we expect higher average box prices as a result of a full quarter realization of the August box price increase and continue to believe we will achieve more than the $55 container board pass through in boxes.

We also anticipate lower overall input costs in the quarter. The unknown variable at this point of course is the economy and its impact on demand for our products. Our box shipments were down approximately 8% in September and are off approximately 7% through the first three weeks of October. It is important to note, however, that these shipments were against very tough comparables of up 4% for September 2007 and up 5% for October 2007.

We have made good progress on the integration of PBL into our system. We are very pleased with this acquisition and are confident we will realize significant synergies for reducing cost, improving productivity and optimizing product mix.

In building products we remain committed to matching our production to our demand, reducing costs and minimizing losses and not losing cash in this business.

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