International Paper Company Annual Report 2004

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FY2004 Annual Report · International Paper Company

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400 Atlantic Street

Stamford, CT 06921

1-203-541-8000

www.inter nationalpaper.com

Listed on the New York Stock Exchange

Equal Opportunity Employer

(M/F/D/V)

2004

Form 10-K
Annual Report

271cvr 3/29/05 3:02 PM Page 2

W e are shaping International Paper to win in a global market. The end game is

being a more successful company so that we can provide expanded opportunities

for employees, meet the increasing needs of our customers and satisfy the expectations

of our shareowners.

North America As we build a more global company, we are continuing

to capitalize on our strong position in North America by investing in our best

performing businesses and divesting non-strategic operations. In 2004,

there were good examples of this across our three core businesses. In our

paper business, we began modernizations at our Eastover, S.C.,

Androscoggin, Maine, and Quinnesec, Mich., paper mills, and we invested

in the continued growth of our packaging business by acquiring Box USA.

We also strengthened the focus of our forest products business by divesting

our Canadian pulp and wood operations as well as non-strategic

forestlands. All of these moves will help us succeed in this key market.

Joe Nelson
Manager,
Plywood Operations
Gurdon, Ark.,
Wood Products Mill

Asia We have a small but strong base in Asia today, which includes

operations through Carter Holt Harvey, our majority-owned subsidiary

headquartered in New Zealand. Going forward, our growth strategy is

to focus on China by investing in our packaging operations. We will

also continue to evaluate our options in the areas of pulp, paper and

board, and explore opportunities to ship to China from low-cost

producing areas. Our focus will be to strengthen our ability to serve both

the fast-growing local markets and grow with our global customers.

International Paper’s Board of Directors

Seated, from left, John V. Faraci, chairman and chief executive officer, International Paper; Samir G. Gibara, retired chairman,
The Goodyear Tire & Rubber Company; W. Craig McClelland, retired chairman and chief executive officer, Union Camp Corporation.

Standing, from left, Robert J. Eaton, retired chairman of the Board of Management DaimlerChrysler AG*; Charles R. Shoemate,
retired chairman, president and chief executive officer, Bestfoods; William G. Walter, chairman, president and chief executive officer,
FMC Corporation; Donald F. McHenry, distinguished professor of diplomacy, Georgetown University; Robert M. Amen, president,
International Paper; James A. Henderson, retired chairman and chief executive officer, Cummins Inc.; Martha Finn Brooks,
chief operating officer, Novelis Inc.

* Mr. Eaton retired from the Board of Directors effective Feb. 9, 2005.

Lucy Tzou
General Manager
IP Taiwan Ltd.

Latin America Looking at Latin America, we have strong mill and

forestry operations across the region. Given that about 1.2 million acres of

the forestlands we sustainably own or manage worldwide are located in

the region, we have a strong source of fiber for our operations. With our mills,

infrastructure and fiber base in Brazil, we have multiple options to build

on our success there and better serve fast-growing local demand as well

as key markets in the United States, Asia and Western Europe.

Marcio Bertoldo
General Manager,
Corporate Engineering
IP Brazil

Europe and Russia In Europe and Russia, we have large-scale

pulp and paper mills as well as packaging operations in a joint

venture in Turkey. In these areas, we are building on the success of

our mills in Kwidzyn, Poland, and Svetogorsk, Russia – both of which

have been very successful at meeting the needs of their growing markets.

Our goal is to grow as the leading supplier of uncoated freesheet and

coated board earning a cost of capital return. To date, these businesses

have delivered on this and that’s why we have invested to improve and

expand these mills even more.

Sergei Pondar
General Director,
European Papers

Corporate Headquarters
400 Atlantic Street, Stamford, CT 06921
1-203-541-8000

Operations Center
6400 Poplar Avenue, Memphis, TN 38197
1-901-419-9000

Global Offices:
International Paper Europe
Chaussée de la Hulpe, 166, 1170 Brussels, Belgium
32-2-774-1211

International Paper do Brasil
Rodovia SP 340 Km 171,
13840-970 Mogi Guaçu SP, Brazil
55-19-3861-8121

International Paper Asia
Room 3001, K. Wah Center
1010 Huaihai Zhong Road
Shanghai, 200031
P. R. China
8621-6113-3200

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F I N A N C I A L H I G H L I G H T S
Dollar amounts and shares in millions, except per share amounts

(a)

Financial Summary
Net Sales
Operating Profit
Earnings from Continuing Operations Before Income Taxes and Minority Interest
Discontinued Operations, net of taxes and minority interest
Net Earnings (Loss)
Earnings from Continuing Operations Before Special Items and Cumulative Effect

of Accounting Changes

Total Assets
Common Shareholders’ Equity
Return on Investment From Continuing Operations
Return on Investment Before Special Items From Continuing Operations

Per Share of Common Stock
Basic Earnings (Loss) Per Common Share
Earnings from Continuing Operations
Discontinued Operations, net of taxes and minority interest
Net Earnings (Loss)
Earnings from Continuing Operations Before Special Items and Cumulative

Effect of Accounting Changes

Diluted Earnings (Loss) Per Common Share
Earnings from Continuing Operations
Discontinued Operations, net of taxes and minority interest
Net Earnings (Loss)
Earnings from Continuing Operations Before Special Items and Cumulative

Effect of Accounting Changes

Cash Dividends
Common Shareholders’ Equity

Shareholder Profile
Shareholders of Record at December 31
Shares Outstanding at December 31
Average Shares Outstanding
Average Shares Outstanding - assuming dilution

2 0 0 4)

2 0 0 3)

25,548)
2,087)
746)
(513)
(35)

(b)

(c)

(d)

(c-e)

637)
34,217)
8,254)
3.9%)
4.4%)

(c,e)

23,955)
1,772)
292)
21)
302)

363)
35,525)
8,237)
2.9%)
3.8%)

(b)

(f)

(d)

(d,f-h)

(f,g)

0.98)
(1.05)
(0.07)

(c,e)

(d)

(c-e)

(f,g)

(d)

(d,f-h)

0.62)
0.04)
0.63)

1.31)

0.76)

0.98)
(1.05)
(0.07)

(c,e)

(d)

(c-e)

(f.g)

(d)

(d,f-h)

0.61)
0.04)
0.63)

1.30)

1.00)
16.93)

28,051)
487.5)
485.8)
488.4)

0.75)

1.00)
16.97)

36,926)
485.2)
479.6)
481.1)

(a) All periods presented have been restated to reflect the Carter Holt Harvey Tissue business (Tissue) and the Weldwood of Canada Limited (Weldwood) business as

discontinued operations.

(b) See the operating profit table on page 33 for details of operating profit by industry segment.

(c) Includes restructuring and other charges of $211 million before taxes and minority interest ($124 million after taxes and minority interest), including a $74 million charge

before taxes and minority interest ($43 million after taxes and minority interest) for organizational restructuring programs, a $92 million charge before taxes ($57 million after
taxes) for early debt retirement costs, a $35 million charge before minority interest ($18 million after minority interest) for a goodwill impairment, and a $10 million charge
before taxes ($6 million after taxes) for litigation settlements. Also included are a $123 million pre-tax credit ($76 million after taxes) for net insurance recoveries related to the
hardboard siding and roofing litigation, a $35 million credit before taxes and minority interest ($22 million after taxes and minority interest) for the net reversal of restruc-
turing reserves no longer required, and a pre-tax charge of $144 million ($128 million after taxes) for net losses on sales and impairments of businesses sold or held for sale.

(d) Includes net income of Weldwood and Tissue prior to their sales. Also included in 2004 is a gain of $268 million before taxes and minority interest ($90 million after taxes and

minority interest) for the sale of Tissue, and a pre-tax charge of $323 million ($711 million after taxes) for the sale of Weldwood.

(e) Includes a $5 million net increase, net of minority interest, in the income tax provision reflecting an adjustment of deferred tax balances and a reduction of valuation reserves

for capital loss carryovers.

(f) Includes restructuring and other charges of $298 million before taxes and minority interest ($184 million after taxes and minority interest), including a $236 million charge
before taxes and minority interest ($144 million after taxes and minority interest) for asset shutdowns of excess internal capacity and cost reduction actions, a $63 million
charge before taxes ($39 million after taxes) for legal reserves, and a $1 million credit before taxes ($1 million charge after taxes) for early debt retirement costs. Also included
are a pre-tax charge of $32 million ($33 million after taxes) for net losses on sales and impairments of businesses held for sale, and a credit of $40 million before taxes and
minority interest ($25 million after taxes and minority interest) for the net reversal of restructuring reserves no longer required.

(g) Includes a $123 million reduction after minority interest of the income tax provision, recorded for significant tax events occurring in 2003.

(h) Includes a charge of $10 million after taxes for the cumulative effect of an accounting change for the adoption of SFAS No. 143, “Accounting for Asset Retirement Obligations,”
and a charge of $3 million after taxes for the cumulative effect of an accounting change related to the adoption of FIN 46, “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.”

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TO O U R S H A R E O W N E R S

As I look back over 2004, I am pleased to report that earnings from continuing operations
of $478 million improved 63 percent vs. $294 million in 2003. I also feel good about the
progress we made in a number of areas – especially in improving our value to customers,
our operational performance and in how we develop and compensate our employees.
When I look at everything International Paper achieved across the globe, it’s clear to me that
our gains were a direct result of focusing on our key success drivers of customers,
operational excellence and people. I’d like to share with you some of the highlights of these
drivers in action during the past year and how individually and together these levers drive
our financial performance.

Customers
In 2004, I had the opportunity to visit with more than 100 customers around the world
and to learn first-hand about how they see International Paper. Across the board, we are
helping our customers – from Hewlett-Packard in paper to Universal Music Group in
packaging to Universal Forest Products in wood products – become more successful. We
are continually enhancing our ability to better serve customers with innovative products,
services and solutions. The success we are seeing demonstrates that our focus on
targeting and adding value to our customers is paying off.

John Faraci

Chairman and
Chief Executive Officer

Operational Excellence
In 2004, we had very strong mill operating performance around the world and continue to take our operations to a higher
level. To cite just a few examples, our European team set new production records in 2004 – today in Poland and Russia,
our tons per day are up 4 percent year over year – and in our U.S.-based Printing & Communications Papers business, we had
one of our best years ever in terms of operating cost performance. There is a lot of leverage here as this business represents
a manufacturing cost base of $3 billion. We also moved further down the road to simplify our supply chain as our businesses
made improvements in every area from sourcing, through manufacturing and distribution, to invoicing. All of these efforts
are aimed at making International Paper a more efficient and effective business partner.

People
We’ve been able to improve International Paper because we have the right people in the right places throughout the organization.
We are working to get all of our 80,000 employees aligned around what they can do to improve our results. We remain
focused on people – developing our people faster and raising the bar for what we expect both in terms of results and leadership.
This is an essential part of taking International Paper to the next level. When I see the talent we have at all levels of the
company – including seven individuals who were newly appointed to officer positions in 2004 – I know that we have what it
takes to achieve our goals.

I am also proud of the way the people of International Paper continue to reach out to one another and to those around them.
Their response to the natural disasters that brought so much devastation to the Southeast United States and Asia – whether
it was from personally delivering much-needed supplies to those hard-hit by the hurricanes or generously donating money for
tsunami victims – was a great reminder of the spirit and compassion of those that make up International Paper. As a team,
they bring the same passion and commitment to our efforts to improve our financial performance.

Financial Performance
In 2004, our earnings from continuing operations – at $478 million or 98 cents per share on a diluted basis – were 63 percent
above the $294 million or 61 cents per share we earned in 2003. Before special items, earnings were $637 million or $1.30
per share compared with $363 million or 75 cents per share in 2003. Net sales in 2004 were $25.5 billion compared with

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2003 net sales of $24 billion. We saw our top line improve throughout 2004, and the fourth quarter was our best sales
revenue quarter since the first quarter of 2001.

In terms of International Paper’s core businesses – paper, packaging and forest products – we had solid year-over-year earnings
gains based on our cost-reduction efforts, operating performance, pricing and volume. However, these gains were offset
by significant pressure from raw material costs. It wasn’t until the fourth quarter that our prices in our U.S.-based paper and
packaging businesses went up more than our major input costs of wood, energy and chemicals.

Continuing our Commitment
Looking forward, we remain committed to our goal of a 9 percent return on investment over the cycle and moving ahead of our
competitors. And, while we have made progress, particularly against our industry competitors, we are far from satisfied with
our absolute levels of earnings and returns. In today’s environment, with high raw material costs, we know that achieving the
9 percent ROI goal may be harder, may take longer and require further adjustment to our strategies and plans. Nonetheless,
we are prepared to meet those challenges and are absolutely dedicated to achieving this level of return. As a company and as
individuals, we will continue to set tough but doable stretch goals.

Achieving this goal will reflect not only our success in achieving our ROI goal – it will mean we are doing the best job possible at
providing greater opportunities for our employees, better meeting the needs of our customers and communities, and satisfying
the expectations of our shareowners. And in all of these things, our efforts begin and end with ethics and integrity.

In last year’s shareowners letter, I stated that we will become a more global company. As we define what that means, we know
we can only become more successful by building stronger businesses in North America – we call it earning the right to
grow. This is not a bigger is better strategy. Our goal is to not only be the best performing company in our industry but also
one of the best industrial companies in the world. All of our initiatives are designed to provide a greater return to those who
have chosen to invest in our company.

I also said that we would be changing the way we as leaders of International Paper are compensated. A year later, we have
significantly adjusted our incentive compensation plans so they are far more directly tied to external performance measures.
Our senior executives now have a majority of their total compensation tied to external measures of performance – return on
investment and total shareowner return. Our compensation is based on rewarding, motivating, aligning and enhancing
accountability.

Looking Ahead
We know our shareowners want to see better earnings performance from International Paper and going forward,
we are prepared to take the steps necessary to build on what we accomplished in 2004. Our strategy is to focus on a
few key paper, packaging and forest products businesses in North America. We will drive both our manufacturing and supply
chain cost to best-in-class levels while we are investing in new capabilities so that we can have the most effective supply
chain cost to serve our customers. We remain committed to the financial discipline of keeping overall capital expenditures to
less than depreciation over the cycle. We are focused on reducing debt and have paid down $1.3 billion in the last three
months. We have targeted an additional reduction of $1.7 billion by the end of 2006, which will reduce our debt to levels we
had in 2000 prior to the Champion merger.

We will continue to make strategic choices going forward to ensure we have our resources focused on the areas where we can
succeed and grow profitability. We’ll have to make some tough choices just as we did in 2004 with the decision to sell our
Canadian wood and pulp business – we see that as part of our strategy. We want to grow International Paper but only grow
profitably. Much of our growth will be outside North America. But we will selectively invest in our core businesses to make
them better and more competitive. Our customers are increasingly becoming more global in their own businesses and in turn,
we need to become more global with them. We have small but strong platforms in Brazil, Eastern Europe and Russia that we
will look to grow over time.

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Although we will continue to face challenges, we have opportunities and I am excited about the direction of our company. The
economy in the United States has picked up and demand for our products is better now than it was at this time last year.
I genuinely believe our best days are ahead of us and I want to thank our employees for their hard work and contributions that have
enabled International Paper to make the progress we did in 2004. I also want to thank our customers for the business
they placed with International Paper and I want to thank our shareowners for their confidence and the investments they have
made in our company. We are dedicated to earning your continued support.

John Faraci
Chairman and Chief Executive Officer

International Paper’s Senior Leadership

Seated, from left, Marianne Parrs, executive vice president; Tom Gestrich, senior vice president, Consumer Packaging; Rob Amen,
president; Dennis Thomas, senior vice president, Public Affairs and Communications; John Faraci, chairman and chief executive officer;
Rich Lowe, senior vice president and president, xpedx; Maura Smith, senior vice president, general counsel and corporate secretary;
Newland Lesko, executive vice president; and Andy Lessin, senior vice president, Internal Audit.

Standing, from left, Bill Hoel, senior vice president, Sales and Marketing; George O’Brien, senior vice president, Forest Resources and
Wood Products*; Wayne Brafford, senior vice president, Industrial Packaging; LH Puckett, senior vice president, Coated and SC Papers;
Chris Liddell, senior vice president and chief financial officer; Cato Ealy, senior vice president, Corporate Development; Mike Balduino,
senior vice president and president, Shorewood Packaging; Richard Phillips, senior vice president, Technology; Paul Herbert, senior vice
president, Printing & Communications Papers; Tom Kadien, senior vice president and president, International Paper Europe; and
Jerry Carter, senior vice president, Human Resources.

*Mr. O’Brien recently retired.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
x

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended
December 31, 2004

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

COMMISSION FILE NO. 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)

New York

13-0872805

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

400 Atlantic Street
Stamford, Connecticut
(Address of principal executive offices)

06921
(Zip Code)
Company’s telephone number, including area code: 203-541-8000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, $1 per share par value

Name of each exchange on which registered
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

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 Company was required to file such
reports), and (2) has been subject to such filing requirements for the past 75 days. Yes x No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2) of the Act.

Yes x or No

The aggregate market value of the Registrant’s outstanding common stock held by non-affiliates of the registrant, computed
by reference to the closing price as reported on the New York Stock Exchange, as of the last business day of the registrant’s most recently
completed second fiscal quarter (June 30, 2004) was approximately $21,717,727,354.

The number of shares outstanding of the Company’s common stock, as of March 4, 2005 was 490,325,984.

Documents incorporated by reference:

Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection with

registrant’s 2005 annual meeting of shareholders are incorporated by reference into Parts III and IV of this Form 10-K.

INTERNATIONAL PAPER COMPANY
Index to Annual Report on Form 10-K
For the Year Ended December 31, 2004

PART I

ITEM 1.

BUSINESS
General
Financial Information Concerning

Industry Segments

Financial Information About International

and Domestic Operations

Competition and Costs
Marketing and Distribution
Description of Principal Products
Sales Volumes by Product
Research and Development
Environmental Protection
Employees
Executive Officers of the Registrant
Raw Materials
Forward-looking Statements

ITEM 2.

PROPERTIES
Forestlands
Mills and Plants
Capital Investments and Dispositions

ITEM 3.

LEGAL PROCEEDINGS

ITEM 4.

SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

PART II.

ITEM 5.

MARKET FOR REGISTRANT'S
COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

ITEM 6.

SELECTED FINANCIAL DATA

ITEM 7.

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Executive Summary
Corporate Overview
Results of Operations
Description of Industry Segments
Industry Segment Results
Liquidity and Capital Resources
Critical Accounting Policies
Significant Accounting Estimates
Income Taxes
Recent Accounting Developments
Legal Proceedings
Effect of Inflation
Foreign Currency Effects
Market Risk

ITEM 7A.

QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

1
2
2
2
2
3
3
3
3
4
4

4
5
5

9
11
11
15
17
21
24
25
27
28
30
31
31
31

ITEM 8.

FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Financial Information by Industry
Segment and Geographic Area

Report of Management on Financial

Statements, Internal Controls over Financial
Reporting & Internal Control Environment
and Board of Directors Oversight

Reports of Deloitte & Touche LLP, Independent

Registered Public Accounting Firm
Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in

Common Shareholders' Equity

Notes to Consolidated Financial Statements
Interim Financial Results (Unaudited)

ITEM 9.

CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

ITEM 9A.

CONTROLS AND PROCEDURES

ITEM 9B.

OTHER INFORMATION

PART III.

ITEM 10.

DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

ITEM 11.

EXECUTIVE COMPENSATION

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT

ITEM 13.

CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

ITEM 14.

PRINCIPAL ACCOUNTANT FEES
AND SERVICES

36
38
39
40

41
42
79

PART IV.

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES
83
Additional Financial Data
Report of Independent Registered

Public Accounting Firm on Financial
Statement Schedule

Schedule II - Valuation and

Qualifying Accounts

SIGNATURES

APPENDIX I 2004 LISTING OF FACILITIES

APPENDIX II 2004 CAPACITY INFORMATION

A-1

A-5

PART I

ITEM 1. BUSINESS

General

International Paper Company (the “Company” or
“International Paper,” which may be referred to as “we” or
“us”), is a global forest products, paper and packaging
company that is complemented by an extensive North
American merchant distribution system, with primary markets
and manufacturing operations in the United States, Europe,
the Pacific Rim and South America. We are a New York
corporation and were incorporated in 1941 as the successor
to the New York corporation of the same name organized in
1898. Our home page on the Internet is
www.internationalpaper.com. You can learn more about us by
visiting that site.

In the United States at December 31, 2004, the Company
operated 27 pulp, paper and packaging mills, 103 converting
and packaging plants, 25 wood products facilities, and seven
specialty chemicals plants. Production facilities at December
31, 2004 in Europe, Asia, Latin America and South America
included seven pulp, paper and packaging mills, 42
converting and packaging plants, one wood products facility,
two specialty panels and laminated products plants and six
specialty chemicals plants. We distribute printing, packaging,
graphic arts, maintenance and industrial products principally
through over 286 distribution branches located primarily in
the United States. At December 31, 2004, we owned or
managed approximately 6.8 million acres of forestlands in the
United States, mostly in the South, approximately 1.2 million
acres in Brazil and had, through licenses and forest
management agreements, harvesting rights on government-
owned forestlands in Russia. Substantially all of our
businesses have experienced, and are likely to continue to
experience, cycles relating to available industry capacity and
general economic conditions.

Carter Holt Harvey Limited, a New Zealand company that is
listed on the New Zealand and Australian stock exchanges and
is approximately 50.5% owned by International Paper,
operates four mills producing pulp, paper and packaging
products, 17 converting and packaging plants and 82 wood
products manufacturing and distribution facilities, primarily in
New Zealand, Australia and, through the 2004 acquisition of
Plantation Timber Products, in China. In New Zealand, Carter
Holt Harvey owns approximately 785,000 acres of forestlands.

For management and financial reporting purposes, our
businesses are separated into six segments: Printing Papers;
Industrial and Consumer Packaging; Distribution; Forest
Products; Carter Holt Harvey; and Specialty Businesses and
Other. A description of these business segments can be found

on pages 15 through 17 of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.

From 2000 through 2004, International Paper’s capital
expenditures approximated $5.9 billion, excluding mergers
and acquisitions. These expenditures reflect our continuing
efforts to improve product quality and environmental
performance, lower costs, and improve forestlands. Capital
spending for continuing operations in 2004 was $1.3 billion
and is expected to be approximately $1.4 billion in 2005.
This amount is below our expected annual depreciation and
amortization expense of $1.7 billion. You can find more
information about capital expenditures on page 22 of Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.

Discussions of mergers and acquisitions can be found on
page 22 of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

You can find discussions of restructuring charges and other
special items on pages 13 and 14 of Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.

Throughout this Annual Report on Form 10-K, we
“incorporate by reference” certain information in parts of
other documents filed with the Securities and Exchange
Commission (SEC). The SEC permits us to disclose important
information by referring to it in that manner. Please refer to
such information. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form
8-K, along with all other reports and any amendments
thereto filed with or furnished to the SEC, are publicly
available free of charge on the Investor Relations section of
our Internet Web site at www.internationalpaper.com as
soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. The information
contained on or connected to our Web site is not
incorporated by reference into this Form 10-K and should not
be considered part of this or any other report that we filed
with or furnished to the SEC.

Financial Information Concerning Industry
Segments

The financial information concerning segments is set forth on
pages 33 and 34 of Item 8. Financial Statements and
Supplementary Data.

Financial Information About International and
Domestic Operations

The financial information concerning international and
domestic operations and export sales is set forth on page 34
of Item 8. Financial Statements and Supplementary Data.

Competition and Costs

Sales Volumes by Product

Despite the size of the Company’s manufacturing capacity for
paper, paperboard, packaging and pulp products, the
markets in all of the cited product lines are large and highly
fragmented. The markets for wood and specialty products are
similarly large and fragmented. There are numerous
competitors, and the major markets, both domestic and
international, in which the Company sells its principal
products are very competitive. These products are in
competition with similar products produced by others, and in
some instances, with products produced by other industries
from other materials.

Many factors influence the Company’s competitive position,
including prices, costs, product quality and services. You can
find more information about the impact of prices and costs on
operating profits on pages 9 through 21 of Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations. You can find information about the Company’s
manufacturing capacities on page A-5 of Appendix II.

Marketing and Distribution

The Company sells paper, packaging products, building
materials and other products directly to end users and
converters, as well as through resellers. We own a large
merchant distribution business that sells products made both
by International Paper and by other companies making paper,
packaging and supplies. Sales offices are located throughout
the United States as well as internationally. We also sell
significant volumes of products through paper distributors,
including our own merchant distribution network, and agents.

We market our U.S. production of lumber and plywood
through independent distribution centers.

Sales volumes of major products for 2004, 2003, and 2002
were as follows:

Sales Volumes by Product (1) (2)
(Unaudited)

International Paper Consolidated
(excluding Carter Holt Harvey)

Printing Papers (In thousands of tons)
Brazil Uncoated Papers and Bristols
Europe & Russia Uncoated Papers
and Bristols

U.S. Uncoated Papers and Bristols
Uncoated Papers and Bristols
Coated Papers
Market Pulp (3)

Packaging (In thousands of tons)

U.S. Container (Boxes)
European Container (Boxes)
Other Industrial and Consumer
Packaging

Industrial and Consumer Packaging
Containerboard
Bleached Packaging Board
Kraft

Forest Products (In millions)
Panels (sq. ft. 3/8” - basis)
Lumber (board feet)
MDF and Particleboard
(sq. ft. 3/4” - basis)

2004

2003

2002

461

447

441

1,409
4,570
6,440
2,173
1,422

1,352
4,439
6,238
2,113
1,379

1,364
4,527
6,332
2,212
1,378

2,668
1,049

2,204
1,031

2,610
1,020

1,222
4,939
2,090
1,495
605

1,148
4,383
1,946
1,348
606

742
4,372
1,862
1,247
626

1,563
2,456

1,580
2,345

1,798
2,464

129

Description of Principal Products

Carter Holt Harvey (4)

The Company’s principal products are described on pages 15
through 17 of Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.

Printing Papers (In thousands of tons)
Market Pulp (3)
Packaging (In thousands of tons)
Containerboard
Bleached Packaging Board
Industrial and Consumer Packaging

Forest Products (In millions)
Panels (sq. ft. 3/8” - basis)
Lumber (board feet)
MDF and Particleboard
(sq. ft. 3/4” - basis)

2004

2003

2002

568

459
83
147

183
497

580

499

512

361
84
153

179
503

400
89
154

200
546

582

494

(1) Includes third party and inter-segment sales.
(2) Sales volumes for divested businesses are included through the

date of sale, except for discontinued operations.

(3) Includes internal sales to mills.
(4) Includes 100% of volumes sold.

Research and Development

The Company operates research and development centers at
Loveland, Ohio; Sterling Forest, New York; Kaukauna,
Wisconsin; Savannah, Georgia; Almere, the Netherlands; a
regional center for applied forest research in Bainbridge,
Georgia; a forest biotechnology center in Rotorua, New
Zealand; and several product laboratories. Additionally, the
Company has approximately a 1/3 interest in ArborGen, LLC,
a joint venture with certain other forest products and
biotechnology companies formed for the purpose of
developing and commercializing improvements to increase
growth rates and improve wood and pulp quality. We direct
research and development activities to short-term, long-term
and technical assistance needs of customers and operating
divisions; to process, equipment and product innovations;
and to improve profits through tree generation and
propagation research. Activities include studies on improved
forest species and management; innovation and improvement
of pulping, bleaching, chemical recovery, papermaking and
coating processes; packaging design and materials
development; reduction of environmental discharges; re-use
of raw materials in manufacturing processes; recycling of
consumer and packaging paper products; energy
conservation; applications of computer controls to
manufacturing operations; innovations and improvement of
products; and development of various new products. Our
development efforts specifically address product safety as well
as the minimization of solid waste. The cost to the Company
of its research and development operations in 2004 was $68
million; $73 million in 2003; and $77 million in 2002.

We own numerous patents, copyrights, trademarks, and trade
secrets relating to our products and to the processes for their
production. We also license intellectual property rights to and
from others where necessary. Many of the manufacturing
processes are among our trade secrets. Some of our products
are covered by U.S. and non-U.S. patents and are sold under
well known trademarks. We derive competitive advantage by
protecting our trade secrets, patents, trademarks and other
intellectual property rights, and by using them as required to
support our businesses.

Environmental Protection

Information concerning the effects of the Company’s
compliance with federal, state and local provisions enacted or
adopted relating to environmental protection matters is set
forth on page 30 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.

Employees

As of December 31, 2004, we had approximately 80,000
employees, 52,000 of whom were located in the United States.

Of the domestic employees, approximately 34,000 are hourly,
with unions representing approximately 20,000. Approximately
16,000 of the union employees are represented by the Paper,
Allied-Industrial, Chemical and Energy International Union
(PACE) under individual location contracts.

During 2004, new labor agreements were ratified at four
paper mills with one paper mill contract carrying over to
early 2005. During 2005, labor agreements are scheduled to
be negotiated at four paper mill operations including
Kaukauna, Wisconsin; Ticonderoga, New York; Savannah,
Georgia and Roanoke Rapids, North Carolina.

During 2004, 13 labor agreements were settled in non-paper
mill operations. Settlements included paper converting, wood
products, chemical, distribution and woodlands operations.
During 2005, new labor agreements are scheduled to be
negotiated in 21 non-paper mill operations.

In January 2005, the Company’s principal union, PACE,
announced that it was merging with the United Steelworkers
Union. The merger is subject to a vote of the memberships of
both unions in April 2005. The name of the resulting union will
be United Steel, Paper and Forestry, Rubber, Manufacturing,
Energy, Allied Industrial and Service Workers International Union.

Executive Officers of the Registrant

John V. Faraci, 55, chairman and chief executive officer since
November 2003. Prior to this, he was president since February
2003, and executive vice president and chief financial officer
from 2000 to 2003. From 1999 to 2000, he was senior vice
president-finance and chief financial officer. From 1995 until
1999, he was chief executive officer and managing director of
Carter Holt Harvey Limited of New Zealand.

Robert M. Amen, 55, president since November 2003.
Previously, he served as executive vice president responsible
for the Company’s paper business, technology and corporate
marketing from 2000 through 2003. He also served as senior
vice president-president of International Paper-Europe from
1996 to 2000.

Newland A. Lesko, 59, executive vice president-manufacturing
and technology since June 2003. He previously served as senior
vice president-industrial packaging group from 1998 to 2003.

Marianne M. Parrs, 60, executive vice president-
administration since 1999 responsible for information
technology, investor relations, and global sourcing.

H. Wayne Brafford, 53, senior vice president-industrial
packaging group since June 2003. He previously served as
vice president and general manager-converting, specialty and
pulp from 1999 to 2003.

Jerome N. Carter, 56, senior vice president-human resources
since 1999 when he joined the Company from Union Camp.

Thomas E. Gestrich, 58, senior vice president-consumer
packaging since 2001. He previously served as vice president
and general manager-beverage packaging from 1999
to 2001.

Andrew R. Lessin, 62, senior vice president-internal audit
since 2002. He previously served as vice president-finance
from 2000 to 2002. From 1995 to 2000, he served as vice
president-controller. He is also a director of Carter Holt
Harvey Limited.

Christopher P. Liddell, 46, senior vice president and chief
financial officer since March 2003. Prior to this, he served as
vice president-finance and controller since February 2003.
From 2002 to 2003, he served as vice president-finance.
From 1999 to 2002, he served as chief executive officer of
Carter Holt Harvey Limited. He is also a director of Carter
Holt Harvey Limited.

Richard B. Lowe, 50, senior vice president-xpedx since April
2003. He previously served as region president-xpedx from
1995 to 2003.

Maura A. Smith, 49, senior vice president, general counsel
and corporate secretary since April 2003 when she joined the
Company. From 1998 to 2003 she served as senior vice
president, general counsel and corporate secretary of Owens
Corning and in addition, from 2000 to 2003, as chief
restructuring officer.

W. Dennis Thomas, 61, senior vice president-public affairs
and communications since 1998.

Robert J. Grillet, 49, vice president-finance and controller
since April 2003. He previously served as region senior vice
president-xpedx from 2000 to 2003. He was group vice
president-xpedx from 1995 to 2000.

Raw Materials

For information on the sources and availability of raw
materials essential to our business, see Item 2. Properties.

FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K, and
in particular, statements found in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, that are not historical in nature may constitute
forward-looking statements. These statements are often
identified by the words, “will,” “may,” “should,” “continue,”
“anticipate,” “believe,” “expect,” “plan,” “appear,” “project,”

“estimate,” “intend,” and words of similar import. Such
statements reflect the current views of International Paper
with respect to future events and are subject to risks and
uncertainties that could cause actual results to differ
materially from those expressed or implied in these
statements. Factors which could cause actual results to differ
include, among other things, the strength and demand for the
Company’s products and changes in overall demand, the
effects of competition from foreign and domestic producers,
the level of housing starts, changes in the cost or availability
of raw materials, unanticipated expenditures relating to the
cost of compliance with environmental and other
governmental regulations, the ability of the Company to
continue to realize anticipated cost savings, performance of
the Company’s manufacturing operations, results of legal
proceedings, changes related to international economic
conditions, specifically in Brazil and Russia, changes in
currency exchange rates, particularly the relative value of the
U.S. dollar to the Euro, the current military action in Iraq,
and the war on terrorism. We undertake no obligation to
publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise. These
and other factors that could cause or contribute to actual
results differing materially from such forward-looking
statements are discussed in greater detail in the Company’s
Securities and Exchange Commission filings.

ITEM 2. PROPERTIES

Forestlands

The principal raw material used by International Paper is
wood in various forms. As of December 31, 2004, the
Company or its subsidiaries owned or managed
approximately 6.8 million acres of forestlands in the United
States, 1.2 million acres in Brazil and had, through licenses
and forest management agreements, harvesting rights on
government-owned forestlands in Russia. An additional
785,000 acres of forestlands in New Zealand were held
through Carter Holt Harvey, a consolidated subsidiary of
International Paper.

During 2004, the Company’s U.S. forestlands supplied 14.7
million tons of roundwood to its U.S. facilities, representing
23% of its wood fiber requirements. The balance was
acquired from other private industrial and nonindustrial
forestland owners, with only an insignificant amount coming
from public lands of the United States government. In
addition, in 2004, 3.8 million tons of wood were sold to
other users.

As one of the largest private landowners in the world,
International Paper employs professional foresters and
wildlife biologists to manage our forestlands with great care

in compliance with the rigorous standards of the Sustainable
Forestry Initiative program (SFI®). SFI® includes an
independent certification system to ensure the sustainable
planting, growing and harvesting of trees while protecting
wildlife, plants, soil, water and air quality. All of our U.S.
forestlands are certified as complying with SFI® standards
by an independent third party, and most of our forestlands
outside of the United States comply with similar local or
regional sustainable forestry programs as well.

Mills and Plants

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal proceedings is
set forth on pages 30 and 31 of Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, and on pages 59 through 65 of Item 8. Financial
Statements and Supplementary Data.

ITEM 4. SUBMISSION OF MATTERS TO A

VOTE OF SECURITY HOLDERS

A listing of our production facilities, the vast majority of
which we own, can be found in Appendix I hereto, which is
incorporated herein by reference.

No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December
31, 2004.

The Company’s facilities are in good operating condition and
are suited for the purposes for which they are presently being
used. We continue to study the economics of modernization
or adopting other alternatives for higher cost facilities.

Capital Investments and Dispositions

Given the size, scope and complexity of our business
interests, we continuously examine and evaluate a wide
variety of business opportunities and planning alternatives,
including possible acquisitions and sales or other
dispositions of properties. You can find a discussion about
the level of planned capital investments for 2005 on page 24,
and dispositions and restructuring activities as of December
31, 2004, on pages 12 through 14 of Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, and on pages 49 through 56 of Item 8. Financial
Statements and Supplementary Data.

PART II

ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES

Dividend per share data on the Company’s common stock
and the high and low sales prices for the Company’s common
stock for each of the four quarters in 2003 and 2004 are set
forth on page 79 of Item 8. Financial Statements and
Supplementary Data. Information concerning the exchanges
on which the Company’s common stock is listed is set forth
on the back cover. As of March 4, 2005, there were
approximately 29,180 record holders of common stock of
the Company.

Total Number
of Shares (or
Units) Purchased

Average Price Paid
per Share (or Unit)

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

Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs

(a)

56,024

$41.44

Period

January 1, 2004 -

December 31, 2004

(a) Represents shares tendered in connection with stock option exercises.

ITEM 6. SELECTED FINANCIAL DATA

Five-Year Financial Summary (a)
Dollar amounts in millions, except per share amounts and stock prices

Results of Operations
Net sales
Costs and expenses, excluding interest
Earnings (loss) from continuing operations before

income taxes and minority interest
Minority interest expense, net of taxes
Discontinued operations (c)
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)
Earnings (loss) applicable to common shares

Financial Position
Working capital
Plants, properties and equipment, net
Forestlands
Total assets
Notes payable and current maturities of long-term debt
Long-term debt
Common shareholders’ equity

Basic Per Share of Common Stock -
Earnings (loss) from continuing operations
Discontinued operations (c)
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)

Diluted Per Share of Common Stock -
Earnings (loss) from continuing operations
Discontinued operations (c)
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)

Cash dividends
Common shareholders’ equity

Common Stock Prices
High
Low
Year-end

Financial Ratios
Current ratio
Total debt to capital ratio
Return on equity
Return on investment

from continuing operations

Capital Expenditures
Number of Employees

2004)

2003)

2002)

2001)

2000)

$25,548)
24,059)

$23,955) $23,899) $ 25,385) $ 27,656)
26,186)
22,891)

25,783)

22,808)

(b)
(b)

(b-d)

746)
62)
(513)
-)
-)
(35)
(35)

(e)

(f)

(e-g)

292)
111)
21)
-)
(13)
302)
302)

306)
118)
35)
-)
(1,175)
(880)
(880)

(h)

(i)

(h-j)

(1,330)
140)
40)
(46)
(16)
(1,204)
(1,204)

(k)

(l)

(k,l)

(m)

(n)

(m,n)

652)
228)
41)
(226)
-)
142)
142)

$ 4,447)
13,432)
3,936)
34,217)
506)
14,132)
8,254)

$ 0.98)
(1.05)
-)
-)
(0.07)

1.00)
16.93)

$ 45.01)
37.12)
42.00)

$ 3,826) $ 4,386) $ 3,875) $ 3,990)
15,459)
13,260)
5,870)
3,979)
42,109)
35,525)
2,115)
2,087)
12,647)
13,450)
12,034)
8,237)

13,292)
3,765)
33,792)
-)
13,042)
7,374)

14,115)
4,107)
37,177)
957)
12,457)
10,291)

$ 0.62) $ 0.54) $ (2.45) $ 0.73)
0.09)
(0.50)
-)
0.32)

0.08)
(0.10)
(0.03)
(2.50)

0.07)
-)
(2.44)
(1.83)

0.04)
-)
(0.03)
0.63)

$ 0.61) $ 0.54) $ (2.45) $ 0.73)
0.09)
(0.50)
-)
0.32)

0.08)
(0.10)
(0.03)
(2.50)

0.07)
-)
(2.43)
(1.82)

0.04)
-)
(0.03)
0.63)

1.00)
16.97)

1.00)
15.21)

1.00)
21.25)

1.00)
24.85)

$ 43.32) $ 46.19) $ 43.25) $ 60.00)
26.31)
40.81)

33.09)
43.11)

31.35)
34.97)

30.70)
40.35)

1.9)
59.9)
(0.4)

(b-d)

1.5)
61.2)
3.9)

(e-g)

1.9)
55.4)
(8.8)

(h-j)

1.7)
50.1)
(10.6)

(k,l)

1.5)
49.5)
1.2)

(b,d)

(h,j)

(e,g)

2.9)

2.6)

3.2)
$ 1,166) $ 1,009) $ 1,049) $ 1,352)
112,900)
82,800)

100,100)

91,000)

(0.8)

(k)

3.9)
$ 1,328)
79,400)

(m,n)

(m)

FINANCIAL GLOSSARY

Current ratio -

current assets divided by current liabilities.

Total debt to capital ratio -

long-term debt plus notes payable and current
maturities of long-term debt divided by long-term debt,
notes payable and current maturities of long-term debt,
minority interest and total common shareholders’ equity.

Return on equity -

net earnings divided by average common shareholders’
equity (computed monthly).

Return on investment -

the after-tax amount of earnings from continuing
operations before interest and minority interest divided
by the average of total assets minus accounts payable
and accrued liabilities (computed on a monthly basis).

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

(a) All periods presented have been restated to reflect the

Carter Holt Harvey Tissue business and the Weldwood of
Canada Limited business as discontinued operations.

2004:

(b) Includes restructuring and other charges of $211 million
before taxes and minority interest ($124 million after
taxes and minority interest), including a $74 million
charge before taxes and minority interest ($43 million
after taxes and minority interest) for organizational
restructuring programs, a $92 million charge before
taxes ($57 million after taxes) for early debt retirement
costs, a $35 million charge before minority interest ($18
million after minority interest) for a goodwill
impairment, and a $10 million charge before taxes ($6
million after taxes) for litigation settlements. Also
included are a $123 million pre-tax credit ($76 million
after taxes) for net insurance recoveries related to the
hardboard siding and roofing litigation, a $35 million
credit before taxes and minority interest ($22 million
after taxes and minority interest) for the net reversal of
restructuring reserves no longer required, and a pre-tax
charge of $144 million ($128 million after taxes) for net
losses on sales and impairments of businesses sold or
held for sale.

(c) Includes net income of Weldwood of Canada Limited and
the Carter Holt Harvey Tissue business prior to their
sales. Also included in 2004 is a gain of $268 million
before taxes and minority interest ($90 million after taxes
and minority interest) for the sale of the Carter Holt

Harvey Tissue business, and a pre-tax charge of $323
million ($711 million after taxes) for the sale of
Weldwood of Canada Limited.

(d) Includes a $5 million net increase, net of minority
interest, in the income tax provision reflecting an
adjustment of deferred tax balances and a reduction of
valuation reserves for capital loss carryovers.

2003:

(e) Includes restructuring and other charges of $298 million
before taxes and minority interest ($184 million after
taxes and minority interest), including a $236 million
charge before taxes and minority interest ($144 million
after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a $63
million charge before taxes ($39 million after taxes) for
legal reserves, and a $1 million credit before taxes ($1
million charge after taxes) for early debt retirement
costs. Also included are a pre-tax charge of $32 million
($33 million after taxes) for net losses on sales and
impairments of businesses held for sale, and a credit of
$40 million before taxes and minority interest ($25
million after taxes and minority interest) for the net
reversal of restructuring reserves no longer required.

(f) Includes a charge of $10 million after taxes for the

cumulative effect of an accounting change for the adoption
of SFAS No. 143, “Accounting for Asset Retirement
Obligations,” and a charge of $3 million after taxes for the
cumulative effect of an accounting change related to the
adoption of FIN 46, “Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51.”

(g) Includes a $123 million reduction after minority interest
of the income tax provision recorded for significant tax
events occurring in 2003.

2002:

(h) Includes restructuring and other charges of $695 million
before taxes and minority interest ($435 million after
taxes and minority interest), including a $199 million
charge before taxes and minority interest ($130 million
after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions, a
$450 million pre-tax charge ($278 million after taxes)
for additional exterior siding legal reserves, and a charge
of $46 million before taxes and minority interest ($27
million after taxes and minority interest) for early debt
retirement costs. Also included are a credit of $41
million before taxes and minority interest ($101 million
after taxes and minority interest) to adjust accrued costs
of businesses sold or held for sale, and a pre-tax credit of

share of Compania de Petroleos de Chile (COPEC), an
extraordinary loss of $460 million before taxes ($310
million after taxes) related to the impairment of the
Zanders and Masonite businesses, an extraordinary gain
before taxes and minority interest of $368 million ($183
million after taxes and minority interest) related to the sale
of Bush Boake Allen, an extraordinary loss of $5 million
before taxes and minority interest ($2 million after taxes
and minority interest) related to Carter Holt Harvey’s sale
of its Plastics division, and an extraordinary pre-tax charge
of $373 million ($231 million after taxes) related to
impairments of the Argentine investments and the Chemical
Cellulose Pulp and the Fine Papers businesses.

$68 million ($43 million after taxes) for the reversal of
2001 and 2000 reserves no longer required.

(i) Includes a $1.2 billion charge for the cumulative effect of
an accounting change for the adoption of SFAS No. 142,
“Goodwill and Other Intangible Assets.”

(j) Reflects a decrease of $46 million in income tax provision
for a reduction of deferred state income tax liabilities.

2001:

(k) Includes restructuring and other charges of $1.1 billion
before taxes and minority interest ($752 million after
taxes and minority interest), including an $892 million
charge before taxes and minority interest ($606 million
after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions and a
$225 million pre-tax charge ($146 million after taxes)
for additional exterior siding legal reserves. Also included
are a net pre-tax charge of $629 million ($587 million
after taxes) related to dispositions and asset impairments
of businesses held for sale, a $42 million pre-tax charge
($28 million after taxes) for Champion merger
integration costs, and a $17 million pre-tax credit ($11
million after taxes) for the reversal of excess 2000 and
1999 restructuring reserves.

(l) Includes an extraordinary pre-tax charge of $73 million
($46 million after taxes) related to the impairment of the
Masonite business and the divestiture of the Petroleum
and Minerals assets, and a charge of $25 million before
taxes and minority interest ($16 million after taxes and
minority interest) for the cumulative effect of a change in
accounting for derivatives and hedging activities.

2000:

(m) Includes restructuring and other charges of $949 million
before taxes and minority interest ($589 million after
taxes and minority interest), including an $824 million
charge before taxes and minority interest ($509 million
after taxes and minority interest) for asset shutdowns of
excess internal capacity and cost reduction actions and a
$125 million pre-tax charge ($80 million after taxes) for
additional exterior siding legal reserves. Also included
are a $54 million pre-tax charge ($33 million after
taxes) for merger-related expenses and a $34 million
pre-tax credit ($21 million after taxes) for the reversal of
reserves no longer required.

(n) Includes an extraordinary gain of $385 million before

taxes and minority interest ($134 million after taxes and
minority interest) on the sale of International Paper’s
investment in Scitex and Carter Holt Harvey’s sale of its

ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS
OF OPERATIONS

Executive Summary

International Paper benefited from a strong economy in 2004
as demand for paper and packaging products was improved
from 2003. Overall average price realizations were up year
over year across all our major product lines except for
European paper products where a strong Euro attracted
imports. Our total industry segment operating profits were up
from 2003 reflecting the higher average prices and improved
shipments combined with benefits from cost reduction
initiatives and a more favorable product mix. These positive
effects were partially offset by higher input costs, including
wood, energy and chemical costs.

Looking forward to 2005, we expect demand in the first
quarter to be somewhat positive, although this is a seasonally
slow period for many of our businesses. Overall, demand
remains solid in the United States and Europe, with strong
order backlogs in our coated papers and bleached board
businesses. Containerboard and box orders are also good.
Uncoated papers’ backlogs were below prior year levels, but
are improving as the first quarter progresses. Our average
price realizations for most paper and packaging products
began the year well above 2004 levels reflecting the
realization of previously announced price increases. Raw
material costs, especially wood, polyethylene and chemical
costs, are expected to increase in early 2005, although energy
costs should be flat compared with the fourth quarter of
2004. In addition, pension and other benefit related costs,
plus supply chain expenses are expected to be higher in
2005. However, interest costs will decline due to debt
repayments in 2004 and the 2005 first quarter.

Results of Operations

Industry segment operating profits are used by International
Paper’s management to measure the earnings performance of
its businesses. Management believes that this measure allows a
better understanding of trends in costs, operating efficiencies,
prices and volumes. Industry segment operating profits are
defined as earnings before taxes and minority interest, interest
expense, corporate items and corporate special items.
Industry segment operating profits are defined by the
Securities and Exchange Commission as a non-GAAP financial
measure, and are not GAAP alternatives to net income or any
other operating measure prescribed by accounting principles
generally accepted in the United States. International Paper
operates in six segments: Printing Papers, Industrial and
Consumer Packaging, Distribution, Forest Products, Carter
Holt Harvey, and Specialty Businesses and Other.

The following table shows the components of net earnings
(loss) for each of the last three years:

In Millions
Industry segment operating profits
Corporate items
Corporate special items*
Interest expense, net
Minority interest
Income tax benefit (provision)
Discontinued operations
Accounting changes and
extraordinary items

Net earnings (loss)

2004)
$2,087)
(469)
(188)
(743)
(3)
(206)
(513)

2003)

2002)
$1,772) $ 1,887)
(253)
(586)
(785)
(75)
72)
35)

(466)
(290)
(772)
(63)
113)
21)

-)
$ (35)

(13)

(1,175)
$ 302) $ (880)

*Special items include restructuring and other charges, net losses (gains) on sales and

impairments of businesses held for sale, insurance recoveries and reversals of reserves

no longer required.

Industry segment operating profits were $315 million higher
in 2004 due principally to improved sales volume ($263
million), higher average prices ($201 million), and the effect
of cost reduction initiatives, improved operating performance
and a more favorable product mix ($186 million), all
partially offset by the impact of higher energy and raw
material costs ($192 million), lower earnings from land sales
($95 million), the impact of hurricanes in the South ($18
million), and foreign currency translation rates and other
items ($30 million).

$2,400
$2,200
$2,000

$1,800
$1,600
$1,400
$1,200

$1,000

$263

$1,772

2003

Volume

Segment Operating Profit
(in millions)
$(192)

$186

$201

$(95)

$(18)

$(30) $2,087

Price

Cost/

Operations/Mix

Energy/
Raw Materials

Land Sales

Hurricanes

FX/Other

2004

The principal changes by segment were as follows: Printing
Papers’ profits were $119 million higher as increased sales
volume, improved sales mix and lower operating and
overhead costs more than offset higher energy and raw
material costs. Industrial and Consumer Packaging’s profits
were up $92 million. Higher average sales prices and
volumes, improved product mix, and reduced overhead costs
and improved operations more than offset the effect of higher
energy and raw material costs. Forest Products’ profit was
$73 million higher. Higher average prices for wood products
more than offset the effect of lower harvest volumes and
lower earnings from land sales.

Corporate items of $469 million net expense in 2004 was
slightly higher than the $466 million net expense in 2003,
due to higher pension and supply chain initiative costs,
increased inventory-related costs and lower gains on energy
hedging transactions, offset in part by lower administrative
overhead and benefit-related costs.

Corporate special items, including restructuring and other
charges, gains/losses on sales and impairments of businesses
held for sale, insurance recoveries and reversals of reserves
no longer required, declined to $188 million from $290
million in 2003 and from $586 million in 2002. The decline
in 2004 reflects lower restructuring charges that relate to
excess capacity shutdowns and organizational restructuring
programs, and insurance recoveries relating to hardboard
siding and roofing matters.

Interest expense, net, decreased to $743 million from $772
million in 2003 and $785 million in 2002. The decline in
2004 compared with both 2003 and 2002 reflects the lower
average interest rates from the refinancing of high coupon
rate debt, and higher interest income at Carter Holt Harvey.

The income tax provision of $206 million includes a $41
million tax benefit related to 2004 special items. The $113
million income tax benefit in 2003 included $231 million of
benefits for special items occurring in 2003. The $72
million benefit in 2002 also reflected adjustments for
special tax items.

During 2004, International Paper completed the sale of its
Weldwood of Canada Limited business in the fourth quarter
and Carter Holt Harvey completed the sale of its Tissue
business in the second quarter. As a result of these
transactions, the operating results of these businesses and the
gain or loss on the sales are reported in discontinued
operations for all periods presented.

Accounting changes included a charge of $13 million in 2003
for the adoption of new accounting pronouncements, and a
$1.2 billion charge in 2002 for the adoption of the new
goodwill accounting standard.

Liquidity and Capital Resources

For the year ended December 31, 2004, International Paper
generated $2.4 billion of operating cash flow, up from $1.8
billion in 2003. Capital spending from continuing operations
for the year totaled $1.3 billion, or 81% of depreciation and
amortization expense. We repaid approximately $900 million
of debt during the year, including various higher coupon rate
debt, that will result in lower interest charges in future years.
Our liquidity position remains strong, supported by
approximately $3.2 billion of unused, committed credit
facilities that we believe are adequate to meet future short-

term liquidity requirements. Maintaining an investment grade
credit rating for our long-term debt continues to be an
important element in our overall financial strategy.

Our focus in 2005 will be to continue to maximize our
financial flexibility and preserve liquidity while further
reducing future interest expense through the repayment or
refinancing of high coupon rate debt, with a target of
reducing consolidated debt to approximately $12 billion by
the end of 2006.

Critical Accounting Policies and Significant
Accounting Estimates

Accounting policies that may have a significant effect on our
reported results of operations and financial position, and that
can require judgments by management in their application,
include accounting for contingent liabilities, impairments of
long-lived assets and goodwill, pensions and postretirement
benefit obligations and income taxes.

Pension expenses for our U.S. plans increased to $111
million in 2004 from $60 million in 2003 due principally to
increased amortization of unrecognized actuarial losses and a
reduction in the assumed discount rate. A further increase of
approximately $100 million is expected in 2005, also due to
an increase in the amortization of unrecognized actuarial
losses, a further reduction in the assumed discount rate, and
a decrease in the expected return on plan assets to 8.50%
from 8.75% in 2004. Our pension funding policy continues to
be to fully fund actuarially determined costs, generally equal
to the minimum amounts required by the Employee
Retirement Income Security Act (ERISA). Unless investment
performance is negative or changes are made to our funding
policy, it is unlikely that any contributions to our U.S.
qualified plan will be required before 2007.

Recent Accounting Developments

Several new accounting standards and interpretations were
released that are effective in either 2004 or 2005. The revised
standard on share-based payment that will be effective in the
third quarter of 2005 will require recognition of
compensation cost for any outstanding option grants that are
unvested at June 30, 2005, as well as reload grants. While the
exact impact will depend upon the number of unvested
options at that time, this standard could increase
compensation expense by approximately $20 million in both
2005 and 2006, with no significant impact in subsequent
years. Accounting guidance was also issued addressing
accounting and disclosure for the foreign earnings
repatriation provision within the American Jobs Creation Act
of 2004. We have started an evaluation of the effects of this
provision, but do not expect to complete this evaluation until
the second quarter of 2005.

Legal

Payments relating to exterior siding and roofing class action
settlements continue to be in line with projections made in
2002. Federal and state court antitrust cases relating to
alleged price fixing in the sale of high-pressure laminates
were settled in 2004 for a total of $38.5 million. The
Company is defending opt-out cases related to a settled class
action brought by purchasers of corrugated sheets and
containers. Additional information on these matters is
included in Note 10 of the Notes to Consolidated Financial
Statements in Item 8.

Corporate Overview

While the operating results for International Paper’s various
business segments are driven by a number of business-
specific factors, changes in International Paper’s operating
results are closely tied to changes in general economic
conditions in the United States, Europe and Asia. Factors that
impact the demand for our products include industrial non-
durable goods production, consumer spending, commercial
printing and advertising activity, white-collar employment
levels, new home construction and repair and remodeling
activity, and movements in currency exchange rates. Product
prices also tend to follow general economic trends, and are
also affected by inventory levels, currency movements and
changes in worldwide operating rates. In addition to these
revenue-related factors, net earnings are impacted by various
cost drivers, the more significant of which include changes in
raw material costs, principally wood fiber and chemical costs,
energy costs, salary and benefits costs, including pensions,
and manufacturing conversion costs.

The following is a discussion of International Paper’s results
of operations for the year ended December 31, 2004, and
the major factors affecting these results compared to 2003
and 2002.

Results of Operations

For the year ended December 31, 2004, International Paper
reported net sales of $25.5 billion, compared with $24.0
billion in 2003 and $23.9 billion in 2002. International net
sales (including U.S. exports) totaled $7.9 billion, or 31% of
total sales in 2004. This compares to international net sales
of $7.2 billion in 2003 and $6.4 billion in 2002.

Full year 2004 results totaled a net loss of $35 million ($0.07
per share basic and diluted), compared with net income of
$302 million ($0.63 per share basic and diluted) in 2003
and a net loss of $880 million ($1.83 per share basic, $1.82
per share diluted) in 2002 and amounts include results of
discontinued operations and the cumulative effect of
accounting changes.

Earnings from continuing operations in 2004 were $478
million compared with $294 million in 2003 and $260
million in 2002. Earnings in 2004 benefited from higher sales
volumes, higher average sales prices, cost reduction
initiatives, improved mill operations and lower interest
expense. These factors more than offset the negative impacts
of increased energy and wood fiber costs, lower earnings
from land sales, a higher effective tax rate, increased special
charges and the impact of the hurricanes in the South. See
Industry Segment Results on pages 17 through 21 for a
discussion of the impact of these factors by segment.

Earnings From Continuing Operations
(after taxes, in millions)

$154

$(142)

$(70)

$(35) $(90)

$(13)

$21

$17 $478

$148

$194

$294

$800
$700
$600
$500
$400
$300
$200
$100
$0

2004

Tax

Special Items

Interest

Minority Interest/Other
Hurricanes

Volume

Price

Costs/Operations/Mix
Energy/Raw Materials
Land Sales

2003

The following table presents a reconciliation of International
Paper’s net earnings (loss) to its operating profit:

In millions
Net Earnings (Loss)
Add back (deduct):
Discontinued operations:
Earnings from operations
Loss on sales or impairments
Cumulative effect of
accounting changes

Earnings From Continuing Operations
Add back (deduct): Income tax
provision (benefit)
Add back: Minority interest expense,
net of taxes
Earnings From Continuing Operations
Before Income Taxes and Minority
Interest
Interest expense, net
Minority interest included
in operations
Corporate items
Special items:
Restructuring and other charges
Insurance recoveries
Net losses (gains) on sales
and impairments of
businesses held for sale

Reversals of reserves
no longer required, net

2004)
$ (35)

2003)
$ 302)

2002)
$ (880)

(108)
621)

-)
478)

(21)
-)

13)
294)

(35)
-)

1,175)
260)

206)

(113)

(72)

62)

111)

118)

746)
743)

(59)
469)

211)
(123)

292)
772)

(48)
466)

298)
-)

306)
785)

(43)
253)

695)
-)

135)

32)

(41)

(35)
$2,087)

(40)
$1,772)

(68)
$1,887)

Industry Segment Operating Profit
Printing Papers
Industrial and Consumer
Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and
Other
Total Industry Segment
Operating Profit

$ 579)

$ 460)

$ 545)

543)
87)
793)
47)

451)
80)
720)
38)

551)
91)
641)
41)

38)

23)

18)

$2,087)

$1,772)

$1,887)

Discontinued Operations and Cumulative Effect of
Accounting Changes

In the third quarter of 2004, International Paper entered into
an agreement to sell its Weldwood of Canada Limited
(Weldwood) business. The Company completed the sale in
the fourth quarter for approximately $1.1 billion. As a result
of the sale, a $323 million pre-tax loss on the sale was
recorded ($711 million after taxes) as a discontinued

operations charge. In the 2004 second quarter, a $90 million
after-tax and minority interest discontinued operations gain
was recorded from the sale of the Carter Holt Harvey Tissue
business. As a result, prior periods operating results have
been restated to present the operating results of these
businesses as earnings from discontinued operations,
including earnings of $108 million in 2004, $21 million in
2003, and $35 million in 2002.

Net earnings for 2003 included after-tax charges of $3 million
and $10 million for the cumulative effect of accounting changes
for the adoption of the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 46 (FIN 46),
“Consolidation of Variable Interest Entities,” and Statement of
Financial Accounting Standards (SFAS) No. 143, “Accounting
for Asset Retirement Obligations, respectively.” Results for 2002
included a charge of $1.2 billion after minority interest for the
cumulative effect of an accounting change to record the
transitional impairment charge for the adoption of SFAS No.
142, “Goodwill and Other Intangible Assets.”

Income Taxes

The income tax provision for 2004 was $206 million, or 28%
of pretax earnings from continuing operations before
minority interest. This included a $41 million tax benefit
related to special items. Excluding the impact of special
items, the tax provision was $247 million, or 26% of pre-tax
earnings before minority interest.

While the Company reported pre-tax income in 2003, a net
income tax benefit was recorded reflecting decreases totaling
$231 million in the provision for income taxes for special
items. These included a $13 million reduction in the fourth
quarter ($26 million before minority interest) for a favorable
settlement with Australian tax authorities of net operating loss
carryforwards, a $60 million reduction in the third quarter
reflecting a favorable revision of estimated tax accruals upon
filing the 2002 Federal income tax return and increased
research and development credits, and a $50 million reduction
in the second quarter reflecting a favorable tax audit settlement
and benefits from a government sponsored overseas tax
program in Italy. Excluding the year-to-date tax effects of
special items, the effective tax rate for 2003 was 20%.

The net tax benefit in 2002 reflects the reversal of the
assumed stock-sale tax treatment of the 2001 fourth-quarter
write-down to net realizable value of the assets of Arizona
Chemical upon the decision to discontinue sale efforts and to
hold and operate this business in the future, and a $46
million fourth-quarter adjustment of deferred income tax
liabilities for the effects of state tax credits and the taxability
of the Company’s operations in various state tax jurisdictions.

Corporate Items and Interest Expense

Minority interest expense, net of taxes, decreased to $62
million in 2004 compared with $111 million in 2003 and
$118 million in 2002. The decreases in 2004 and 2003
reflect a reduction in minority interest related to preferred
securities that were replaced by debt obligations in the
second half of 2003. This decrease was partially offset in
2004 by higher earnings at Carter Holt Harvey.

Interest expense, net, decreased to $743 million compared
with $772 million in 2003 and $785 million in 2002. The
decline reflects lower interest rates from the refinancing of
high coupon debt, the impact of interest rate swaps, and, in
2004, higher interest income from Carter Holt Harvey, net of
the additional expense of $36 million for the preferred debt
securities discussed above.

For the twelve months ended December 31, 2004, corporate
items totaled $469 million compared with $466 million of
expense in 2003 and $253 million in 2002. The increased
expense in 2004 compared with 2003 is due to higher
pension, inventory-related and supply chain initiative costs,
and lower gains on energy hedging transactions, offset in part
by reduced administrative overhead costs. Higher pension,
inventory-related and supply chain costs were also factors in
2003 as compared with 2002, which also included income
from an insurance company demutualization and foreign
exchange gains.

Our supply chain project, begun in late 2002, is a corporate-
wide initiative to improve customer service capabilities and
implement “best practice” supply chain business processes for
order management, supply and demand planning, product
scheduling and tracking, transportation and warehousing, and
procurement. Expenses related to this program in 2005,
should be approximately $100 million above the 2004 level of
$84 million. The associated benefits are reflected in business
earnings as the programs are implemented.

Special Items

Restructuring and Other Charges

International Paper continually evaluates its operations for
opportunities for improvement. These evaluations are
targeted to (a) focus our portfolio on our core businesses of
paper, packaging and forest products, (b) rationalize and
realign capacity to operate fewer facilities with the same
revenue capability and close high cost facilities, and (c)
reduce costs. Annually, strategic operating plans are
developed by each of our businesses to demonstrate that they
will achieve a return at least equal to their cost of capital over
an economic cycle. If it subsequently becomes apparent that
a facility’s plan will not be achieved, a decision is then made

to (a) invest additional capital to upgrade the facility, (b)
shut down the facility and record the corresponding charge,
or (c) evaluate the expected recovery of the carrying value of
the facility to determine if an impairment of the asset value of
the facility has occurred under SFAS No. 144.

In recent years, this policy has led to the shutdown of a
number of facilities and the recording of significant asset
impairment charges and severance costs. As this profit
improvement initiative is ongoing, it is possible that additional
charges and costs will be incurred in future periods should
such triggering events occur.

2004: During 2004, restructuring and other charges before
taxes and minority interest of $211 million ($124 million
after taxes and minority interest) were recorded. These
charges included a $74 million charge before taxes and
minority interest ($43 million after taxes and minority
interest) for organizational restructuring programs, a $92
million charge before taxes ($57 million after taxes) for early
debt retirement costs, a $35 million charge before minority
interest ($18 million after minority interest) for a goodwill
impairment charge, and a $10 million charge before taxes
($6 million after taxes) for a litigation settlement. Also in
2004, a $123 million credit before taxes ($76 million after
taxes) was recorded for insurance recoveries related to the
hardboard siding and roofing litigation, and a $35 million
credit before taxes and minority interest ($22 million after
taxes and minority interest) was recorded for the net reversal
of restructuring reserves no longer required.

2003: During 2003, restructuring and other charges before
taxes and minority interest of $298 million ($184 million
after taxes and minority interest) were recorded. These
charges included a $236 million charge before taxes and
minority interest ($144 million after taxes and minority
interest) for asset shutdowns of excess internal capacity and
cost reduction actions, a $63 million charge before taxes
($39 million after taxes) for legal reserves, and a $1 million
credit before taxes ($1 million charge after taxes) for early
debt retirement costs. In addition, a $40 million credit before
taxes and minority interest ($25 million after taxes and
minority interest) was recorded for the net reversal of
restructuring reserves no longer required.

retirement costs. In addition, a $68 million pre-tax credit
($43 million after taxes) was recorded in 2002 for the
reversal of 2001 and 2000 reserves no longer required.

A further discussion of restructuring, business improvement
and other charges can be found in Note 6 of the Notes to
Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.

Net Losses (Gains) on Sales and Impairments of
Businesses Held for Sale

Net losses (gains) on sales and impairments of businesses
held for sale totaled $135 million in 2004, $32 million in
2003 and ($41) million in 2002 before taxes and minority
interest. The principal components of these gains/losses were:

2004: In December 2004, International Paper committed to
plans for the sale in 2005 of its Fine Papers business and its
Maresquel mill and Papeteries de France distribution
business in Europe, resulting in charges of $56 million
before taxes ($54 million after taxes) to write down the
assets of these entities to their estimated fair values less costs
to sell. In October 2004, International Paper sold two box
plants located in China, resulting in a pre-tax loss of $14
million ($4 million after taxes). Also in the fourth quarter, a
$9 million loss before taxes ($6 million after taxes) was
recorded to adjust gains/losses of businesses previously sold.

In the 2004 third quarter, a charge of $38 million before and
after taxes was recorded for losses associated with the sale of
Scaldia Papier B.V. and its subsidiary Recom B.V. ($34
million) and to adjust the estimated loss on sale of Papeteries
de Souche L.C. ($4 million).

In the 2004 second quarter, a charge of $27 million before
and after taxes was recorded to write down the assets of
Papeteries de Souche L.C. to their estimated realizable value.

In the 2004 first quarter, a pre-tax gain of $9 million ($6
million after taxes) was recorded to adjust previously
estimated gains/losses of businesses previously sold.

In addition, the 2004 second quarter included a loss of $9
million before taxes and minority interest ($5 million after
taxes and minority interest) to write down the assets of Food
Pack S.A. to their estimated realizable value, of which $4
million was included in the Packaging segment, $3 million
was included in the Carter Holt Harvey segment and $2
million was included in Minority interest.

2003: In the fourth quarter of 2003, International Paper
recorded a $34 million pre-tax charge ($34 million after
taxes) to write down the assets of its Polyrey business to
estimated fair value. In addition, a $13 million pre-tax gain

($8 million after taxes) was recorded to adjust estimated
gains/losses of businesses previously sold.

A pre-tax charge of $1 million ($1 million after taxes) was
recorded in the 2003 third quarter to adjust previously
estimated gains/losses of businesses previously sold.

In the second quarter of 2003, a $10 million pre-tax charge
($6 million after taxes) was recorded to adjust estimated
gains/losses of businesses previously sold.

2002: In the fourth and third quarters of 2002, International
Paper recorded $10 million and $3 million of pre-tax credits
($4 million and $1 million after taxes, respectively), to adjust
estimated accrued costs of businesses previously sold.

During the second quarter of 2002, a net gain on sales of
businesses held for sale of $28 million before taxes and
minority interest ($96 million after taxes and minority
interest) was recorded, including a pre-tax gain of $63
million ($40 million after taxes) from the sale in April 2002
of International Paper’s oriented strand board facilities to
Nexfor Inc. for $250 million, and a net charge of $35 million
before taxes and minority interest (a gain of $56 million after
taxes and minority interest) relating to other sales and
adjustments of previously recorded estimated costs of
businesses held for sale.

The impairment charge recorded for Arizona Chemical in the
fourth quarter of 2001 included a tax expense based on the
form of sale being negotiated at that time. As a result of the
decision in the second quarter of 2002 to discontinue sale
efforts and to hold and operate Arizona Chemical in the future,
this provision was no longer required. Consequently, special
items for the second quarter of 2002 include a gain of $28
million before taxes and minority interest, with an associated
$96 million benefit after taxes and minority interest.

Industry Segment Operating Profit

Industry segment operating profits of $2.1 billion were higher
than the $1.8 billion in 2003 and the $1.9 billion in 2002. The
higher profit in 2004 was principally due to improved sales
volumes ($263 million), higher average sales prices ($201
million), and cost reduction initiatives and a more favorable
product mix ($186 million), all partially offset by higher energy
and raw material costs ($192 million), lower earnings from
land sales ($95 million), the impact of hurricanes in the South
($18 million) and unfavorable foreign currency exchange rates
($30 million). In 2003, industry segment operating profits
declined slightly as compared with 2002 principally due to
higher energy and raw material costs ($275 million) and lower
average prices ($85 million), partially offset by the effect of cost
reduction initiatives, improved operating performance and a
more favorable product mix ($245 million).

The rationalization and realignment program announced in
2003 was completed during 2004. The program announced
in July 2003 targeted significant additional reductions in
overhead costs and included the elimination of approximately
3,000 salaried positions in the United States. We are currently
engaged in a customer-driven, company-wide supply chain
initiative that will enhance International Paper’s customer
relationships and standardize processes while improving
overall company profitability. Ultimately, the initiative will
provide the foundation upon which to build improved
customer value propositions while enabling International
Paper to become increasingly competitive.

International Paper experienced an improving business
environment during 2004 as higher sales volume and average
prices reflected a steadily improving economy. Demand for
our paper and packaging products was stronger resulting in
only about 70,000 tons of market related downtime in our
mill system compared with 590,000 tons in 2003. Our focus
on operational performance and improvements to our
internal cost structure and product mix helped mitigate the
impact of increased raw material and energy costs. Looking
forward to 2005, we anticipate a seasonally slow start in the
first quarter as wood and chemical costs continue to be high
with further increases expected early in the year. Earnings in
2005 should benefit from increased price realizations and
improved demand for our products. We believe that the
actions taken over the last few years to restructure our
operations and eliminate excess manufacturing capacity, to
reduce overhead costs, and to focus on our customer
relationships will favorably position International Paper as
market conditions continue to improve.

Description of Industry Segments

International Paper’s industry segments discussed below are
consistent with the internal structure used to manage these
businesses. All segments, except for Carter Holt Harvey, are
differentiated on a common product, common customer basis
consistent with the business segmentation generally used in
the Forest Products industry. The Carter Holt Harvey business
includes the results of multiple Forest Products businesses.

Printing Papers

International Paper is one of the world’s leading producers of
printing and writing papers. Products in this segment include
uncoated and coated papers, market pulp and bristols.

Uncoated Papers: This business produces papers for use in
desktop and laser copiers and digital imaging printing as well
as in advertising and promotional materials such as
brochures, pamphlets, greeting cards, books, annual reports
and direct mail publications. Uncoated Papers also produces a
variety of grades that are converted by our customers into

envelopes, tablets, business forms and file folders. Fine papers
are used in high-quality text, cover, business correspondence
and artist papers. Uncoated papers are sold under private
label and International Paper brand names that include
Hammermill, Springhill, Great White, Strathmore, Ballet,
Beckett and Rey. The mills producing uncoated papers are
located in the United States, Scotland, France, Poland and
Russia. These mills have uncoated paper production capacity
of approximately 5.3 million tons annually.

Coated Papers: This business produces coated papers used
in a variety of printing and publication end uses such as
catalogs, direct mailings, magazines, inserts and commercial
printing. Products include coated free sheet, coated
groundwood and supercalendered groundwood papers.
Production capacity in the United States amounts to
approximately 2.0 million tons annually.

Market Pulp: Market pulp is used in the manufacture of
printing, writing and specialty papers, towel and tissue
products and filtration products. Pulp is also converted into
products such as diapers and sanitary napkins. Pulp products
include fluff, southern softwood pulp, as well as northern,
southern, and birch hardwood pulps. These products are
produced in the United States, France, Poland and Russia,
and are sold around the world. International Paper facilities
have annual dried pulp capacity of about 1.6 million tons.

Brazilian Paper: Brazilian operations function through
International Paper do Brasil, Ltda and subsidiaries, that own
or manage 1.2 million acres of forestlands in Brazil. Our
annual production capacity in Brazil is approximately
685,000 tons of coated and uncoated papers. Our uncoated
papers are primarily sold under the brand name Chamex.
The Company also operates a wood chip business that sells
eucalyptus and pine chips on a global basis.

Industrial and Consumer Packaging

Industrial Packaging: With production capacity of about
4.7 million tons annually, International Paper is the third
largest manufacturer of containerboard in the United States.
Over one-third of our production consists of specialty grades,
such as BriteTop. About 70% of our production is converted
domestically into corrugated boxes and other packaging by
our 70 U.S. container plants. In Europe, our operations
include one recycled containerboard mill in France and 23
container plants in France, Ireland, Italy, Spain and the United
Kingdom. Global operations also include facilities in Chile,
Turkey and China. Our container plants are supported by
regional design centers, which offer total packaging solutions
and supply chain initiatives. We have the capacity to produce
approximately 600,000 tons of kraft paper each year for use
in multi-wall, retail bags and saturated kraft. We manufacture
lightweight and pressure sensitive papers and converted

products in four domestic facilities and one in the
Netherlands with an annual capacity of 375,000 tons. These
products are used in applications such as pressure sensitive
labels, food and industrial packaging, industrial sealants and
tapes, and consumer hygiene products.

Consumer Packaging: International Paper is the world’s
largest producer of solid bleached sulfate packaging board
with annual U.S. production capacity of about 1.8 million
tons. On a global basis, our businesses work closely with our
customers to understand their needs and create profitable
business opportunities sourced from our broad base of
packaging solutions: substrates and barrier board
technologies combined with our printing expertise, graphics
and structural design, filling equipment and service, Smart
Packaging and marketing services. All are tailored to create
packaging that appeals to consumers while building customer
brand equity. Our Everest, Fortress and Starcote brands are
used in packaging applications for everyday products such as
juice, milk, food, cosmetics, pharmaceuticals, computer
software and tobacco products. Approximately 33% of our
bleached board production is converted into packaging
products in our own plants. Our Beverage Packaging
business, made up of 17 facilities worldwide, offers complete
packaging systems. From paper to filling machines, using
proprietary technologies including Tru-Taste brand barrier
board technology for premium long-life juices, our expertise
is utilized to produce creative customer solutions and value.
Shorewood Packaging Corporation utilizes emerging
technologies in its 17 facilities worldwide to produce world-
class packaging with high-impact graphics for a variety of
markets, including home entertainment, tobacco, cosmetics,
general consumer and pharmaceuticals. The Foodservice
business offers cups, lids, bags, food containers and plates
through four domestic plants and four international facilities.

Distribution

Through xpedx, our North American merchant distribution
business, we service the commercial printing market with
printing papers and graphic art supplies, high traffic/away-
from-home markets with facility supplies, and various
manufacturers and processors with packaging supplies and
equipment. xpedx is the leading wholesale distribution
marketer in these customer and product segments in North
America, operating 136 warehouse locations and 148 retail
stores in the United States and Mexico.

Forest Products

Forest Resources: International Paper owns or manages
approximately 6.8 million acres of forestlands in the United
States, mostly in the South. All lands are independently third-
party certified under the operating standards of the
Sustainable Forestry Initiative (SFI®). In 2004, these

forestlands supplied about 23% of the wood fiber
requirements of our other businesses. Our forestlands are
managed as a portfolio to optimize the economic value to our
shareholders. Principal revenue-generating activities include
the sale of trees for harvest, the sale of forestlands to
investment funds and other buyers for various uses, real
estate development, and the leasing of our properties for
third-party recreational and commercial uses. The mix of
these activities varies based on the fiber requirements of our
mills and wood products plants, prevailing stumpage prices,
supply and demand for forestlands, and market preferences
for timber and forestlands. When stumpage prices are
depressed relative to land values, forestland sales tend to
comprise a larger part of our portfolio mix. Conversely, when
stumpage prices are high, stumpage sales may be the best
alternative to maximize the value of our forestland holdings.

Wood Products: International Paper owns and operates 25
plants producing lumber, plywood, engineered wood
products and utility poles in the southern United States.
Through these, we produce approximately 2.5 billion board
feet of lumber and 1.6 billion square feet of plywood
annually. On December 31, 2004, International Paper sold its
wholly-owned subsidiary Weldwood of Canada Limited
(Weldwood) to West Fraser Timber Company Limited. During
our ownership, Weldwood operated 10 plants in the Canadian
provinces of British Columbia and Alberta, which produced
about 1.3 billion board feet of lumber and 495 million
square feet of plywood annually. Prior to the sale, we had
harvesting rights on 10.2 million acres of government-owned
forestlands in Canada through licenses and forest
management agreements.

Carter Holt Harvey

Carter Holt Harvey is approximately 50.5% owned by
International Paper. It is one of the largest forest products
companies in the Southern Hemisphere, with operations in
New Zealand, Australia and Asia. Sales consist of
approximately 46% in New Zealand, 36% in Australia and
18% in Asia and elsewhere. Carter Holt Harvey’s major
businesses include:

Forests, including ownership of 785,000 acres of
predominantly radiata pine plantations that currently
yield 5.5 million tons of logs annually. Long term
sustainable yield of the estate is about 8.5 million tons of
logs annually.
Wood Products, including about 467 million board feet
of lumber capacity, 90 million square feet of laminated
veneer lumber production and about 1,072 million
square feet of plywood and panel production, including
approximately 205 million square feet from Plantation
Timber Products in China acquired in 2004. Carter Holt
Harvey is the largest Australasian producer of lumber,
plywood, panels and laminated veneer lumber.

Pulp, Paper and Packaging, with overall capacity of
more than 1.1 million tons of annual linerboard and pulp
capacity at four mills, Carter Holt Harvey is New Zealand’s
largest manufacturer and marketer of pulp and paper
products. These supply 65% of the needs of their
packaging plants which produce corrugated boxes,
cartons and paper bags, with a focus on horticulture and
primary produce.

downtime to align production with customer demand. This
compared with 750,000 tons of downtime in 2003, of which
335,000 tons related to lack of orders.

Printing Papers
In millions
Sales
Operating Profit

2004
$7,635
$ 579

2003
$7,245
$ 460

2002
$7,265
$ 545

Specialty Businesses and Other

Chemicals: Arizona Chemical is a leading producer of oleo
chemicals and specialty resins based on crude tall oil,
byproducts of the wood pulping process. These products,
used in adhesives and inks, are made at 13 plants in the
United States and Europe.

European Distribution: International Paper sold Scaldia
on August 31, 2004. Prior to the sale, European Distribution
consisted of Papeteries de France and Scaldia and served
markets in France, Belgium and the Netherlands.

Products and brand designations appearing in italics are
trademarks of International Paper or a related company.

Industry Segment Results

Printing Papers

Demand for Printing Papers products is closely correlated
with changes in commercial printing and advertising activity,
direct mail volumes and, for uncoated free sheet products,
with changes in white-collar employment levels that affect the
usage of copy and laser printer paper. These products are
further affected by changes in currency rates that can enhance
or disadvantage producers in different geographic regions.
Principal cost drivers include manufacturing efficiency and
raw material, transportation and energy costs.

Printing Papers net sales for 2004 increased 5% from
2003 and 2002. Operating profits in 2004 were 26% higher
than in 2003 and 6% higher than in 2002. Earnings in 2004
compared with 2003 improved across all Printing Papers
businesses. Higher sales volumes ($130 million), improved
mill operations and lower overhead costs ($90 million) and
a more profitable product mix ($20 million) contributed to
the earnings increase, although these effects were partially
offset by higher raw material and energy costs ($90 million)
and lower average prices in Europe which more than offset
higher average prices in the United States ($30 million).
Compared with 2002, higher 2004 earnings in the Brazilian
Papers and Market Pulp businesses were partially offset by
lower earnings in both the Uncoated and Coated Papers
businesses. The Printing Papers segment took 525,000 tons
of downtime in 2004, including 65,000 tons of lack-of-order

Uncoated Papers sales were $4.9 billion in 2004, up 4%
from 2003 and 2% from 2002. Operating profits rose 11%
compared with 2003, but were 18% lower than 2002.

In the United States, our average price realizations improved
steadily during 2004 compared with 2003 and ended the year
higher than in either 2003 or 2002. On average, prices were
up 1% in 2004 compared with 2003 and 2002. The
improving economic environment in 2004 resulted in
stronger demand, particularly in the commercial printing and
converting markets, as sales volumes rose 4% and 2%
compared with 2003 and 2002, respectively. In addition to
higher average sales prices and improved shipments,
improved mill operations also had a positive impact on 2004
earnings. These positive factors were partially offset by higher
input costs, particularly for wood and energy costs. The
business was also adversely impacted by higher
transportation costs in 2004 compared with 2003 and the
impact of hurricanes in the South. The earnings decline in
2004 compared with 2002 was due principally to higher
wood and energy costs offset somewhat by an increase in
shipments and lower overhead costs as a result of our cost
reduction initiatives.

Average prices in our European operations declined
throughout most of 2004 as a strong Euro made Western
Europe a more attractive market for imports, putting pressure
on prices. Average prices were down 8% and 17% as
compared with 2003 and 2002, respectively. European sales
volumes rose 5% in 2004 compared with 2003 and 6%
versus 2002. Earnings in Eastern Europe in 2004 were higher
than in 2003, but were more than offset by the earnings
decline in the West. Overall, lower average prices and higher
wood and energy costs offset the favorable effects of higher
sales volumes, a better mix of products sold and improved
mill operations.

Coated Papers sales were $1.5 billion in 2004, compared
with $1.4 billion in 2003 and $1.5 billion in 2002. Although
the business reported an operating loss for the year, a profit
was recorded for the second half of 2004. The improvement
in earnings in 2004 compared with 2003 was driven by lower
overhead costs, improved mill operations and higher sales
prices for our products. These positive factors, combined
with improved product sales mix, more than offset the impact

of higher energy and wood costs. Average prices in 2004 were
up versus 2003 and 2002 due to price increases effective in
the second half of 2004. Sales volume was up about 4% in
2004 versus 2003 but down about 2% from 2002.

Market Pulp sales from our U.S. and European facilities
totaled $661 million in 2004 compared with $571 million
and $520 million in 2003 and 2002, respectively. In 2004,
the business reported an operating profit, after incurring
losses in 2003 and 2002, as higher average price realizations
and sales volumes, lower overhead costs, and improved mill
operations more than offset increases in raw material costs.
Our U.S. pulp prices improved steadily through the 2004
third quarter, then declined slightly during the fourth quarter,
but ended the year about 6% higher than 2003 and 21%
higher than 2002. U.S. pulp volumes were strong in the
fourth quarter and ended the year 5% higher than in 2003
and 4% higher than in 2002 reflecting increased global
demand, primarily in Asia. European pulp volumes decreased
12% and 3% compared with 2003 and 2002, respectively.
The negative effects of these lower volumes and higher wood
costs were partially offset by the benefits from average price
realizations, which were 3% and 18% higher than in 2003
and 2002, respectively.

Brazilian Paper sales were $592 million in 2004
compared with $540 million in 2003 and $440 million in
2002. The increase compared with 2003 reflects increased
sales volume for uncoated papers and a doubling of wood
chip operations in the North. The effect of currency
translation, as the Real appreciated 8% versus the U.S. dollar,
was another factor in the increased reported U.S. dollar sales.
Uncoated paper pricing in Reals in 2004 declined 9% versus
2003, while coated paper prices were down 3%. Operating
profits in 2004 were up 13% and 28% from 2003 and 2002,
respectively. The earnings improvement in 2004 reflected the
increased shipments and operational improvements, partially
offset by higher transportation, energy and chemical costs
and lower average prices.

As 2005 begins, the outlook for Printing Papers is positive as
our previously announced price increases have been fully
implemented. Demand for both coated papers and pulp is
strong. Uncoated papers’ backlogs were below prior year
levels, but are improving as the first quarter progresses.
Further strengthening is expected in customer demand as
improving economic conditions lead to increased
employment and higher demand. We expect continued high
costs for wood fiber and raw materials such as caustic soda,
although energy prices should stabilize. We will continue our
focus on further improvements in manufacturing efficiency
and overall cost structure.

Industrial and Consumer Packaging

Demand for Industrial Packaging products is closely
correlated with non-durable industrial goods production in
the United States, as well as with demand for processed
foods, poultry, meat and agricultural products. Demand and
pricing for Consumer Packaging products correlate closely
with consumer spending and general economic activity. In
addition to prices and volumes, major factors affecting the
profitability of both Industrial and Consumer Packaging are
raw material and energy costs, manufacturing efficiency and
product mix.

Industrial and Consumer Packaging net sales for
2004 were 12% and 14% higher than 2003 and 2002,
respectively. Operating profits in 2004 were 20% higher than
2003 but were down 1% from 2002. Increased volume ($95
million), higher price realizations ($40 million), improved
mill operations and reduced overhead costs ($35 million),
and a more favorable mix of products sold ($20 million)
contributed to the improved earnings in 2004 compared
with 2003. These benefits were partially offset by increased
raw material and transportation costs ($100 million). The
segment took 210,000 tons of downtime in 2004, including
only 5,000 tons of lack-of-order downtime to balance
internal supply with customer demand, compared to a total
of 400,000 tons in 2003, of which 255,000 tons were
market related.

Industrial and Consumer Packaging
In millions
Sales
Operating Profit

2004
$7,470
$ 543

2003
$6,670
$ 451

2002
$6,530
$ 551

Industrial Packaging net sales for 2004 totaled $4.9 billion,
compared with $4.2 billion in 2003 and $4.1 billion in 2002.
Our average containerboard prices were up about 9%, specialty
papers prices were up about 5% and U.S. box prices were up
about 2% compared to 2003; however, container prices in
Europe were down about 3% on a constant dollar basis.
Operating profits increased 43% from 2003 and 25% from
2002. Increased prices, higher containerboard and U.S.
converting shipments, a more favorable mix, mill operating
improvements, and lower overhead costs were partially offset by
raw material and transportation cost increases. U.S. converting
shipments were up about 7% from 2003 for the Company’s
ongoing operations, and were up about 19% including the
additional contributions from the acquisition of Box USA in July
2004. A slight increase in demand for International Container
coupled with operational cost reduction efforts more than offset
the decrease in price so that operating results improved 4%. In
2004, the Industrial Packaging business took 5,000 tons of
market related downtime compared to 245,000 tons in 2003,
reflecting the improved market conditions.

Entering 2005, additional favorable price effects are expected
to continue. Synergies associated with the Box USA
acquisition will benefit 2005 through both volume
improvements and cost reductions. The implementation of a
new operating model at our mills, representing the first phase
of our supply chain project, will result in some efficiency
improvements and cost savings in 2005. The European
operating results are expected to improve as a result of
targeted market growth and cost reduction initiatives.

Consumer Packaging 2004 net sales of $2.6 billion were up
compared to the 2003 and 2002 sales of $2.5 billion each. Our
average prices in 2004 increased about 1% for bleached board
over 2003, and were up about 4% for the beverage and
foodservice converting businesses. The higher prices reflect the
pass-through of higher raw material costs, although this
continues to be tempered by competitive pressures. Our
bleached board mills operated with no market-related
downtime in 2004, with shipments up 10% over the prior year.
Operating profits in 2004 declined 12% from 2003 and 34%
from 2002 as improved pricing and favorable operations in the
mills did not overcome the impact of cost increases in raw
materials, especially wood, energy and resin. During 2004,
manufacturing improvement, rationalization and organizational
restructuring plans were implemented throughout this business
to reduce costs and improve market alignment.

Improved price realizations are expected to continue into
2005 as the market remains strong; however, raw material
costs for wood and resin are expected to be negative factors.
Capital improvements and cost reduction efforts made in
2004 will benefit operating results in 2005.

Distribution

Our Distribution business, including xpedx, markets a
diverse array of products and services to customers in many
business segments, including commercial printing,
manufacturing and building services. Distribution’s customer
demand is sensitive to changes in general economic
conditions. Sales to commercial printers are heavily
dependent on the levels of corporate advertising and
promotional spending. In addition, efficient customer service,
cost-effective logistics, and controlled working capital
management are key factors in this segment’s profitability.

and cost containment initiatives drove the 2004 earnings
improvement. The sales growth reflects rising prices for paper
and tissue products and for packaging products. Also
contributing to the sales growth were the addition of new
national retail accounts to Distribution’s customer portfolio
and brisk demand from commercial printers. Reduction in
operating costs continued in 2004 as the business consolidated
facilities and rationalized its information systems. Since 2002,
Distribution has reduced its work force 38% through actions
related to consolidations and system efficiencies.

The outlook for 2005 is favorable. Our average prices are
expected to remain at or above 2004 levels, and additional
market penetration is planned through new initiatives in the
printing and manufacturing segments. Additional
improvement is expected from programs to further reduce
operating costs.

Forest Products

Forest Products manages approximately 6.8 million acres of
forestlands in the United States, and operates wood products
plants in the United States that produce lumber, plywood,
engineered wood products and utility poles. Forest
Resources’ operating results are largely driven by demand
and pricing for softwood sawtimber, and to a lesser extent for
softwood pulpwood, by the volume of merchantable timber
on Company forestlands, and by demand and pricing for
specific forestland tracts offered for sale. Wood Products
operating results are driven by new housing starts and repair
and remodeling activity. Fiber costs are a major factor in
Wood Products’ profitability.

Forest Products net sales for 2004 were about even with
2003, but were 5% lower than in 2002. Operating profits in
2004 were 10% and 24% higher than in 2003 and 2002,
respectively. Earnings in 2004 reflected continued strong
contributions from the U.S. Wood Products business,
primarily as a result of higher average plywood and lumber
prices ($180 million) and improved mix of products sold
($20 million). Lower earnings from forestland and real estate
sales ($95 million) and from reduced Forest Resources’
harvest volumes ($15 million), combined with higher raw
material costs ($15 million) to partially offset the impact of
these higher prices.

Distribution
In millions
Sales
Operating Profit

2004
$6,065
87
$

2003
$5,860
$ 80

2002
$5,990
$ 91

Forest Products
In millions
Sales
Operating Profit

2004
$2,395
$ 793

2003
$2,390
$ 720

2002
$2,525
$ 641

Distribution’s 2004 net sales increased 3% from 2003 and
1% from 2002. Operating profits in 2004 were 9% higher than
2003, but were 4% lower than 2002. Sales revenue increases

Forest Resources sales in 2004 were $900 million
compared with $1.1 billion in 2003 and $1.2 billion in 2002.
Operating profits in 2004 were 16% lower than in 2003 and

19% lower than in 2002 principally due to lower stumpage
and forestland sales.

Gross margins from stumpage sales and recreational income
were $281 million in 2004 compared with $268 million in
2003 and $324 million in 2002. Harvest volumes declined
8% in 2004, compared with 2003, and 14% from 2002,
reflecting a lower inventory of mature sawtimber in 2004.
Sawtimber prices were flat compared to 2003 and down 11%
compared to 2002. Gross margins from forestland sales were
$315 million in 2004 as compared with $462 million in 2003
and $461 million in 2002, reflecting a lower number of acres
sold, partially offset by higher average per-acre sales
realizations. Operating expenses increased to $178 million in
2004 from $157 million in 2003 due primarily to higher
information systems costs. Operating expenses for 2004
decreased from $190 million in 2002 reflecting the impact of
restructuring and cost reduction actions. Operating profits for
the Real Estate division, which sells higher-use properties,
were $124 million, $71 million and $75 million in 2004,
2003 and 2002, respectively. International Paper monetizes
its forest assets in various ways, including sales of short- and
long-term harvest rights, on a pay-as-cut or lump-sum bulk-
sale basis, as well as sales of timberlands.

For 2005, our harvest is projected to decline due to a lower
inventory of mature timber. In future years, harvests are
expected to increase as timber tracts mature and the benefits
of higher yield-per-acre initiatives are realized. Average first
quarter 2005 southern pine pulpwood, pine sawtimber, and
hardwood pulpwood prices are expected to remain close to
fourth quarter 2004 levels. Forestland sales will continue to
be dependent upon various factors including tract location
and the level of investor interest.

Wood Products sales in the United States in 2004 of $1.5
billion were up about 15% from both 2003 and 2002.
Operating profits in 2004 were about three times higher than
in 2003. The business had recorded a net operating loss in
2002. Substantially higher average prices more than offset the
effects of increased raw material costs. Average plywood
prices rose 22% above 2003 levels and were 43% higher than
2002. Plywood sales volumes in 2004 were slightly higher
than 2003 and 2002. Average prices for lumber were up 11%
and 13% in 2004 compared with 2003 and 2002, respectively.
Lumber sales volumes were up 5% in 2004 versus 2003 and
about even with 2002. In 2004, log costs were up 2.5% versus
2003, negatively impacting both plywood and lumber profits.
Lumber and plywood operating costs were also negatively
impacted by substantially higher raw material and natural gas
costs versus both 2003 and 2002.

Looking ahead to 2005, robust housing starts in the fourth
quarter of 2004, combined with low inventory in the
distribution chain, should translate into continued strong

lumber and plywood demand in the first half of 2005.
However, an expected slowing in housing starts and higher
interest rates in the second half of 2005 could put downward
pressure on pricing in the second half of 2005. The lower
tariff rate on Canadian lumber imports announced in
December may result in higher lumber imports and increased
pressure on pricing. However, a weaker U.S. dollar could
partially offset this impact.

Carter Holt Harvey

Carter Holt Harvey, International Paper’s approximately 50.5%
owned subsidiary operating principally in New Zealand and
Australia, is in many of the same businesses as International
Paper, and is thus affected by many of the same economic
factors as our other segments. Additionally, Carter Holt
Harvey’s reported operating results are sensitive to changes in
currency exchange rates, especially changes in the New
Zealand dollar versus the U.S. dollar since most operating
costs are New Zealand dollar denominated while a large
portion of its export sales are denominated in U.S. dollars.
Demand for its wood products is largely driven by housing
and remodeling activity in Australia and New Zealand.

Carter Holt Harvey
In millions
Sales
Operating Profit

2004
$2,190
$ 47

2003
$1,820
$ 38

2002
$1,540
$ 41

Carter Holt Harvey’s 2004 U.S. dollar net sales and operating
profits were about 20% higher than 2003, due mainly to
favorable U.S. dollar translation rates. Net sales for 2004 in
New Zealand dollars were up 3% compared with 2003.
Operating profit for 2004 in New Zealand dollars was down
5% versus 2003, principally due to higher pension and
benefit-related costs.

Earnings for Forests in 2004 were down compared with 2003
as the strong New Zealand dollar and increased freight costs
negatively impacted price realizations. As a result of the lower
realizations, harvest volumes were reduced by 13%. Wood
Products earnings were down in 2004 versus 2003, largely due
to an unfavorable mix of products sold and higher input costs,
somewhat mitigated by improved sales volumes in New Zealand
building distribution and the laminated veneer lumber
businesses. Pulp and Papers’ 2004 earnings were ahead of
2003, which was impacted by a three-month labor strike at the
Kinleith mill, reflecting record production by two key mills in
2004. Packaging’s 2004 earnings were up versus 2003. Lower
production costs and benefits from productivity and business
restructuring programs contributed to the improved results.

During 2004, Carter Holt Harvey sold its Tissue business.
Accordingly, all periods presented have been restated to

separately present the operating results of the Tissue
business as a discontinued operation excluded from segment
operating results.

Market conditions are expected to be challenging in 2005.
The New Zealand dollar closed 2004 at its highest ever month-
end rate, and should continue to adversely impact New
Zealand dollar realizations and shipments into export markets.
The log export market is expected to remain difficult, while
the housing markets in Australia and New Zealand are
expected to remain robust, although down somewhat from
2004 levels. The Company’s total productivity program will
continue to contribute to earnings, as will contributions from
recently acquired Plantation Timber Products. The planned
2005 acquisitions of the Australian carton business of
Wadepack Limited and the structural lumber business of New
Zealand based Tenon Limited should also benefit future
operating results.

Specialty Businesses and Other

The Specialty Businesses and Other segment includes the
operating results of Arizona Chemical, European Distribution
and, prior to its closure in 2003, our Natchez, Mississippi
Chemical Cellulose Pulp mill. Also included are certain
divested businesses whose results are included in this
segment for periods prior to their sale (excluding Weldwood
and the Carter Holt Harvey Tissue business that are included
in discontinued operations).

This segment’s 2004 net sales declined 9% and 23% from
2003 and 2002, respectively. Operating profits in 2004
improved substantially from 2003 and 2002. Both the decline
in sales and improved earnings are principally due to lost
contributions from businesses previously sold.

Specialty Businesses and Other
In millions
Sales
Operating Profit

2004
$1,120
$ 38

2003
$1,235
$ 23

2002
$1,455
$ 18

Chemicals sales were $670 million in 2004, compared with
$625 million in 2003 and $595 million in 2002. Operating
profits in 2004 were flat with 2003 and 27% higher than in
2002 as the impact of increased volumes and manufacturing
and overhead cost reduction efforts more than offset
increased raw material costs and lower average prices
compared with 2003.

Other businesses in the above totals include operations that
have been sold, closed, or are held for sale, principally the
European Distribution business, the oil and gas and mineral
royalty business, Decorative Products, Retail Packaging, and
the Natchez Chemical Cellulose Pulp mill. Sales for these

businesses were approximately $450 million in 2004 (mainly
European Distribution and Decorative Products) compared
with $610 million in 2003 (mainly European Distribution,
Decorative Products and the Chemical Cellulose Pulp mill),
and $860 million in 2002.

Liquidity and Capital Resources

Overview

A major factor in International Paper’s liquidity and capital
resource planning is its generation of operating cash flow,
which is highly sensitive to changes in the pricing and
demand for our major products. While changes in key cash
operating costs, such as energy and raw material costs, do
have an effect on operating cash generation, we believe that
our strong focus on cost controls has improved our cash flow
generation over an operating cycle. As a result, we believe
that we are well positioned for continued strong operating
cash flow generation as prices and worldwide economic
conditions improve.

As part of our continuing focus on improving our return on
investment, we have focused our capital spending on those
businesses with the best returns and in geographic areas with
strong growth opportunities. Spending levels have been kept
well below the level of depreciation and amortization charges
for each of the last three years, and we anticipate continuing
this approach in 2005.

With the low interest rate environment in 2004, financing
activities have focused largely on the repayment or
refinancing of higher coupon debt, resulting in a net
reduction in debt of approximately $900 million in 2004. An
additional $750 million was subsequently repaid as of
February 2005. We plan to continue this program, with a
target of reducing consolidated debt balances to
approximately $12 billion by the end of 2006. Our liquidity
position continues to be strong, with approximately $3.2
billion of committed liquidity to cover future cash flow
requirements not met by operating cash flows.

Management believes it is important for International Paper
to maintain an investment-grade credit rating to facilitate
access to capital markets on favorable terms.

Cash Provided by Operations

Cash provided by operations totaled $2.4 billion for 2004,
compared with $1.8 billion in 2003 and $2.1 billion in 2002.
The major components of cash provided by operations are
net income adjusted for primarily non-cash income and
expense items and changes in working capital. Also included
in 2004 was $242 million representing cash proceeds from
the Maine and New Hampshire forestlands transaction (see

Note 11 of the Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary Data). Net
income adjusted for non-cash items increased $817 million
in 2004 compared with 2003. The increase for 2003 over
2002 was $126 million.

Working capital, representing International Paper’s
investments in accounts receivable and inventory less accounts
payable and accrued liabilities, was $4.4 billion at December
31, 2004. Cash used for working capital components totaled
$305 million in 2004, compared with $54 million in 2003 and
a $344 million decrease in 2002. The increase in 2004 was
principally due to an increase in accounts receivable reflecting
higher fourth-quarter sales.

Investment Activities

Capital spending from continuing operations was $1.3 billion
in 2004, or 81% of depreciation and amortization as
compared to $1.1 billion, or 71% of depreciation and
amortization in 2003, and $0.9 billion, or 63% of
depreciation and amortization in 2002.

The following table presents capital spending from continuing
operations by each of our business segments for the years
ended December 31, 2004, 2003 and 2002.

In millions
Printing Papers
Industrial and Consumer Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and Other
Subtotal
Corporate and other
Total from continuing operations

2004
$ 590
384
5
126
86
39
1,230
32
$1,262

2003
$ 482
293
12
121
101
31
1,040
54
$1,094

2002
$393
254
5
100
69
36
857
79
$936

In addition, capital spending related to businesses sold and
held for sale was $66 million, $72 million and $73 million in
2004, 2003 and 2002, respectively.

We expect capital expenditures in 2005 to be about $1.4
billion, or about 83% of depreciation and amortization. Capital
allocations will focus on businesses with the best returns,
including an upgrade to our Eastover, South Carolina mill, and
growth opportunities in Eastern Europe and Brazil where we
are conducting a study to evaluate the potential construction of
a new mill in Tres Lagoas in the 2007 to 2008 time frame.

Mergers and Acquisitions

On July 2, 2004, Carter Holt Harvey completed the purchase
of an 85% interest in a Chinese premium panels

manufacturer, Plantation Timber Products (PTP), for $134
million. PTP is a manufacturer of special medium density
fiberboard and flooring products.

On July 1, 2004, International Paper acquired Box USA, one
of America’s leading corrugated packaging companies, for
approximately $400 million, including the assumption of
approximately $197 million of debt.

In December 2002, Carter Holt Harvey acquired Starwood
Australia’s Bell Bay medium density fiberboard plant in
Tasmania, for $28 million in cash.

Each of the above acquisitions was accounted for using the
purchase method. The operating results of these mergers and
acquisitions have been included in the consolidated statement
of operations from the dates of acquisition.

Financing Activities

2004: Financing activities during 2004 included debt
issuances of $3 billion and retirements of $4.5 billion,
including repayments of $193 million of debt assumed in the
Box USA acquisition in July and $340 million of debt that was
reclassified from Minority interest in 2004 prior to
repayment. Excluding these repayments, and currency
translation effects, the net reduction in debt during 2004 was
approximately $900 million.

In December 2004, Timberlands Capital Corp. II, a wholly-
owned consolidated subsidiary of International Paper,
redeemed $170 million of 4.5% preferred securities. In
August 2004, International Paper repurchased $168 million
of limited partnership interests in Georgetown Equipment
Leasing Associates, L.P. and Trout Creek Equipment Leasing,
L.P. Both of these securities had been reclassified from
Minority interest to Current maturities of long-term debt prior
to their repayment.

Also in August 2004, an International Paper wholly-owned
subsidiary issued 500 million of Euro-denominated long-term
debt (equivalent to approximately $619 million at issuance)
with an initial interest rate of EURIBOR plus 55 basis points
and a maturity in August 2009.

In June 2004, an International Paper wholly-owned
subsidiary issued $650 million of long-term debt with an
interest rate of LIBOR plus 62.5 basis points and a maturity
date of June 2007, which refinanced $650 million of long-
term debt having an interest rate of LIBOR plus 100 basis
points and a maturity date in August 2004. In April 2004,
$1.0 billion of 8.125% coupon rate debt was retired using the
proceeds from the March 2004 issuance of $400 million of
5.25% notes due in April 2016 and $600 million of 4.00%
notes due in April 2010.

In January 2004, approximately $1.0 billion of debt with an
8.05% blended coupon rate was retired, including all of the
outstanding $805 million principal amount of International
Paper Capital Trust III 7.875% preferred securities, using the
proceeds from the two December 2003 issuances of $500
million each of notes discussed below.

During 2004, Carter Holt Harvey borrowed $425 million
under its multi-currency and commercial paper credit
facilities at interest rates ranging from 5.5% to 6.8% to be
repaid during 2005. Proceeds from the borrowing were used
to repay approximately $305 million of 8.875% notes and
cross-currency and interest rate swap settlements with a
maturity date of December 2004.

In addition to the preceding repayments, various other
International Paper borrowings totaling approximately $1.0
billion were repaid in 2004.

Other financing activity in 2004 included the issuance of
approximately 3,652,000 treasury shares and 2,333,000
common shares under various incentive plans, including
stock option exercises that generated $164 million of cash.

2003: Financing activities during 2003 included debt and
preferred security issuances of $2.4 billion and retirements
totaling $1.4 billion for a net increase of $1.0 billion, before
non-cash adjustments under FIN 46 (see Recent Accounting
Developments). The increase reflects the timing of $1 billion
of borrowings in December 2003 used to retire approximately
$1 billion of debt in early 2004 as discussed above. Other
2003 financing activity included the redemption of $550
million and the issuance of $150 million of preferred
securities of International Paper subsidiaries.

In December 2003, $500 million of 4.25% Senior Unsecured
Notes due January 15, 2009, and $500 million of 5.50%
Senior Unsecured Notes due January 15, 2014, were issued.
In January 2004, the proceeds from these issuances were
used to redeem $805 million of 7.875% preferred securities
of International Paper Capital Trust III that, prior to July 1,
2003, was a subsidiary of International Paper (see Notes 4
and 8 of the Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary Data). The
remaining proceeds were used for the repayment or early
retirement of other debt.

In March 2003, $300 million of 3.80% notes due in April
2008, and $700 million of 5.30% notes due in April 2015,
were issued. The proceeds from these notes were used to
repay approximately $450 million of commercial paper and
long-term debt and to redeem $550 million of preferred
securities of IP Finance (Barbados) Limited, a non-U.S.
consolidated subsidiary of International Paper. In the same
period, International Paper sold a minority interest in

Southeast Timber, Inc., a consolidated subsidiary of
International Paper, to a private investor for $150 million
with future dividend payments based on LIBOR. Other
financing activity included $26 million for the repurchase of
approximately 713,000 shares of International Paper
common stock, and the issuance of 2,725,000 treasury
shares under various incentive plans, including stock option
exercises that generated $80 million of cash.

2002: Financing activities during 2002 included debt
issuances of $2.0 billion and retirements of $3.0 billion, for a
net debt reduction of $1.0 billion. Debt issuances in 2002
included $1.2 billion of 5.85% Senior Unsecured Notes due
in October 2012, the proceeds of which were used to retire
most of International Paper’s $1.2 billion of 8.0% notes due
July 2003 that were issued in connection with the Champion
acquisition. Other financing activity included $169 million for
the repurchase of approximately 4,390,000 shares of
International Paper common stock, and the issuance of
1,403,000 shares for various incentive plans, including stock
option exercises that generated $53 million of cash.

Refinancing of high coupon rate debt in the last three years is
one means the Company uses to manage interest expense.
Another method is the use of interest rate swaps to change
the mix between fixed and variable rate debt. At December
31, 2004, International Paper had entered into interest rate
swaps with a total notional amount of $2.2 billion. These
swaps reduced 2004 interest expense by $52 million before
taxes and minority interest, or 236 basis points, on $2.2
billion of related debt. At December 31, 2004, the swaps
reduced the weighted average fixed rate on the debt of 5% to
an effective rate of 2.6% with maturities ranging from one to
11 years.

Dividend payments totaled $485 million in 2004, $480
million in 2003 and $482 million in 2002. The International
Paper common stock dividend remained at $1.00 per share
during the three-year period.

In August 2004, CHH used a portion of the funds generated
in connection with the second quarter sale of its Tissue
business to repurchase shares from its shareholders,
including approximately $158 million that was paid to
minority shareholders.

At December 31, 2004 and 2003, cash and temporary
investments totaled $2.6 billion and $2.4 billion, respectively.
Both balances were higher than normal as they included cash
proceeds from the sales of Weldwood of Canada Limited and
the Maine and New Hampshire forestlands (2004) and $1
billion of borrowings (2003) that were used in part for the
retirement of debt in January of the following year.

Capital Resources Outlook for 2005

International Paper can meet projected capital expenditures,
service existing debt and meet working capital and dividend
requirements during 2005 through cash from operations,
supplemented as required by its various existing credit
facilities. International Paper has approximately $3.2 billion
of committed liquidity, which we believe is adequate to cover
expected operating cash flow variability during our industry’s
economic cycles. This includes $2 billion available under
contractually committed bank credit agreements and up to
$1.2 billion of available commercial paper-based financings
under a receivables securitization program. At December 31,
2004, there were no outstanding borrowings under these
agreements. Additionally, multi-currency credit facilities
equivalent to NZ$725 million are available for liquidity
requirements of our Carter Holt Harvey subsidiary in New
Zealand. At December 31, 2004, CHH had approximately
NZ$381 million of borrowings under these facilities.

Liquidity could also be enhanced by possible future earnings
repatriation decisions associated with the American Jobs
Creation Act of 2004. See Note 9 of the Notes to Consolidated
Financial Statements in Item 8. Financial Statements and
Supplementary Data, for additional information.

The Company will continue to rely upon debt capital markets
for the majority of any necessary funding not provided by
operating cash flow or repatriated cash. Funding decisions
will be guided by our capital structure planning and liability
management practices. The primary goals of the Company’s
capital structure planning are to maximize financial flexibility
and preserve liquidity while reducing interest expense. In
2005, the Company will continue to access the capital
markets where there are opportunities to replace high
coupon debt with new financing instruments at lower interest
rates, with a target of reducing consolidated debt to
approximately $12 billion by the end of 2006. Accordingly, an
additional $750 million of debt was subsequently repaid as of
February 2005.

The majority of International Paper’s debt is accessed through
global public capital markets where we have a wide base of
investors. The Company was well within the requirements for
compliance with all its debt covenants at December 31, 2004.
Principal financial covenants include maintenance of a
minimum net worth of $9 billion, defined as the sum of
common stock, paid-in capital and retained earnings, less
treasury stock, plus any goodwill impairment charges, and a
maximum total debt to capital ratio, defined as total debt
divided by total debt plus net worth plus the minority interest
in CHH, of 60%.

Maintaining an investment grade credit rating is an important
element of International Paper’s financing strategy. At

December 31, 2004, the Company held long-term credit
ratings of BBB (negative outlook) and Baa2 (negative
outlook) by Standard & Poor’s and Moody’s Investor Services,
respectively. The Company currently has short-term credit
ratings by Standard & Poor’s and Moody’s Investor Services of
A-3 and P-2, respectively.

Contractual obligations for future payments under existing
debt and lease commitments and purchase obligations at
December 31, 2004 were as follows:

In millions
Total debt
Lease
obligations
Purchase
obligations (a) 2,723
Total

211

2005

2006

2009 Thereafter
$ 506 $ 882 $1,244 $326 $1,326 $10,354

2008

2007

170

141

115

214

2,700
$3,440 $1,499 $1,739 $778 $1,685 $13,268

447

292

354

337

(a) The 2005 amount includes $2.1 billion for contracts made in
the ordinary course of business to purchase pulpwood, logs and
wood chips by Forest Resources and Carter Holt Harvey. The
majority of our other purchase obligations are take-or-pay or
purchase commitments made in the ordinary course of business
related to raw material purchases and energy contracts. Other
significant items include purchase obligations related to
contracted services.

Critical Accounting Policies

The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires International Paper to establish accounting policies
and to make estimates that affect both the amounts and
timing of the recording of assets, liabilities, revenues and
expenses. Some of these estimates require judgments about
matters that are inherently uncertain.

Accounting policies whose application may have a significant
effect on the reported results of operations and financial
position of International Paper, and that can require
judgments by management that affect their application,
include SFAS No. 5, “Accounting for Contingencies,” SFAS
No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” SFAS No. 142, “Goodwill and Other
Intangible Assets,” SFAS No. 87, “Employers’ Accounting for
Pensions,” SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” as amended
by SFAS No. 132 and 132R, “Employers’ Disclosures About
Pension and Other Postretirement Benefits,” and SFAS No.
109, “Accounting for Income Taxes.” The following is a
discussion of the impact of these accounting policies on
International Paper:

accompanying consolidated balance sheet in Other liabilities.
Changes to the reserves are only made when an identifiable
event occurs that changes the probable outcome, such as
settlement with relevant tax authority, the expiration of statutes
of limitation for the subject tax year, change in tax laws, or a
recent court case that addresses the matter.

While International Paper believes that these judgments and
estimates are appropriate and reasonable under the
circumstances, actual resolution of these matters may differ
from recorded estimated amounts.

Significant Accounting Estimates

Pension and Postretirement Benefit Accounting. The
calculations of pension and postretirement benefit obligations
and expenses require decisions about a number of key
assumptions that can significantly affect liability and expense
amounts, including the expected long-term rate of return on
plan assets, the discount rate used to calculate plan liabilities,
the projected rate of future compensation increases and
health care cost trend rates.

Benefit obligations and fair values of plan assets as of
December 31, 2004, for International Paper’s pension and
postretirement plans are as follows:

In millions
U.S. qualified pension
U.S. nonqualified pension
U.S. postretirement
Non-U.S. pension
Non-U.S. postretirement

Benefit
Obligation
$8,015
279
838
365
20

Fair Value of
Plan Assets
$6,745
-
-
255
-

The table below shows the assumptions used by International
Paper to calculate U.S. pension expenses for the years shown:

Discount rate
Expected long-term return on

plan assets

Rate of compensation increase

2005% 2004% 2003% 2002%
5.75% 6.00% 6.50% 7.25%

8.50% 8.75% 8.75% 9.25%
3.25% 3.25% 3.75% 4.50%

Contingent Liabilities. Accruals for contingent liabilities,
including legal and environmental matters, are recorded
when it is probable that a liability has been incurred or an
asset impaired and the amount of the loss can be reasonably
estimated. Liabilities accrued for legal matters require
judgments regarding projected outcomes and range of loss
based on historical experience and recommendations of legal
counsel. Additionally, as discussed in Note 10 of the Notes to
Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data, reserves for projected
future claims settlements relating to exterior siding products
previously manufactured by Masonite require judgments
regarding projections of future claims rates and amounts.
International Paper utilizes independent third parties to assist
in developing these estimates. Liabilities for environmental
matters require evaluations of relevant environmental
regulations and estimates of future remediation alternatives
and costs. International Paper determines these estimates
after a detailed evaluation of each site.

Impairment of Long-Lived Assets and Goodwill. An
impairment of a long-lived asset exists when the asset’s
carrying amount exceeds its fair value, and is recorded when
the carrying amount is not recoverable through future
operations. A goodwill impairment exists when the carrying
amount of goodwill exceeds its fair value. Assessments of
possible impairments of long-lived assets and goodwill are
made when events or changes in circumstances indicate that
the carrying value of the asset may not be recoverable through
future operations. Additionally, testing for possible impairment
of recorded goodwill and intangible asset balances is required
annually. The amount and timing of impairment charges for
these assets require the estimation of future cash flows and the
fair market value of the related assets.

Pension and Postretirement Benefit Obligations.
The charges recorded for pension and other postretirement
benefit obligations are determined annually in conjunction
with International Paper’s consulting actuary, and are
dependent upon various assumptions including the expected
long-term rate of return on plan assets, discount rates,
projected future compensation increases, health care cost
trend rates and mortality rates.

Income Taxes. International Paper records its world-wide
tax provision based on the respective tax rules and regulations
for the jurisdictions in which it operates. Where the Company
believes that the deduction of an item is supportable for
income tax purposes, the item is deducted in its income tax
returns. However, where treatment of an item is uncertain, tax
accruals are recorded based upon the expected most
probable outcome taking into consideration the specific tax
regulations and facts of each matter, the results of historical
negotiated settlements, and the results of consultations with
outside specialists. These accruals are recorded in the

Additionally, the health care cost trend rates used in the
calculation of U.S. postretirement obligations for the years
shown were:

Health care cost trend rate
assumed for next year
Rate that the cost trend rate

gradually declines to

Year that the rate reaches the
rate it is assumed to remain

% 2004% 2003% 2002%

10.00% 10.00% 10.00%

5.00% 5.00% 5.00%

2009

2008

2007

100%

75%

50%

25%

Pension Fund
Rolling Three-Year Performance vs. Peers

Percentile Ranking (100% = Best)

1998

1999

2000

2001

2002

2003

2004

International Paper determines these actuarial assumptions,
after consultation with our actuaries, on December 31 of
each year to calculate liability information as of that date and
pension and postretirement expense for the following year.
The discount rate assumption is determined based on a yield
curve that incorporates approximately 570 Aa-graded bonds.
The plan’s projected cash flows are then matched to this yield
curve to develop the discount rate.

The expected long-term rate of return on plan assets reflects
projected returns for an investment mix, determined upon
completion of a detailed asset/liability study that meets the
plans’ investment objectives. Increasing (decreasing) the
expected long-term rate of return on U.S. plan assets by an
additional 0.25% would decrease (increase) 2005 pension
expense by approximately $16 million, while a (decrease)
increase of .25% in the discount rate would (increase)
decrease pension expense by approximately $22 million. The
effect on net postretirement benefit cost from a 1% increase
or decrease in the annual trend rate would be approximately
$4 million.

Actual rates of return earned on U.S. pension plan assets for
each of the last 10 years were:

Year
2004
2003
2002
2001
2000

Return
14.1)%
26.0)%
(6.7)%
(2.4)%
(1.4)%

Year
1999
1998
1997
1996
1995

Return
21.4%
10.0%
17.2%
13.3%
19.9%

The following chart, prepared by International Paper,
illustrates the quarterly performance ranking of our pension
fund investments compared with approximately 100 other
corporate and public pension funds. The peer group, of
which International Paper is one, is the “State Street
Corporate and Public Master Trusts Universe.”

SFAS No. 87, “Employers’ Accounting for Pensions,” provides
for delayed recognition of actuarial gains and losses, including
amounts arising from changes in the estimated projected plan
benefit obligation due to changes in the assumed discount
rate, differences between the actual and expected return on
plan assets, and other assumption changes. These net gains
and losses are recognized in pension expense prospectively
over a period that approximates the average remaining service
period of active employees expected to receive benefits under
the plans (approximately 13 years) to the extent that they are
not offset by gains and losses in subsequent years. At
December 31, 2004, unrecognized net actuarial losses for
International Paper’s U.S. pension plans totaled approximately
$2.6 billion. While actual future amortization charges will be
affected by future gains/losses, amortization of cumulative
unrecognized losses as of December 31, 2004 is expected to
increase U.S. pension expense by approximately $53 million
in 2005, an additional $41 million in 2006, then decreasing
expense by $14 million in 2007.

Net periodic pension and postretirement plan expense (income),
calculated for all of International Paper’s plans were as follows:

In millions
Pension expense (income) - U.S. plans

(non-cash) (a)

Pension expense - non-U.S. plans (b)
Postretirement benefit cost -

U.S. plans (a)

Postretirement benefit cost -

non-U.S. plans (b)

Net expense

2004

2003)

2002)

$111
44

$ 60
39

$(75)
26)

59)

5
$213

5
$159

2 )
$ 12)

(a) Excludes $4.8 million, $10.9 million and $1.0 million of expense in
2004, 2003 and 2002, respectively, for curtailments, settlements and
special termination benefits related to divestitures and restructurings
that were recorded in Restructuring and other charges and Net
losses (gains) on sales and impairments of businesses held for sale
in the consolidated statement of operations.

(b) Excludes $42.7 million of income in 2004 for curtailments and
settlements related to divestitures that were recorded in Net
losses (gains) on sales and impairments of businesses held for
sale in the consolidated statement of operations.

The increase in 2004 U.S. pension expense, and the change
in 2003 to net pension expense from income in 2002, were
principally due to a reduction in the expected long-term rate
of return on plan assets in 2003, and increases in the
amortization of unrecognized actuarial losses, with smaller
impacts from reductions in the assumed discount rate and
the assumed rate of future compensation increases.

For 2005, the Company estimates that it will record net pension
expense of approximately $210 million for its U.S. defined
benefit plans, with the increase versus 2004 principally
reflecting increased amortization of unrecognized actuarial
losses over a shorter average remaining service period, a
decrease in the assumed discount rate to 5.75% in 2005 from
6.00% in 2004, and a decrease in the expected return on plan
assets to 8.50% in 2005 from 8.75% in 2004. The estimated
2005 pension expense for our non-U.S. plans is $32 million,
with the decrease from 2004 reflecting the sale of Weldwood.
Net postretirement benefit costs in 2005 will decrease by
approximately $13 million reflecting the impact of the
Medicare Prescription Drug, Improvement and Modernization
Act of 2003, partially offset by a decline in the discount rate
assumption from 6.00% in 2004 to 5.75% in 2005.

The market value of plan assets for International Paper’s U.S.
pension plan at December 31, 2004, totaled approximately
$6.7 billion, consisting of approximately 62% equity
securities, 27% fixed income securities, and 11% real estate
and other assets. Plan assets did not include International
Paper common stock.

International Paper makes contributions that are sufficient to
fully fund its actuarially determined costs, generally equal to
the minimum amounts required by the Employee Retirement
Income Security Act (ERISA). While International Paper may
elect to make voluntary contributions to its U.S. qualified plan
up to the maximum deductible amount per IRS tax
regulations in the coming years, it is unlikely that any
contributions to the plan will be required before 2007 unless
investment performance is negative or International Paper
changes its funding policy to make contributions above the
minimum requirements. The U.S. nonqualified plans are only
funded to the extent of benefits paid which are expected to be
$21 million in 2005.

Accounting for Stock Options. International Paper
accounts for stock options using the intrinsic value method
under Accounting Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Under this
method, compensation expense is recorded over the related
service period when the market price exceeds the option price
at the measurement date, which is the grant date for
International Paper’s options. No compensation expense is
recorded as options are issued with an exercise price equal to
the market price of International Paper stock on the grant date.

During each reporting period, fully diluted earnings per share
is calculated by assuming that “in-the-money” options are
exercised and the exercise proceeds are used to repurchase
shares in the marketplace. When options are actually
exercised, option proceeds are credited to equity and issued
shares are included in the computation of earnings per
common share, with no effect on reported earnings. Equity is
also increased by the tax benefit that International Paper will
receive in its tax return for income reported by the optionees
in their individual tax returns.

Under the provisions of SFAS No. 123, “Accounting for Stock-
Based Compensation,” expense for stock options is measured
at the grant date based on a computed fair value of options
granted, and then charged to expense over the related service
period. Had this method of accounting been applied, additional
expense of $38 million in 2004, $44 million in 2003, and $41
million in 2002 would have been recorded, decreasing
reported earnings (loss) per share by 114% to ($.15) in 2004,
14% to $.54 in 2003, and 5% to ($1.92) in 2002.

Beginning in 2005, U.S. employees will no longer receive stock
option awards. Accordingly, the provisions of recently issued
SFAS No. 123 (revised 2004), that require compensation costs
related to share-based payment transactions to be recognized
in the financial statements, will mainly affect only previously
issued options that are still outstanding and unvested on the
effective date, as well as reload grants. While the exact impact
on expense will depend upon the number of remaining
unvested options at that time, the adoption of this standard
could increase pre-tax compensation expense by approximately
$20 million in both 2005 and 2006, with no significant impact
in subsequent years.

At December 31, 2004, 45.4 million options were outstanding
with exercise prices ranging from $29.31 to $66.81 per
share. At December 31, 2003, 42.8 million options were
outstanding with exercise prices ranging from $29.31 to
$69.63 per share.

Income Taxes

Before minority interest, discontinued operations,
extraordinary items and the cumulative effect of accounting
changes, the effective income tax rates were 28%, (39%) and
(24%) for 2004, 2003 and 2002, respectively. These effective
tax rates include the tax effects of certain special and unusual
items that can affect the effective income tax rate in a given
year, but may not recur in subsequent years. Management
believes that the effective tax rate computed after excluding
these special or unusual items may provide a better estimate
of the rate that might be expected in future years if no
additional special or unusual items were to occur in those
years. Excluding these special and unusual items, the effective
income tax rate for 2004 was 26% of pre-tax earnings

compared with 20% in 2003 and 29% in 2002. The increase
in the rate in 2004 reflects a higher proportion of earnings in
higher tax rate jurisdictions. We estimate that the 2005
effective income tax rate will be approximately 33% based on
expected earnings and business conditions, which are subject
to change.

Recent Accounting Developments

The following represent recently issued accounting
pronouncements that will affect reporting and disclosures in
future periods. See Note 4 of the Notes to Consolidated
Financial Statements in Item 8. Financial Statements and
Supplementary Data for a further discussion of each item.

the American Jobs Creation Act of 2004 (the Act)” that provides
tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers’ deduction provided for under the Act should be
accounted for as a special deduction in accordance with
Statement 109 rather than a tax rate reduction.

Also in December 2004, the FASB issued FSP FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act
of 2004,” addressing accounting and disclosure guidance
relating to a company’s repatriation program. The additional
disclosures required under this staff position are included in
Note 9 of the Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary Data.

Share-Based Payment Transactions:

These FSP’s were effective upon issuance.

Exchanges of Nonmonetary Assets:

In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29,” which replaces the exception from fair
value measurement in APB Opinion No. 29, “Accounting for
Nonmonetary Transactions,” for nonmonetary exchanges of
similar productive assets with a general exception from fair
value measurement for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the
exchange. This statement is to be applied prospectively and is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. International Paper
believes that the adoption of SFAS No. 153 will not have a
material impact on its consolidated financial statements.

Accounting for Income Taxes:

Inventory Costs:

In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs, an amendment of ARB No. 43, Chapter 4,” which
requires that abnormal amounts of idle facility expense,
freight, handling costs and wasted material be recognized as
current-period charges regardless of whether they meet the
“so abnormal” criterion outlined in ARB No. 43. This
statement also introduces the concept of “normal capacity”
and requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production
facilities. Unallocated overheads must be recognized as an
expense in the period in which they are incurred. This
statement is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. International Paper
believes that the adoption of SFAS No. 151 will not have a
material impact on its consolidated financial statements.

Accounting for Medicare Benefits:

In May 2004, the FASB issued FSP FAS 106-2 that provides
guidance on the accounting and required disclosures for the
effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. International Paper adopted FSP
FAS 106-2 prospectively in the third quarter of 2004. The
impact was a reduction of net postretirement benefit cost of
approximately $8 million for the last half of 2004 and a
reduction of the accumulated postretirement benefit
obligation of approximately $110 million.

Information about Capital Structure –
Contingently Convertible Securities:

disclosures of the significant terms of the conversion features
of these securities to enable users of the financial statements
to understand the circumstances of the contingencies and the
potential impact of conversion. These additional disclosures
are presented for International Paper’s contingently
convertible securities in Note 12 of the Notes to Consolidated
Financial Statements in Item 8. Financial Statements and
Supplementary Data.

In October 2004, the FASB ratified a consensus reached by the
Emerging Issues Task Force of the FASB that, effective for
periods ending after December 15, 2004, contingently
convertible securities should be included in the computation
of diluted earnings per share regardless of whether or not the
market price trigger for issuance of the securities has been
met. Furthermore, the calculation of diluted earnings per
share for all prior periods presented should be restated to
reflect this consensus. At December 31, 2004, International
Paper had outstanding $2.1 billion principal amount of zero-
coupon convertible senior debentures that are convertible into
approximately 20 million shares of common stock subject to
certain conditions. Accordingly, the calculation of diluted
earnings per common share shown in Note 2 of the Notes to
Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data, reflects the assumed
conversion of these debentures for all periods presented.

Consolidation of Variable Interest Entities:

In January 2003, the FASB issued Interpretation No. 46 (FIN
46), “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.” This Interpretation changed
existing consolidation rules for certain entities, those in
which equity investors do not have the characteristics of a
controlling financial interest, or do not have sufficient equity
at risk for the entity to finance the entity’s activities without
additional subordinated financial support.

The interpretation applied immediately to variable interest
entities (VIE’s) created after January 31, 2003, and to VIE’s in
which an enterprise obtains an interest after that date.
International Paper neither entered into nor obtained an
interest in any VIE’s after January 31, 2003. For VIE’s created
before February 1, 2003, this interpretation was effective for
the first reporting period ending after December 15, 2003.
During December 2003, the FASB issued a revision to FIN 46
(FIN 46(R)) with varying effective dates. International Paper,
applied FIN 46(R) to its variable interest entities as of
December 31, 2003.

The cumulative effect of adoption of FIN 46(R) amounted to a
$3 million charge after taxes.

Financial Instruments with Characteristics of both
Liabilities and Equity:

In May 2003, the FASB issued SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity.” It established standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. This
standard was effective for financial instruments entered into
or modified after May 31, 2003, and otherwise was effective
at the beginning of the first interim period beginning after
June 15, 2003. International Paper adopted this standard
during the third quarter ended September 30, 2003, with no
material effect on the Company’s financial statements.

Costs Associated with Exit or Disposal Activities:

In June 2002, the FASB issued SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities.” The
statement changed the measurement and timing of
recognition for exit costs, including restructuring charges,
and was effective for activities initiated after December 31,
2002. It requires that a liability for costs associated with an
exit or disposal activity, such as one-time termination
benefits, be recognized when the liability is incurred, rather
than at the date of a company’s commitment to an exit plan. It
had no effect on charges recorded for exit activities begun
prior to December 31, 2002. International Paper adopted this
standard effective January 1, 2003, with no material effect on
the Company’s financial statements.

Impairment and Disposal of Long-Lived Assets:

In August 2001, the FASB issued SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” It
established a single accounting model for the impairment of
long-lived assets to be held and used or to be disposed of by
sale or abandonment, and broadened the definition of
discontinued operations. International Paper adopted SFAS
No. 144 in 2002, with no significant change in the accounting
for the impairment and disposal of long-lived assets.

Asset Retirement Obligations:

In June 2001, the FASB issued SFAS No. 143, “Accounting for
Asset Retirement Obligations.” It requires the recording of an
asset and a liability equal to the present value of the estimated
costs associated with the retirement of long-lived assets where
a legal or contractual obligation exists. The asset is required
to be depreciated over the life of the related equipment or
facility, and the liability accreted each year using a credit-
adjusted risk-free rate.

International Paper adopted SFAS No. 143 effective January 1,
2003, recording a discounted liability of $22 million, an

increase in Property, plant and equipment, net, of $7 million,
and a one-time cumulative effect of accounting change charge
of $10 million (net of a deferred tax benefit of $5 million).

Legal Proceedings

Environmental Matters

International Paper is subject to extensive federal and state
environmental regulation as well as similar regulations in all
other jurisdictions in which we operate. Our continuing
objectives are to: (1) control emissions and discharges from
our facilities into the air, water and groundwater to avoid
adverse impacts on the environment, (2) make continual
improvements in environmental performance, and (3)
maintain 100% compliance with applicable laws and
regulations. A total of $99 million was spent in 2004 for
capital projects to control environmental releases into the air
and water, and to assure environmentally sound management
and disposal of waste. We expect to spend approximately
$140 million in 2005 for similar capital projects, including
the costs to comply with the Environmental Protection
Agency’s (EPA) Cluster Rule regulations. Amounts to be spent
for environmental control projects in future years will depend
on new laws and regulations and changes in legal
requirements and environmental concerns. Taking these
uncertainties into account, our preliminary estimate for
additional environmental appropriations during the year 2006
is approximately $121 million, and during the year 2007 is
approximately $42 million. The reduced capital forecast for
2007 reflects the reduction in Cluster Rule spending and
completion of significant environmental improvement
projects in Brazil.

On April 15, 1998, the EPA issued final Cluster Rule
regulations that established new requirements regarding air
emissions and wastewater discharges from pulp and paper
mills to be met by 2006. The projected costs included in our
spending estimate related to the Cluster Rule regulations for
the year 2005 are $61 million. Included in this estimate are
costs associated with pulp and paper industry combustion
source standards that were issued by the EPA on January 12,
2001. Total projected Cluster Rule costs for 2006 through
2007 are $58 million.

The EPA is continuing the development of new programs and
standards such as additional wastewater discharge allocations,
water intake structure requirements and national ambient air
quality standards. When regulatory requirements for new and
changing standards are finalized, we will add any resulting
future cost requirements to our expenditure forecast.

Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA). Most of these proceedings involve the
cleanup of hazardous substances at large commercial
landfills that received waste from many different sources.
While joint and several liability is authorized under CERCLA
and equivalent state laws, as a practical matter, liability for
CERCLA cleanups is allocated among the many potential
responsible parties. Based upon previous experience with
respect to the cleanup of hazardous substances and upon
presently available information, International Paper believes
that it has de minimis or no liability with respect to 20 of
these sites; that liability is not likely to be significant at 29
sites; and estimates that liability at the remaining 39 sites is
likely to be significant, but not material to International
Paper’s consolidated financial statements. Related costs are
recorded in the financial statements when they are probable
and reasonably estimable. International Paper believes that
the probable liability associated with these 88 proceedings is
approximately $48 million.

In addition to the above 88 proceedings, other remediation
costs recorded as liabilities in the balance sheet totaled
approximately $37 million. Completion of these actions is not
expected to have a material adverse effect on our consolidated
financial statements. As of February 2005, there were no other
pending judicial proceedings, brought by government
authorities against International Paper, for alleged violations of
applicable environmental laws or regulations.

Finally, on October 10, 2003, the Company was served with a
civil administrative complaint by the EPA seeking a civil
penalty of $673,969 based on alleged hazardous waste
deficiencies at the Company’s treated pole facility in Joplin,
Missouri. In August 2004, the Company and the EPA settled
the matter and the Company agreed to pay a penalty in the
amount of $86,649 and to perform additional environmental
assessments of the facility.

International Paper is involved in other contractual disputes,
administrative and legal proceedings and investigations of
various types. While any litigation, proceeding or investigation
has an element of uncertainty, we believe that the outcome of
any proceeding, lawsuit or claim that is pending or
threatened, or all of them combined, will not have a material
adverse effect on our consolidated financial statements.

Litigation

See Note 10 of the Notes to Consolidated Financial Statements
in Item 8. Financial Statements and Supplementary Data, for a
detailed discussion of each of the following litigation matters.

International Paper has been named as a potentially
responsible party in a total of 88 environmental remediation
actions under various federal and state laws, including the

Exterior Siding and Roofing Litigation: Three
nationwide class action lawsuits filed against International
Paper have been settled in recent years. A provision of $450

million was recorded in 2002 to increase existing reserve
balances to projected settlement amounts. At December 31,
2004, reserves for these actions totaled $259 million.

Insurance Matters: In connection with one of the exterior
siding and roofing actions above, International Paper
commenced a lawsuit against certain insurance carriers
relating to their refusal to indemnify International Paper and,
in the case of one insurance carrier, also for its refusal to
provide a defense. In July 2003, a jury determined that $383
million of International Paper’s payments to settle these
claims are covered by its insurance policies. International
Paper is engaged in further court proceedings to determine
each carrier’s allocable share. International Paper is also
participating in court-ordered mediation with some of those
insurance carriers and has settled its claims with certain
other insurance carriers.

In addition, International Paper was involved in a dispute with
a third party regarding $100 million paid to International
Paper under an alternative risk-transfer agreement. In February
2004, an agreement was reached whereby International Paper
agreed to pay the third party a portion of future insurance
proceeds as they are recovered by International Paper
beginning in 2004, up to a maximum of $95 million.

Antitrust Matters: In 2003, International Paper, along with
two other defendants, settled a class action lawsuit alleging
that it and other manufacturers of linerboard conspired to fix
prices for corrugated sheets and containers during the period
October 1, 1993, through November 30, 1995. International
Paper’s share of this settlement, with a substantial proportion
of the class (which included claims brought against Union
Camp acquired by the Company in 1999), was $24.4 million.

In connection with this class action lawsuit, a number of
plaintiffs opted out of the class action and filed lawsuits in
various federal district courts. These lawsuits, which have
been consolidated for pretrial purposes in federal court in
Pennsylvania, allege a class period of October 1, 1993
through February 28, 1997.

In addition to the foregoing the Company is a defendant in
several other antitrust class actions. One of the matters,
relating to the Company’s fiber procurement, has been
certified as a class action in the federal court in the District of
South Carolina. Another purported class action involves
publication papers, and has been recently consolidated for
pre-trial purposes in the federal court for the District of
Connecticut. Discovery in that case has not yet begun.

The Company is vigorously defending these cases and believes
it has valid defenses.

Effect of Inflation

While inflationary increases in certain input costs, such as
energy, wood fiber and chemical costs, have an impact on the
Company’s operating results, changes in general inflation
have had minimal impact on our operating results in the last
three years. Sales prices and volumes are more strongly
influenced by supply and demand factors in specific markets
and by exchange rate fluctuations than by inflationary factors.

Foreign Currency Effects

International Paper has operations in a number of countries.
Its operations in those countries also export to, and compete
with imports from, other regions. As such, currency
movements can have a number of direct and indirect impacts
on the Company’s financial statements. Direct impacts include
the translation of international operations’ local currency
financial statements into U.S. dollars. Indirect impacts include
the change in competitiveness of imports into, and exports
out of, the United States (and the impact on local currency
pricing of products that are traded internationally). In
general, a lower U.S. dollar and stronger local currency is
beneficial to International Paper. The currencies that have the
most impact are the Euro, the Canadian dollar, the New
Zealand dollar, the Brazilian real, the Polish zloty and the
Russian ruble.

Market Risk

We use financial instruments, including fixed and variable
rate debt, to finance operations, for capital spending
programs and for general corporate purposes. Additionally,
financial instruments, including various derivative contracts,
are used to hedge exposures to interest rate, commodity and
foreign currency risks. We do not use financial instruments
for trading purposes. Information related to International
Paper’s debt obligations is included in Note 12 of the Notes to
Consolidated Financial Statements in Item 8. Financial
Statements and Supplementary Data. A discussion of
derivatives and hedging activities is included in Note 13 of the
Notes to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.

The fair value of our debt and financial instruments varies
due to changes in market interest and foreign currency rates
and commodity prices since the inception of the related
instruments. We assess this market risk utilizing a sensitivity
analysis. The sensitivity analysis measures the potential loss in
earnings, fair values and cash flows based on a hypothetical
10% change (increase and decrease) in interest and currency
rates and commodity prices.

such financial instruments from a 10% adverse change in
quoted foreign currency exchange rates would be immaterial
for both 2004 and 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

See the discussion under Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
on pages 31 and 32, and under Item 8. Financial Statements
and Supplementary Data in Note 13 of the Notes to
Consolidated Financial Statements on pages 69 through 71.

Interest Rate Risk

Our exposure to market risk for changes in interest rates
relates primarily to short- and long-term debt obligations and
investments in marketable securities. We invest in investment
grade securities of financial institutions and industrial
companies and limit exposure to any one issuer. Our
investments in marketable securities at December 31, 2004
are stated at cost, which approximates market due to their
short-term nature. Our interest rate risk exposure related to
these investments was immaterial.

We issue fixed and floating rate debt in a proportion
consistent with International Paper’s optimal capital
structure, while at the same time taking advantage of market
opportunities to reduce interest expense as appropriate.
Derivative instruments, such as interest rate swaps, may be
used to implement the optimal capital structure. At December
31, 2004 and 2003, the net fair value liability of financial
instruments with exposure to interest rate risk was
approximately $11.3 billion and $11.8 billion, respectively.
The potential loss in fair value resulting from a 10% adverse
shift in quoted interest rates would be approximately $419
million and $430 million for 2004 and 2003, respectively.

Commodity Price Risk

The objective of our commodity exposure management is to
minimize volatility in earnings due to large fluctuations in the
price of commodities. Commodity swap and option contracts
have been used to manage risks associated with market
fluctuations in energy prices. There are no outstanding energy
hedge contracts as of December 31, 2004. As of December
31, 2003, the net fair value of such contracts was a $5
million asset. The potential loss in fair value resulting from a
10% adverse change in the underlying commodity prices
would have been immaterial for 2003.

Foreign Currency Risk

International Paper transacts business in many currencies
and is also subject to currency exchange rate risk through
investments and businesses owned and operated in foreign
countries. Our objective in managing the associated foreign
currency risks is to minimize the effect of adverse exchange
rate fluctuations on our after-tax cash flows. We address these
risks on a limited basis through financing a portion of our
investments in overseas operations with borrowings
denominated in the same currency as the operation’s
functional currency, or by entering into long-term cross-
currency and interest rate swaps, or short-term foreign
exchange contracts. At December 31, 2004 and 2003, the net
fair value liability of financial instruments with exposure to
foreign currency risk was approximately $510 million and
$540 million, respectively. The potential loss in fair value for

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

Financial Information by Industry Segment and
Geographic Area

For information about our industry segments, see the
“Description of Industry Segments” included on pages 15
through 17 of Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.

For management purposes, we report the operating
performance of each business based on earnings before
interest and income taxes (“EBIT”) excluding special and
extraordinary items, gains or losses on sales of businesses
and cumulative effects of accounting changes. Our Carter Holt
Harvey segment includes our share, about half, of their
operating earnings adjusted for accounting principles
generally accepted in the United States of America. The
remaining half is included in minority interest. Intersegment
sales and transfers are recorded at current market prices.

External Sales by Major Product is determined by aggregating
sales from each segment based on similar products or
services. External sales are defined as those that are made to
parties outside International Paper’s consolidated group,
whereas sales by segment in the Net Sales table are
determined by the management approach and include
intersegment sales.

Capital Spending by Industry Segment is reported on page 22
of Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.

Prior-year industry segment information has been restated to
conform to the 2004 management structure and to reflect the
Weldwood of Canada Limited business and Carter Holt Harvey
Tissue business sold in 2004 as discontinued operations.

INFORMATION BY INDUSTRY SEGMENT

Net Sales

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and

Other (a)
Corporate and

Intersegment Sales

Net Sales

Assets

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and

Other (a)

Corporate and other (b)
Assets

2004)
$ 7,635)

2003)
$ 7,245)

2002)
$ 7,265)

7,470)
6,065)
2,395)
2,190)

6,670)
5,860)
2,390)
1,820)

6,530)
5,990)
2,525)
1,540)

1,120)

1,235)

1,455)

(1,327)
$25,548)

(1,265)
$23,955)

(1,406)
$23,899)

2004)
$ 9,171)

2003)
$ 8,948)

2002)
$ 9,011)

6,865)
1,515)
3,068)
4,026)

6,499)
1,458)
3,324)
3,731)

6,468)
1,533)
3,564)
3,108)

652)
8,920)
$34,217)

625)
10,940)
$35,525)

694)
9,414)
$33,792)

Operating Profit

In millions
Printing Papers
Industrial and Consumer Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and Other (a)
Operating Profit
Interest expense, net
Minority interest (c)
Corporate items, net
Restructuring and other charges
Insurance recoveries
Reversals of reserves no longer

2004)
$ 579)
543)
87)
793)
47)
38)
2,087)
(743)
59)
(469)
(211)
123)

2003)
$ 460)
451)
80)
720)
38)
23)
1,772)
(772)
48)
(466)
(298)
-)

2002)
$ 545)
551)
91)
641)
41)
18)
1,887)
(785)
43)
(253)
(695)
-)

required

35)

40)

68)

Net gains (losses) on sales and

impairments of businesses held
for sale

Earnings from Continuing
Operations Before
Income Taxes
and Minority Interest

(135)

(32)

41)

$ 746)

$ 292)

$ 306)

INFORMATION BY GEOGRAPHIC AREA

Net Sales (f)

In millions
United States (g)
Europe
Pacific Rim (h)
Americas, other than U.S.
Net Sales

2004
$19,167
3,056
2,405
920
$25,548

2003
$18,138
2,928
2,025
864
$23,955

European Sales by Industry Segment

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Specialty Businesses and

Other (a)
European Sales

2004
$1,370

2003
$1,291

891
2

822
9

793
$3,056

806
$2,928

Long-Lived Assets (i)

In millions
United States
Europe
Pacific Rim (h)
Americas, other than U.S.
Corporate
Long-Lived Assets

2004
$11,764
1,489
3,109
718
288
$17,368

2003
$12,102
1,334
2,867
629
307
$17,239

2002
$18,772
2,636
1,735
756
$23,899

2002
$1,152

703
15

766
$2,636

2002
$12,630
1,206
2,436
477
308
$17,057

Restructuring and Other Charges
2004
-
$

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and

Other (a)

Corporate
Restructuring and Other

-
-
-
35

-
176

2003
$ 26

30
7
31
12

69
123

2002
$ 85

31
13
12
28

19
507

Charges

$211

$298

$695

Depreciation and Amortization (d)

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Carter Holt Harvey
Specialty Businesses and

Other (a)

Corporate
Depreciation and
Amortization

2004
$ 700

2003
$ 682

2002
$ 665

405
17
111
208

27
97

396
14
119
190

25
112

391
15
115
181

19
111

$1,565

$1,538

$1,497

External Sales by Major Product
2004
$ 6,973

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Other (e)
Net Sales

7,640
6,306
3,953
676
$25,548

2003
$ 6,395

6,895
6,191
3,738
736
$23,955

2002
$ 6,109

6,852
6,519
3,642
777
$23,899

(a) Includes Arizona Chemical and Chemical Cellulose Pulp. Also included are certain other smaller businesses identified in the Company’s

divestiture program.

(b) Includes corporate assets and assets of discontinued operations in 2003 and 2002.
(c) Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are
less than wholly-owned. The pre-tax minority interest for these subsidiaries is added here to present consolidated earnings before income taxes,
minority interest, extraordinary items, and cumulative effect of accounting changes.

(d) Includes cost of timber harvested.
(e) Includes sales of products not included in our major product lines.
(f) Net sales are attributed to countries based on location of seller.
(g) Export sales to unaffiliated customers (in billions) were $1.5 in 2004, $1.4 in 2003 and $1.3 in 2002.
(h) Operations in New Zealand and Australia account for most of the Pacific Rim amounts.
(i) Long-Lived Assets includes Forestlands and Plants, Properties and Equipment, net.

Report of Management on:
Financial Statements - The management of International
Paper Company is responsible for the preparation of the
consolidated financial statements in this annual report. The
consolidated financial statements have been prepared using
accounting principles generally accepted in the United States of
America considered appropriate in the circumstances to
present fairly the Company’s consolidated financial position,
results of operations and cash flows on a consistent basis.
Management has also prepared the other information in this
annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.

As can be expected in a complex and dynamic business
environment, some financial statement amounts are based on
estimates and judgments. However, measures have been taken
to provide reasonable assurance of the integrity and reliability
of the financial information contained in this annual report.
We have formed a Disclosure Committee to oversee this process.

The accompanying consolidated financial statements have been
audited by the independent registered public accounting firm,
Deloitte & Touche LLP. During their audits, they were given
unrestricted access to all financial records and related data,
including minutes of all meetings of stockholders and the board
of directors and all committees of the board. Management
believes that all representations made to the independent
auditors during their audits were valid and appropriate.

Internal Controls over Financial Reporting - The
management of International Paper Company is also
responsible for establishing and maintaining adequate
internal controls over financial reporting including the
safeguarding of assets against unauthorized acquisition, use
or disposition. These controls are designed to provide
reasonable assurance to management and the board of
directors regarding preparation of reliable published
financial statements and such asset safeguarding. The system
is supported by written policies and procedures, contains
self-monitoring mechanisms, and is audited by internal audit.
Appropriate actions are taken by management to correct
deficiencies as they are identified.

The Company has assessed the effectiveness of its internal
control over financial reporting as of December 31, 2004. In
making this assessment, it used the criteria described in
“Internal Control – Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management
believes that, as of December 31, 2004, the Company’s
internal control over financial reporting is effective. Deloitte &
Touche LLP, have issued their report on management’s
assessment of the effectiveness of the Company’s internal
control over financial reporting. The report appears on
page 37.

Internal Control Environment and Board of
Directors Oversight - Our internal control environment
includes an enterprise-wide attitude of integrity and control
consciousness that establishes a positive “tone at the top.” This
is exemplified by our ethics program that includes long-
standing principles and policies on ethical business conduct
that require employees to maintain the highest ethical and legal
standards in the conduct of International Paper business, that
have been distributed to all employees, a toll-free telephone
helpline whereby any employee may report suspected violations
of law or International Paper’s policy, and an office of ethics
and business practice. The internal controls system further
includes careful selection and training of supervisory and
management personnel, appropriate delegation of authority
and division of responsibility, dissemination of accounting and
business policies throughout International Paper, and an
extensive program of internal audits with management follow-up.

The Board of Directors, assisted by the Audit and Finance
Committee (Committee), monitors the integrity of the
Company’s financial statements and financial reporting
procedures, the performance of the Company’s internal audit
function and independent auditors, and other matters set
forth in its charter. The Committee, which currently consists
of four independent directors, meets regularly with
representatives of management, and with the independent
auditors and the Internal Auditor, with and without
management representatives in attendance, to review their
activities. The Committee’s Charter takes into account the New
York Stock Exchange rules relating to Audit Committees and
the SEC rules and regulations promulgated as a result of the
Sarbanes-Oxley Act of 2002. A copy of the charter will be
included in the Company’s definitive proxy statement relating
to the annual meeting of shareholders in 2005. The
Committee has reviewed and discussed the consolidated
financial statements for the year ended December 31, 2004,
including critical accounting policies and significant
management judgments, with management and the
independent auditors. The Committee’s report recommending
the inclusion of such financial statements in this Annual
Report on Form 10-K will be set forth in our proxy statement.

JOHN V. FARACI
Chairman and Chief Executive Officer
March 7, 2005

CHRISTOPHER P. LIDDELL
Senior Vice-President and Chief Financial Officer
March 7, 2005

Report of Deloitte & Touche LLP,
Independent Registered Public Accounting Firm,
on Consolidated Financial Statements

To the Shareholders of International Paper Company:

We have audited the accompanying consolidated balance
sheets of International Paper Company and subsidiaries (the
“Company”) as of December 31, 2004 and 2003, and the
related statements of operations, changes in shareholders’
equity, and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of
International Paper Company and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States
of America.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report
dated March 7, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.

NEW YORK, N.Y.
MARCH 7, 2005

assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
consolidated financial statements.

Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material
misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation
of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects,
based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion,
the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2004 of
the Company and our report dated March 7, 2005 expressed
an unqualified opinion on those financial statements and
financial statement schedule.

NEW YORK, N.Y.
MARCH 7, 2005

Report of Deloitte & Touche LLP,
Independent Registered Public Accounting Firm,
on Internal Controls Over Financial Reporting

To the Shareholders of International Paper Company:

We have audited management’s assessment, included in the
accompanying Report of Management on Internal Controls
over Financial Reporting, that International Paper Company
and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on
our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we
considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial officers,
or persons performing similar functions, and effected by the
company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation
of financial statements in accordance with accounting
principles generally accepted in the United States, and that
receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable

I n t e r n a t i o n a l P a p e r C o m p a n y

2 0 0 3)

2 0 0 2)

$23,955)

$23,899)

17,878)
1,952)
1,538)
992)
241)
298)
-)

32)
(40)
772)

292)
(113)
111)

294)
21)

(10)
(3)
-)

$302)

$0.62)
0.04)

(0.02)
(0.01)
-)

$0.63)

$0.61)
0.04)

(0.02)
(0.01)
-)

$0.63)

17,468)
2,022)
1,497)
993)
242)
695)
-)

(41)
(68)
785)

306)
(72)
118)

260)
35)

-)
-)
(1,175)

$(880)

$0.54)
0.07)

-)
-)
(2.44)

$(1.83)

$0.54)
0.07)

-)
-)
(2.43)

$(1.82)

C O N S O L I D AT E D S TAT E M E N T O F O P E R AT I O N S
In millions, except per share amounts, for the years ended December 31

Net Sales

Costs and Expenses

Cost of products sold
Selling and administrative expenses
Depreciation, amortization and cost of timber harvested
Distribution expenses
Taxes other than payroll and income taxes
Restructuring and other charges
Insurance recoveries
Net losses (gains) on sales and impairments of businesses

held for sale

Reversals of reserves no longer required, net
Interest expense, net

Earnings From Continuing Operations Before Income Taxes

and Minority Interest
Income tax provision (benefit)
Minority interest expense, net of taxes

Earnings From Continuing Operations

Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes, net of taxes and

minority interest:
Asset retirement obligations
Variable interest entities
Transitional goodwill impairment charge

Net Earnings (Loss)

Basic Earnings (Loss) Per Common Share

Earnings from continuing operations
Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes, net of taxes and

minority interest:
Asset retirement obligations
Variable interest entities
Transitional goodwill impairment charge

Net earnings (loss)

Diluted Earnings (Loss) Per Common Share

Earnings from continuing operations
Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes, net of taxes and

minority interest:
Asset retirement obligations
Variable interest entities
Transitional goodwill impairment charge

Net earnings (loss)

2 0 0 4 )

$25,548)

18,996)
2,005)
1,565)
1,054)
242)
211)
(123)

144)
(35)
743)

746)
206)
62)

478)
(513)

-)
-)
-)

$(35)

$0.98)
(1.05)

-)
-)
-)

$(0.07)

$0.98)
(1.05)

-)
-)
-)

$(0.07)

The accompanying notes are an integral part of these financial statements.

C O N S O L I D AT E D B A L A N C E S H E E T
In millions at December 31

Assets
Current Assets

Cash and temporary investments
Accounts and notes receivable, less allowances of

$128 in 2004 and $135 in 2003

Inventories
Assets of businesses held for sale
Deferred income tax assets
Other current assets

Total Current Assets
Plants, Properties and Equipment, net
Forestlands
Investments
Goodwill
Deferred Charges and Other Assets

Total Assets

Liabilities and Common Shareholders’ Equity
Current Liabilities

Notes payable and current maturities of long-term debt
Accounts payable
Accrued payroll and benefits
Liabilities of businesses held for sale
Other accrued liabilities

Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Other Liabilities
Minority Interest
Commitments and Contingent Liabilities - Note 10
Common Shareholders’ Equity

Common stock, $1 par value, 2004 - 487.5 shares, 2003 - 485.2 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less: Common stock held in treasury, at cost, 2003 - 3.7 shares

Total Common Shareholders’ Equity

I n t e r n a t i o n a l P a p e r C o m p a n y

2 0 0 4 )

2003)

$2,596)

2,994)
2,718)
229)
470)
312)

9,319)
13,432)
3,936)
679)
4,994)
1,857)

$2,363)

2,765)
2,767)
2,104)
581)
516)

11,096)
13,260)
3,979)
678)
4,793)
1,719)

$34,217)

$35,525)

$506)
2,279)
492)
82)
1,513)

4,872)
14,132)
1,697)
3,714)
1,548)

487)
6,562)
2,562)
(1,357)
8,254)
-)
8,254)

$2,087)
2,188)
445)
645)
1,905)

7,270)
13,450)
1,387)
3,559)
1,622)

485)
6,500)
3,082)
(1,690)
8,377)
140)
8,237)

Total Liabilities and Common Shareholders’ Equity

$34,217)

$35,525)

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS
In millions for the years ended December 31

2 0 0 4 )

2 0 0 3 )

2 0 0 2 )

I n t e r n a t i o n a l P a p e r C o m p a n y

Operating Activities
Net earnings (loss)
Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes, net of taxes and minority interest
Depreciation, amortization and cost of timber harvested
Deferred income tax benefit, net
Restructuring and other charges
Payments related to restructuring and legal reserves
Reversals of reserves no longer required, net
Net losses (gains) on sales and impairments of businesses held for sale
Proceeds on Maine timberlands transaction
Other, net
Changes in current assets and liabilities

Accounts and notes receivable
Inventories
Accounts payable
Accrued liabilities
Other

Cash Provided By Operations
Investment Activities

Invested in capital projects
Continuing operations
Businesses sold and held for sale

Mergers and acquisitions, net of cash acquired
Proceeds from divestitures
Other

Cash Provided By (Used For) Investment Activities
Financing Activities

Issuance of common stock
Issuance of debt
Reduction of debt
Redemption of preferred securities of a subsidiary
CHH share repurchase
Change in book overdrafts
Purchases of treasury stock
Dividends paid
Sale of minority interest
Other

Cash (Used For) Provided By Financing Activities
Effect of Exchange Rate Changes on Cash
Change in Cash and Temporary Investments
Cash and Temporary Investments

Beginning of the year
End of the year

$(35)
513)
-)
1,565)
(114)
211)
(236)
(35)
144)
242)
438)

(186)
(66)
93)
(23)
(123)
2,388)

(1,262)
(66)
(305)
1,471)
217)
55)

164)
2,962)
(4,533)
-)
(158)
(145)
-)
(485)
-)
(240)
(2,435)
225)
233)

2,363)
$2,596)

$302)
(21)
13)
1,538)
(397)
298)
(270)
(40)
32)
-)
421)

74)
(21)
(55)
(39)
(13)
1,822)

(1,094)
(72)
-)
78)
(179)
(1,267)

80)
2,254)
(839)
(550)
-)
104)
(26)
(480)
150)
(102)
591)
143)
1,289)

1,074)
$2,363)

$(880)
(35)
1,175)
1,497)
(389)
695)
(340)
(68)
(41)
- )
136)

98)
53)
247)
(47)
(7)
2,094)

(936)
(73)
(28)
535)
22)
(480)

53)
2,011)
(3,017)
-)
-)
(33)
(169)
(482)
50)
(145)
(1,732)
(32)
(150)

1,224)
$1,074)

The accompanying notes are an integral part of these financial statements.

C O N S O L I D AT E D S TAT E M E N T O F C H A N G E S I N C O M M O N S H A R E H O L D E R S ’ E Q U I T Y
In millions, except share amounts in thousands

I n t e r n a t i o n a l P a p e r C o m p a n y

Balance, January 1, 2002
Issuance of stock for various plans
Repurchase of stock
Cash dividends - Common stock

($1.00 per share)

Comprehensive income (loss):

Net loss
Minimum pension liability adjustment:

U.S. plans (less tax of $964)
Non-U.S. plans (less tax of $9)

Change in cumulative foreign currency

translation adjustment (less tax of $2)
Net gains on cash flow hedging derivatives:

Net gain arising during the period

(less tax of $33)

Less: Reclassification adjustment for

gains included in net income
(less tax of $3)

Total comprehensive loss
Balance, December 31, 2002
Issuance of stock for various plans
Repurchase of stock
Cash dividends - Common stock

($1.00 per share)

Comprehensive income (loss):

Net income
Minimum pension liability adjustment:

U.S. plans (less tax of $94)
Non-U.S. plans (less tax of $2)

Change in cumulative foreign currency
translation adjustment (less tax
of $51)

Net gains on cash flow hedging derivatives:

Net gain arising during the period
(less tax of $38)
Less: Reclassification adjustment for

gains included in net income
(less tax of $36)

Total comprehensive income
Balance, December 31, 2003
Issuance of stock for various plans
Cash dividends - Common stock

($1.00 per share)

Comprehensive income (loss):

Net loss
Minimum pension liability adjustment:

U.S. plans (less tax of $20)
Non-U.S. plans (less tax of $5)

Change in cumulative foreign currency

translation adjustment (less tax
of $17)

Net gains on cash flow hedging derivatives:
Net gain arising during the period

(less tax of $19)

Less: Reclassification adjustment for

gains included in net income
(less tax of $13)

Common Stock Issued

Amount

484,281
479
-

$484
1
-

Paid-in)
Capital)

$6,465
28
-

-
-

484,760
402
-

485
-
-

6,493
7
-

-
-

485,162
2,333

485
2

6,500
62

-
-

Retained)
Earnings)

$4,622)
-)
-)

(482)

(880)

-)
-)

3,260)
-)
-)

(480)

302)

-)
-)

3,082)
-)

(485)

(35)

-)
-)

Accumulated)
Other)
Comprehensive)
Income (Loss)(1)

Treasury Stock

Shares)

Amount

$(1,175)
-)
-)

2,693)
(1,403)
4,390)

$105)
(55)
169)

Total)
Common)
Shareholders’)
Equity)

$10,291)
84)
(169)

(1,543)
(21)

27)

71)

(4)

-)
-)

(2,645)
-)
-)

5,680)
(2,725)
713)

219)
(105)
26)

150)
(4)

808)

66)

(65)

-)
-)

(1,690)

3,668)
-) (3,652)

140)
(140)

33)
1)

255)

70)

(26)

-)
-)

(482)

(880)

(1,543)
(21)

27)

71)

(4)
(2,350)
7,374)
112)
(26)

(480)

302)

150)
(4)

808)

66)

(65)
1,257)
8,237)
204)

(485)

(35)

33)
1)

255)

70)

(26)
298)
$8,254)

Total comprehensive income

Balance, December 31, 2004

487,495

$487

$6,562

$2,562)

$(1,357)

16)

$-)

(1) The cumulative foreign currency translation adjustment (in millions) was $(29), $(284) and $(1,092) at December 31, 2004, 2003 and 2002,

respectively, and is included as a component of accumulated other comprehensive income (loss).

The accompanying notes are an integral part of these financial statements.

Notes to Consolidated Financial Statements

NOTE 1 SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

Nature of Our Business

International Paper is a global forest products, paper and
packaging company that is complemented by an extensive
North American merchant distribution system, with primary
markets and manufacturing operations in the United States,
Europe, the Pacific Rim and South America. Substantially all
of our businesses have experienced, and are likely to
continue to experience, cycles relating to available industry
capacity and general economic conditions.

Financial Statements

These financial statements have been prepared in conformity
with accounting principles generally accepted in the United
States that require the use of management’s estimates. Actual
future results could differ from management’s estimates.

in the consolidated statement of operations. These costs,
when included in the sales price charged for our products,
are recognized in net sales.

Annual Maintenance Costs

Annual maintenance costs for major planned maintenance
shutdowns (in excess of $1 million) are expensed ratably
over the year in which the maintenance shutdowns occur
since the Company believes that operations benefit
throughout the year from the maintenance work performed.
These costs, including manufacturing variances and out-of-
pocket costs that are directly related to the shutdown, are
fully expensed in the year of the shutdown with no amounts
remaining accrued at year-end. Other maintenance costs are
expensed as incurred.

Temporary Investments

Temporary investments with an original maturity of three
months or less are treated as cash equivalents and are stated
at cost, which approximates market.

Consolidation

Inventories

The consolidated financial statements include the accounts of
International Paper and its wholly-owned, controlled majority-
owned and financially controlled subsidiaries. Minority
interest principally represents minority shareholders’
proportionate share of the equity in our consolidated
subsidiary, Carter Holt Harvey Limited (CHH). All significant
intercompany balances and transactions are eliminated.

Investments in affiliated companies are accounted for by the
equity method, including companies owned 20% to 50%.
International Paper’s share of affiliates’ earnings totalled $18
million, $10 million and ($10) million in 2004, 2003 and
2002, respectively.

Revenue Recognition

Revenue is recognized when the customer takes title and
assumes the risks and rewards of ownership. Revenue is
recorded at the time of shipment for terms designated f.o.b.
(free on board) shipping point. For sales transactions
designated f.o.b. destination, revenue is recorded when the
product is delivered to the customer’s delivery site, when title
and risk of loss are transferred. Timber and timberland sales
revenue is generally recognized when title and risk of loss
pass to the buyer.

Shipping and Handling Costs

Shipping and handling costs, such as freight to our
customers’ destinations, are included in distribution expenses

Inventory is valued at the lower of cost or market and
includes all costs directly associated with manufacturing
products: materials, labor and manufacturing overhead. In
the United States, costs of raw materials, finished lumber and
panels and finished pulp and paper products are generally
determined using the last-in, first-out method. Other
inventories are valued using the first-in, first-out or average
cost methods.

Plants, Properties and Equipment

Plants, properties and equipment are stated at cost, less
accumulated depreciation. Expenditures for betterments are
capitalized whereas normal repairs and maintenance are
expensed as incurred. The units-of-production method of
depreciation is used for major pulp and paper mills and
certain wood products facilities and the straight-line method
for other plants and equipment. Annual straight-line
depreciation rates are, for buildings, 2 1/2% to 8 1/2%, and,
for machinery and equipment, 5% to 33%.

Forestlands

At December 31, 2004, International Paper and its
subsidiaries owned or controlled about 6.8 million acres of
forestlands in the United States, 1.2 million acres in Brazil,
785,000 acres in New Zealand, and had, through licenses and
forest management agreements, harvesting rights on
government-owned forestlands in Russia. Forestlands include
owned property as well as certain timber harvesting rights

with terms of one or more years, and are stated at cost, less
cost of timber harvested (COTH). Costs attributable to timber
are charged against income as trees are cut. The rate charged
is determined annually based on the relationship of incurred
costs to estimated current merchantable volume.

Effective January 1, 2002, International Paper prospectively
changed its method of accounting for mid-rotation
fertilization expenditures to include such expenditures in the
capitalized cost of forestlands. Accordingly, these costs are
included as part of the COTH as trees are sold.

Goodwill

Effective January 1, 2002, International Paper adopted
Statement of Financial Accounting Standards (SFAS) No. 142. As
required by SFAS No. 142, an initial assessment of recorded
goodwill for possible impairment was conducted as of January
1, 2002. Annual testing for possible goodwill impairment is
performed as of the end of the third quarter of each year. A
transitional impairment charge of $1.2 billion, including all of
the goodwill associated with CHH, was recorded upon the initial
adoption of this standard in 2002. In addition, CHH recorded
$35 million of goodwill upon its acquisition of Plantation
Timber Products which was written off by International Paper
following an impairment evaluation in 2004 (see Note 5). No
impairment charges were recorded in 2003.

Goodwill relating to a single business reporting unit is
included as an asset of the applicable segment while goodwill
arising from major acquisitions that involve multiple business
segments is classified as a corporate asset for segment
reporting purposes. For goodwill impairment testing, this
goodwill is allocated to business segments.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment upon the
occurrence of events or changes in circumstances that indicate
that the carrying value of the assets may not be recoverable, as
measured by comparing their net book value to their projected
undiscounted future cash flows generated by their use.
Impaired assets are recorded at their estimated fair value.

Income Taxes

International Paper uses the asset and liability method of
accounting for income taxes whereby deferred income taxes are
recorded for the future tax consequences attributable to
differences between the financial statement and tax bases of assets
and liabilities. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Deferred tax assets and liabilities are revalued to reflect
new tax rates in the periods rate changes are enacted.

International Paper records its worldwide tax provision based
on the respective tax rules and regulations for the
jurisdictions in which it operates. Where the Company
believes that the deduction of an item is supportable for
income tax purposes, the item is deducted in its income tax
returns. However, where treatment of an item is uncertain, tax
accruals are recorded based upon the expected most
probable outcome taking into consideration the specific tax
regulations and facts of each matter, the results of historical
negotiated settlements, and the results of consultations with
outside tax advisors. These accruals for tax contingencies are
recorded in the accompanying consolidated balance sheet in
Other liabilities. Changes to the reserves are only made when
an identifiable event occurs that changes the probable
outcome, such as a settlement with relevant tax authority, the
expiration of statutes of limitation for the subject tax year,
change in tax laws, or a relevant court decision that
addresses the matter.

While the Company believes that these judgments and
estimates are appropriate and reasonable under current
circumstances, actual resolution of these matters may differ
from recorded estimated amounts.

Stock-Based Compensation

Stock options and other stock-based compensation awards are
accounted for using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees,” and related interpretations.

Had compensation cost for International Paper’s stock-based
compensation programs been determined consistent with the
provisions of SFAS No. 123, its net earnings, earnings per
common share and earnings per common share - assuming
dilution would have been reduced to the pro forma amounts
indicated in the following table:

In millions, except per share amounts 2004
Net Earnings (Loss)

2003

2002

As reported
Pro forma

Earnings (Loss) Per
Common Share
As reported
Pro forma

Earnings (Loss) Per
Common Share -
assuming dilution
As reported
Pro forma

$ (35)
(73)

$ 302
258

$ (880)
(921)

$(0.07)
(0.15)

$0.63
0.54

$(1.83)
(1.92)

$(0.07)
(0.15)

$0.63
0.54

$(1.82)
(1.91)

The effect on 2004, 2003 and 2002 pro forma net earnings,
earnings per common share and earnings per common share

- assuming dilution of expensing the estimated fair market
value of stock options is not necessarily representative of the
effect on reported earnings for future years due to the vesting
period of stock options and the potential for issuance of
additional stock-based compensation.

Environmental Remediation Costs

Costs associated with environmental remediation obligations
are accrued when such costs are probable and reasonably
estimable. Such accruals are adjusted as further information
develops or circumstances change. Costs of future
expenditures for environmental remediation obligations are
discounted to their present value when the amount and
timing of expected cash payments are reliably determinable.

Asset Retirement Obligations

In accordance with the provisions of SFAS No. 143,
“Accounting for Asset Retirement Obligations,” adopted
effective January 1, 2003 (see Note 4), a liability and an asset
are recorded equal to the present value of the estimated costs
associated with the retirement of long-lived assets where a legal
or contractual obligation exists. The liability is accreted over
time and the asset is depreciated over the life of the related
equipment or facility. International Paper’s asset retirement
obligations under this standard relate to closure costs for
landfills. Revisions to the liability could occur due to changes
in the estimated costs or timing of closures, or possible new
federal or state regulations affecting these closures.

Translation of Financial Statements

before the cumulative effect of accounting changes, assuming
dilution, are computed assuming that all potentially dilutive
securities, including “in-the-money” stock options, are
converted into common shares at the beginning of each year.
In addition, beginning in the fourth quarter of 2004, the
computation of diluted earnings per share reflects the
inclusion of contingently convertible securities in periods
when dilutive (see “Information About Capital Structure –
Contingently Convertible Securities” in Note 4). Furthermore,
as required by the recent consensus of the Emerging Issues
Task Force of the Financial Accounting Standards Board
(FASB), the computations of diluted earnings per share for all
prior periods have been restated on this basis.

A reconciliation of the amounts included in the computation
of earnings per common share from continuing operations
before the cumulative effect of accounting changes, and
earnings per common share from continuing operations
before the cumulative effect of accounting changes, assuming
dilution, is as follows:

In millions, except per share amounts 2004
Earnings from continuing
operations before the
cumulative effect of
accounting changes
Effect of dilutive securities
Earnings from continuing
operations before the
cumulative effect of
accounting changes -
assuming dilution

$ 478
-

$ 478

2003

2002

$ 294
-

$ 260
-

$ 294

$ 260

Balance sheets of international operations are translated into
U.S. dollars at year-end exchange rates, while statements of
operations are translated at average rates. Adjustments
resulting from financial statement translations are included as
cumulative translation adjustments in Accumulated other
comprehensive income (loss) (OCI). See Note 13 related to
derivatives and hedging activities.

Average common shares

outstanding

485.8

479.6

481.4

Effect of dilutive securities

Stock options

Average common shares

outstanding -
assuming dilution

2.6

1.5

1.6

488.4

481.1

483.0

Reclassifications

Certain reclassifications have been made to prior-year
amounts to conform to the current year presentation.

NOTE 2 EARNINGS PER COMMON SHARE

Earnings per common share from continuing operations
before the cumulative effect of accounting changes are
computed by dividing earnings from continuing operations
before the cumulative effect of accounting changes by the
weighted average number of common shares outstanding.
Earnings per common share from continuing operations

Earnings per common share
from continuing operations
before the cumulative
effect of accounting changes $ 0.98

$ 0.62

$ 0.54

Earnings per common share
from continuing operations
before the cumulative
effect of accounting changes
- assuming dilution

$ 0.98

$ 0.61

$ 0.54

Note: If an amount does not appear in the above table, the security
was antidilutive for the period presented. Antidilutive securities
included preferred securities of a subsidiary trust for 2002.

NOTE 3 INDUSTRY SEGMENT INFORMATION

Accounting for Income Taxes:

In December 2004, the FASB issued FASB Staff Position (FSP)
Financial Accounting Standard (FAS) 109-1, “Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by
the American Jobs Creation Act of 2004 (the Act)” that provides
tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers’ deduction provided for under the Act should be
accounted for as a special deduction in accordance with
Statement 109 rather than as a tax rate reduction.

Also in December 2004, the FASB issued FSP FAS 109-2,
“Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004,” addressing accounting and disclosure
guidance relating to a company’s repatriation program. The
additional disclosures required under this staff position are
included in Note 9, Income Taxes.

Both FSP’s were effective upon issuance.

Inventory Costs:

In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs, an amendment of ARB No. 43, Chapter 4,” which
requires that abnormal amounts of idle facility expense,
freight, handling costs and wasted material be recognized as
current-period charges. This statement also introduces the
concept of “normal capacity” and requires the allocation of
fixed production overheads to inventory based on the normal
capacity of the production facilities. Unallocated overheads
must be recognized as an expense in the period in which they
are incurred. This statement will be effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. International Paper believes that the adoption of SFAS
No. 151 will not have a material impact on its consolidated
financial statements.

Accounting for Medicare Benefits:

Financial information by industry segment and geographic area
for 2004, 2003 and 2002 is presented on pages 33 and 34.

NOTE 4 RECENT ACCOUNTING DEVELOPMENTS

Share-Based Payment Transactions:

In December 2004, the FASB issued SFAS No. 123 (revised
2004), “Share-Based Payment,” which will require
compensation costs related to share-based payment
transactions to be recognized in the financial statements. The
amount of the compensation cost will be measured based on
the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards will be remeasured each
reporting period. Compensation cost will be recognized over
the period that an employee provides service in exchange for
the award. This statement will apply to all awards granted
after the required effective date and to awards modified,
repurchased, or cancelled after that date. FASB Statement No.
123(R) replaces FASB Statement No. 123, “Accounting for
Stock-Based Compensation,” and supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and will
be effective for International Paper in the third quarter of
2005. Since, beginning in 2005, stock option grants will be
limited only to certain non-U.S. employees, the provisions of
this statement will mainly affect only previously issued options
that are still outstanding and unvested on the effective date, as
well as reload grants. While the exact impact on expense will
depend upon the number of remaining unvested options at
that time, the adoption of this standard could increase pre-tax
compensation expense by approximately $20 million in both
2005 and 2006, with no significant impact on the Company’s
financial statements in subsequent years.

Exchanges of Nonmonetary Assets:

In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 29,” which replaces the exception from fair
value measurement in APB Opinion No. 29, “Accounting for
Nonmonetary Transactions,” for nonmonetary exchanges of
similar productive assets with a general exception from fair
value measurement for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the
exchange. This statement is to be applied prospectively and
will be effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. International
Paper believes that the adoption of SFAS No. 153 will not have
a material impact on its consolidated financial statements.

Information about Capital Structure –
Contingently Convertible Securities:

applied FIN 46(R) to its variable interest entities as of
December 31, 2003.

In April 2004, the FASB issued FSP FAS 129-1, Disclosure
Requirements under FASB Statement No. 129, “Disclosure of
Information about Capital Structure,” relating to contingently
convertible securities and to their potentially dilutive effects
on earnings per share. The FSP required expanded
disclosures of the significant terms of the conversion features
of these securities to enable users of the financial statements
to understand the circumstances of the contingencies and the
potential impact of conversion. These additional disclosures
are presented for International Paper’s contingently
convertible securities in Note 12.

In October 2004, the FASB ratified a consensus reached by
the Emerging Issues Task Force of the FASB that, effective for
periods ending after December 15, 2004, contingently
convertible securities should be included in the computation
of diluted earnings per share regardless of whether or not the
market price trigger for issuance of the securities has been
met. Furthermore, the calculation of diluted earnings per
share for all prior periods presented should be restated to
reflect this consensus. At December 31, 2004, International
Paper had outstanding $2.1 billion principal amount at
maturity of zero-coupon convertible senior debentures. The
debentures are contingently convertible into shares of the
Company’s common stock at a conversion ratio of 9.5111
shares per $1,000 principal amount at maturity of debentures
totaling approximately 20 million shares. See Note 12 for
additional information. Accordingly, the calculation of diluted
earnings per common share shown in Note 2 considers,
when dilutive, the assumed conversion of these debentures
for all periods presented.

Consolidation of Variable Interest Entities:

In January 2003, the FASB issued Interpretation No. 46 (FIN
46), “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.” This interpretation changed
existing consolidation rules for certain entities, those in
which equity investors do not have the characteristics of a
controlling financial interest, or do not have sufficient equity
at risk for the entity to finance the entity’s activities without
additional subordinated financial support.

The interpretation applied immediately to variable interest
entities (VIE’s) created after January 31, 2003, and to VIE’s in
which an enterprise obtains an interest after that date.
International Paper has neither entered into nor obtained an
interest in any VIE’s after January 31, 2003. For VIE’s created
before February 1, 2003, this interpretation was effective for
the first reporting period ending after December 15, 2003.
During December 2003, the FASB issued a revision to FIN 46,
FIN 46(R), with varying effective dates. International Paper

As a result of the application of the provisions of FIN 46(R)
during 2003, four entities that were required to be
consolidated under prior accounting rules were
deconsolidated, and one previously unconsolidated entity was
consolidated, at December 31, 2003. The following
paragraphs describe the entities affected by the new FIN
46(R) consolidation rules and the effects on International
Paper’s December 31, 2003 financial statements:

(a) A special purpose leasing entity that was formerly part of
an operating lease arrangement between International
Paper and a third party was determined to be a VIE and
required to be consolidated by the Company. Plants,
properties and equipment and Long-term debt of
approximately $50 million that were formerly part of this
operating lease arrangement were consolidated and a
non-cash, after-tax charge of $3 million was recorded as
the cumulative effect of an accounting change.

(b) In connection with a forestlands sale in 2001,

International Paper received notes having a value of
approximately $480 million on the date of sale. During
2001, International Paper contributed the notes to an
unconsolidated entity in exchange for a preferred interest
in that entity valued at approximately $480 million, and
accounted for this transfer as a sale of the notes for
financial reporting purposes with no associated gain or
loss. Also during 2001, the entity acquired approximately
$561 million of other International Paper debt
obligations for cash.

In December 2002, International Paper acquired an
option to purchase the third party’s interest in the
unconsolidated entity and modified the terms of the
entity’s special loss allocation between the third party and
International Paper. These actions required the entity to
be consolidated by International Paper at December 31,
2002, resulting in increases in installment notes
receivable (included in Deferred charges and other
assets) of $480 million, Long-term debt of $460 million
and Minority interest of $20 million.

In the fourth quarter of 2003, International Paper
determined that it is not the primary beneficiary of the
entity under the provisions of FIN 46(R) and,
accordingly, deconsolidated the entity effective December
31, 2003. At December 31, 2003, International Paper’s
$530 million preferred interest in the entity has been
offset against $530 million of International Paper debt
obligations since International Paper has, and intends to
effect, a legal right to net settle these two amounts.

approximately $400 million of installment notes received
in connection with the sale of forestlands in various states
were transferred to a consolidated entity in exchange for
a preferred interest in the entity. In the same period, the
entity acquired International Paper debt obligations of
$450 million for cash. Under the provisions of FIN
46(R), International Paper is not the primary beneficiary
of this entity, resulting in its deconsolidation as of
December 31, 2003. The deconsolidation increased
Investments by $465 million, Long-term debt by $100
million, and decreased notes receivable (included in
Deferred charges and other assets) by $415 million and
Minority interest by $50 million.

(d) In the third quarter of 2003, International Paper Capital
Trust and International Paper Capital Trust III (the
Trusts), were determined to be VIE’s for which
International Paper is not the primary beneficiary. Prior to
July 1, 2003, the Trusts had been consolidated in the
Company’s financial statements, and the preferred
securities of the Trusts of approximately $1.3 billion were
presented in the consolidated balance sheet as
International Paper – Obligated Mandatorily Redeemable
Preferred Securities of Subsidiaries Holding International
Paper Debentures. Effective July 1, 2003, the Trusts were
deconsolidated and the previously consolidated
Mandatorily Redeemable Securities were replaced with
International Paper’s obligations to the Trusts of
approximately $1.3 billion that were classified as Long-
term debt. In addition, interest on the International Paper
debt obligations totaling approximately $44 million was
recorded as Interest expense in the last half of 2003,
replacing preferred dividends on the Mandatorily
Redeemable Securities of the Trusts that, prior to the
deconsolidation, would have been recorded as Minority
interest expense. Preferred dividends for periods prior to
the July 1, 2003 deconsolidation continue to be reported
as Minority interest expense. A further discussion of the
Company’s obligations to the Trusts is presented in Note 8.

In December 2003, International Paper exercised its
option to redeem the securities of one of the Trusts
effective January 14, 2004, and, consequently, reclassified
$830 million to Current maturities of long-term debt.

In February 2005, International Paper redeemed the
preferred securities of the remaining Trust which were
classified in Long-term debt at December 31, 2004.

See Notes 8 and 12 for additional information.

The following table summarizes increases (decreases) in
2003 Consolidated Balance Sheet captions resulting from the
application of FIN 46(R) to the entities described above.

In millions
Assets
Plants, Properties
and Equipment,
net
Investments
Deferred Charges
Total Assets

Liabilities
Current Maturities
of Long-Term
Debt
Long-Term Debt
Minority Interest
Mandatorily
Redeemable
Preferred
Securities
Total Liabilities

(a)

(b)

VIE

(c)

(d)

Total

$50 $
-
-

-) $ -) $ -) $ - ) $
-)
(480)

50)
505)
(895)
$50 $(480) $ 50) $ 25) $ 15) $ (340)

465)
(415)

25)
-)

15)
-)

$ - $ -) $ -) $ 830) $ -) $ 830)
155)
50
(70)
-

(460)
(20)

100)
(50)

465)
-)

-)
-)

(805) (450) (1,255)
$50 $(480) $ 50) $ 25) $ 15) $ (340)

The pro forma effects on earnings (loss) before extraordinary
items and cumulative effect of accounting changes, and net
earnings, for the year ended December 31, 2002, assuming
the adoption of FIN 46(R) as of January 1, 2002, were not
material to net earnings or earnings per share.

Financial Instruments with Characteristics of Both
Liabilities and Equity:

In May 2003, the FASB issued SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity.” It established standards for how an
issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. This standard
was effective for financial instruments entered into or modified
after May 31, 2003, and otherwise was effective at the
beginning of the first interim period beginning after June 15,
2003. International Paper adopted this standard during the
third quarter ended September 30, 2003, with no material
effect on the Company’s consolidated financial statements.

Costs Associated with Exit or Disposal Activities:

benefits, be recognized when the liability is incurred, rather
than at the date of a company’s commitment to an exit plan. It
had no effect on charges recorded for exit activities begun
prior to December 31, 2002. International Paper adopted this
standard effective January 1, 2003, with no material effect on
the Company’s consolidated financial statements.

Impairment and Disposal of Long-Lived Assets:

Asset Retirement Obligations:

International Paper adopted SFAS No. 143 effective January 1,
2003, recording a discounted liability of $22 million, an
increase in Property, plant and equipment, net, of $7 million,
and a one-time cumulative effect of accounting change charge
of $10 million (net of a deferred tax benefit of $5 million).
The pro forma effects on earnings (loss) before extraordinary
items and cumulative effect of accounting changes, and net
earnings, for the year ended December 31, 2002, assuming
the adoption of SFAS No. 143 as of January 1, 2002, were not
material to net earnings or earnings per share.

NOTE 5 ACQUISITIONS

On July 2, 2004, Carter Holt Harvey (CHH) completed the
purchase of an 85% interest in Plantation Timber Products
(PTP), a Chinese premium panels manufacturer, for $134
million. PTP is a manufacturer of special medium density
fiberboard and flooring products. In connection with this
acquisition, CHH recorded $35 million of goodwill. However,
in 2002, International Paper wrote off all CHH goodwill
under newly adopted U.S. accounting standards. The goodwill
arising in subsequent CHH acquisitions must be evaluated for
impairment in International Paper’s consolidated financial
statements and, in this case, was written off. This acquisition
was accounted for using the purchase method with operating

results included in the consolidated statement of operations
from the date of acquisition.

On July 1, 2004, International Paper completed the previously
announced acquisition of Box USA Holdings, Inc. (Box USA).
Prior to its acquisition by International Paper, Box USA was
America’s largest independent packaging producer with 23
industrial packaging converting facilities across the country.
The acquisition of Box USA, which is now included in the
Industrial and Consumer Packaging segment, provides
improved access to markets, better integration between
International Paper mills and converting plants and other
operating synergies. International Paper acquired all of the
outstanding common and preferred stock of Box USA for
approximately $189 million in cash and a $15 million 6% note
payable issued to Box USA’s controlling shareholders. In
addition, International Paper assumed approximately $197
million of debt, of which approximately $193 million was
repaid by July 31, 2004. The note payable represents
contingent consideration to be paid within two years from the
July 1, 2004 acquisition date provided that no claims for
indemnification are offset against the note. This acquisition was
accounted for using the purchase method with the operating
results of Box USA included in the accompanying consolidated
statement of operations from the acquisition date.

The following table summarizes the estimated fair values of
assets acquired and liabilities assumed at the date of the Box
USA acquisition, subject to adjustment upon completion of
purchase accounting activities in 2005:

in millions
Current assets
Property, plant and equipment, net
Goodwill
Other assets
Total assets acquired
Current liabilities
Debt
Other liabilities
Total liabilities assumed
Net assets acquired

July 1, 2004)

$ 98
104
238
40
480
72
197
7
276
$204

The following unaudited pro forma information for the years
ended December 31, 2004, 2003 and 2002, presents the
combined results of the continuing operations of
International Paper and Box USA as if the acquisition had
occurred as of January 1, 2002. This pro forma information
does not purport to represent International Paper’s actual
results of operations if the transaction described above would
have occurred on January 1, 2002, nor is it necessarily
indicative of future results.

In millions, except per share amounts,
for the years ended December 31
Net sales
Earnings from continuing

2004)
$25,802)

operations

Net earnings (loss)
Earnings from continuing
operations per common
share

Net earnings (loss) per

common share

483)
(30)

0.99)

(0.06)

2003
$24,448

2002)
$24,385)

299
307

0.62

0.64

273)
(867)

0.57)

(1.80)

In December 2002, CHH acquired Starwood Australia’s Bell Bay
medium density fiberboard plant in Tasmania for $28 million in
cash. This acquisition was accounted for using the purchase
method with operating results included in the consolidated
statement of operations from the date of acquisition.

NOTE 6 RESTRUCTURING, BUSINESS
IMPROVEMENT AND OTHER
CHARGES

This footnote discusses restructuring, business improvement
and other charges recorded for each of the three years
included in the period ended December 31, 2004. It includes
a summary of activity for each year, a roll forward associated
with severance and other cash costs arising in each year, a
table presenting details of the 2004 organizational
restructuring program, and tables showing quarterly charges
by business along with explanations for 2003 and 2002.

2004: During 2004, restructuring and other charges before
taxes and minority interest of $211 million ($124 million
after taxes and minority interest) were recorded. These
charges included a $74 million charge before taxes and
minority interest ($43 million after taxes and minority
interest) for a corporate-wide organizational restructuring
program, a $92 million charge before taxes ($57 million
after taxes) for losses on early extinguishment of debt, a $35
million charge before minority interest ($18 million after
minority interest) for the impairment of goodwill arising in
connection with CHH’s purchase of Plantation Timber
Products (PTP) and a $10 million charge before taxes ($6
million after taxes) for legal settlements. In addition, credits
of $123 million before taxes ($76 million after taxes) for net
insurance recoveries related to the hardboard siding and
roofing litigation (see Note 10) and $35 million before taxes
and minority interest ($22 million after taxes and minority
interest) for the net reversal of restructuring reserves no
longer needed were recorded. Also, a $5 million net increase
in the tax provision, after minority interest, was recorded
reflecting a $32 million charge for an adjustment of deferred

tax balances and a $27 million credit from the reduction of
valuation reserves for capital loss carryovers.

The following table presents a detail of the $74 million
corporate-wide organizational restructuring program charge
in 2004, by business:

In millions
Printing Papers
Industrial and
Consumer Packaging
Forest Products
Distribution
Specialty Businesses

and Other
Administrative

Support Groups

First
Quarter
$ 1

Second
Quarter
$ 1

Third
Quarter
$ 5

5
4
2

2
$14

3
1
2

24
$42

6
-
3

4
$18

Total
$ 7

14
5
7

30
$74

The following table presents a roll forward of the severance
and other costs included in the 2004 restructuring plans:

In millions
Opening Balance (first quarter 2004)
Additions (second quarter 2004)
Additions (third quarter 2004)
2004 Activity

Cash charges
Reclassifications:

Pension and postretirement curtailments and

special termination benefits

Balance, December 31, 2004

Severance)
and Other)
$ 14)
42)
18)

(52)

(22)
$ -)

The severance charges recorded in 2004 related to 984
employees. As of December 31, 2004, 833 employees had
been terminated and 151 employees retained. Actual pension
and postretirement costs exceeded estimates despite the
lower number of employees terminated.

The $236 million charge in 2003 for the asset shutdowns of
excess internal capacity and cost reduction actions consisted
of a $91 million charge in the fourth quarter, a $71 million
charge in the third quarter, a $51 million charge in the
second quarter, and a $23 million charge in the first quarter.
The fourth-quarter charge included $49 million of asset
write-downs and $42 million of severance and other charges.
The third-quarter charge included $9 million of asset write-
downs and $62 million of severance and other charges. The
second-quarter charge consisted of $16 million of asset
write-downs and $35 million of severance and other charges.
The first-quarter charge included $2 million of asset write-
downs and $21 million of severance and other charges.

The following table and discussion present details related to
the 2003 fourth-quarter charge:

In millions
Printing Papers
Industrial and Consumer

Packaging
Forest Products
Distribution
Carter Holt Harvey
Administrative Support

Groups

Asset
Write-downs
$19
(a)

Severance
and Other
$ 2

(b)
(c)
(d)
(e)

(f)

16
10
-
4

-
$49

6
1
3
7

23
$42

Total
$21

22
11
3
11

23
$91

(a) The Printing Papers business recorded a charge of $5 million to
write off certain assets at the Courtland, Alabama and Franklin,
Virginia mills. Management also approved a $14 million charge
to write down the assets of the Maresquel, France mill to its net
realizable value of approximately $5 million. The Printing
Papers business also recorded a charge of $2 million for
severance costs relating to 42 employees associated with a
manufacturing excellence program.

associated with this shutdown included $10 million of asset
write-downs to salvage value and $1 million of other exit costs.

(d) The Distribution business (xpedx) recorded a charge of $3
million to cover lease termination costs related to the
Nationwide San Francisco, California facility that was vacated in
the fourth quarter of 2003.

(e) CHH recorded a charge of $7 million to shut down the

Tokoroa, New Zealand sawmill. Charges associated with this
shutdown included $4 million to write down assets to salvage
value, $2 million for severance costs covering the termination
of 115 employees and other exit costs of $1 million. CHH
also implemented a cost reduction initiative recording a
charge of $4 million for severance covering the termination
of 229 employees.

(f) During the fourth quarter of 2003, International Paper

implemented the second phase of the previously announced
Overhead Reduction Program to improve competitive
performance. Charges associated with this initiative included
$23 million of severance costs covering the termination of 557
employees. The $23 million charge included: Printing Papers -
$6 million; Industrial and Consumer Packaging - $7 million;
Forest Products - $5 million; Specialty Businesses and Other -
$1 million; and Corporate - $4 million.

The following table and discussion present details related to
the 2003 third-quarter charge:

In millions
Administrative Support

Groups

Specialty Businesses

and Other

(a)

(b)

Asset
Write-downs

Severance
and Other

9
$9

$38

24
$62

Total

$38

33
$71

(b) The Consumer Packaging business recorded an additional

(a) During the third quarter of 2003, International Paper

charge of $22 million in conjunction with the closure of the
Rolark manufacturing facility in Toronto, Canada, and a
rationalization plan implemented in the second quarter of 2003.
Closure costs for Rolark consisted of an $8 million charge to
write down assets to their salvage value, $3 million of severance
costs covering the termination of 178 employees and other exit
costs of $1 million. The charge also included an additional
provision for the previously implemented commercial business
rationalization initiative. These charges included $8 million to
write down assets to their salvage value and $2 million of
severance costs covering the termination of 153 employees.

(c) The Forest Products business approved plans in the fourth
quarter of 2003 to shut down the Tuskalusa lumber mill in
Moundville, Alabama. Operations at this mill had been
temporarily ceased in the second quarter of 2003. Charges

implemented the initial phase of an Overhead Reduction
Program to improve competitive performance. Charges
associated with this initiative included $37 million of severance
costs covering the termination of 744 employees and other cash
costs of $1 million. The $38 million charge included: Printing
Papers - $12 million; Industrial and Consumer Packaging - $11
million; Distribution - $2 million; Forest Products - $6 million;
Specialty Businesses - $2 million; and Corporate - $5 million.

(b) Specialty Businesses recorded an additional charge of $33

million in connection with the July 15, 2003 shutdown of the
Natchez, Mississippi mill. The charge included $9 million of
asset write-downs to salvage value, $1 million of severance
costs covering the termination of 20 employees, $20 million of
environmental closure costs and other cash costs of $3 million.

The following table and discussion present details related to
the 2003 second-quarter charge:

The following table and discussion present details related to
the 2003 first-quarter charge:

In millions
Industrial and

Consumer Packaging (a)

Specialty Businesses

and Other

Carter Holt Harvey

(b)
(c)

Asset
Write-downs

Severance
and Other

$ -

2
-
$2

$ 2

18
1
$21

Total

$ 2

20
1
$23

(a) The Industrial Packaging business implemented a plan to

reorganize the Creil and Mortagne locations in France into a
single complex. Charges associated with the reorganization
included $1 million for severance costs covering the
termination of 31 employees and other cash costs of $1 million.

(b) Arizona Chemical recorded a charge of $1 million for severance
costs of 51 employees associated with the Valkeakoski, Finland
plant closure. Chemical Cellulose implemented a plan to shut
down the Natchez, Mississippi dissolving pulp mill by mid-2003.
Charges associated with this shutdown included a $1 million
charge to write down assets to their salvage value and $12
million of severance costs covering the termination of 141
employees in April and other employees to be terminated upon
closure. Additional shutdown charges for severance and closure
costs were recorded in the second and third quarters of 2003.
Additionally, Industrial Papers approved a plan to restructure
converting operations at the Kaukauna, Wisconsin facility,
modify its release products organization and implement
division-wide productivity improvement actions. Charges
associated with these plans included $1 million to write down
assets to their salvage value and $5 million of severance costs
covering the termination of 130 employees.

33 employees associated with a headcount reduction initiative.

In millions
Printing Papers
Industrial and

Asset
Write-downs
$ 3

(a)

Severance
and Other
$ 2

Consumer Packaging (b)
(c)
(d)

Forest Products
Distribution
Specialty Businesses

and Other

(e)

-
13
-

-
$16

6
7
4

16
$35

Total
$ 5

6
20
4

16
$51

(a) The Printing Papers business recorded a charge of $2 million

for severance costs relating to 19 employees associated with an
organizational restructuring initiative. The business also
recorded an additional charge of $3 million to write off
obsolete equipment.

(b) The Consumer Packaging business implemented a

rationalization plan at the Clifton and Englewood, New Jersey
plants as a result of increased competition and slowing growth
rates in key market segments. Management also approved a
plan to exit leased space at the Montvale, New Jersey office in
connection with the realignment of the Beverage Packaging and
Foodservice businesses. Additionally, the Consumer Packaging
business initiated an organizational restructuring program at
several of its Bleached Board facilities. Charges associated with
the programs included $2 million to cover the termination of
79 employees, lease termination costs of $3 million, and other
cash costs of $1 million.

Springhill, Louisiana lumber facility and the Slaughter Industries
Distribution Center in Portland, Oregon, and to temporarily
cease operations at the Tuskalusa lumber mill in Moundville,
Alabama. Charges associated with the shutdowns included $12
million of asset write-downs to salvage value at Springhill and
Slaughter, $5 million of severance costs covering the termination
of 198 employees at all three facilities, and $1 million of other
exit costs. Management also approved the closure of the
Madison, New Hampshire lumber mill. Charges associated with
this plan included $1 million to write down assets to their net
realizable value and other cash costs of $1 million.

(d) The Distribution business (xpedx) recorded a severance charge
of $4 million covering the termination of 176 employees in a
continuing effort to consolidate duplicative facilities and reduce
ongoing operational expenses.

(e) Specialty Businesses recorded a severance charge of $16 million
associated with the termination of 447 employees in connection
with the July 15th shutdown of the Natchez, Mississippi mill.

The following table presents a roll forward of the severance
and other costs included in the 2003 restructuring plans:

In millions
Opening Balance (first quarter 2003)
Additions (second quarter 2003)
Additions (third quarter 2003)
Additions (fourth quarter 2003)
2003 Activity

Cash charges
Reclassifications:

Pension and postretirement curtailments and

special termination benefits

Reversals of reserves no longer required

2004 Activity

Cash charges
Reclassifications:

Pension and postretirement curtailments and

special termination benefits

Environmental

Reversals of reserves no longer required

Balance, December 31, 2004

Severance
and Other
$ 21)
35)
62)
42)

(72)

(4)
(3)

(57)

(9)
(13)
(2)
$ -)

The severance charges recorded in the first, second, third
and fourth quarters of 2003 related to 3,343 employees. As of
December 31, 2004, 3,305 employees had been terminated
and 38 employees retained.

2002: During 2002, restructuring and other charges before
taxes and minority interest of $695 million ($435 million
after taxes and minority interest) were recorded. These
charges included a $199 million charge before taxes and
minority interest ($130 million after taxes and minority
interest) for asset shutdowns of excess internal capacity and
cost reduction actions, a $450 million pre-tax charge ($278
million after taxes) for additional exterior siding legal
reserves discussed in Note 10, and a charge of $46 million
before taxes and minority interest ($27 million after taxes
and minority interest) for early debt retirement costs
discussed in Note 12. In addition, a $68 million pre-tax credit
($43 million after taxes) was recorded in 2002, including
$45 million for the reversal of 2001 and 2000 reserves no
longer required and $23 million for the reversal of excess
Champion purchase accounting reserves.

The $199 million charge in 2002 for the asset shutdowns of
excess internal capacity and cost reduction actions consisted
of a $101 million charge in the fourth quarter, a $19 million
charge in the third quarter and a $79 million charge in the
second quarter. The fourth-quarter charge included $29
million of asset write-downs and $72 million of severance
and other charges. The third-quarter charge included $9
million of asset write-downs and $10 million of severance

and other charges. The second-quarter charge consisted of
$42 million of asset write-downs and $37 million of
severance and other charges.

The following table and discussion present details related to
the 2002 fourth-quarter charge:

In millions
Printing Papers
Industrial and

Asset
Write-downs
$2

(a)

Severance
and Other
$26

Consumer Packaging (b)
(c)
(d)

Forest Products
Distribution
Specialty Businesses

and Other

Carter Holt Harvey

(e)
(f)

16
10
1

-
-
$29

12
2
5

16
11
$72

Total
$28

28
12
6

16
11
$101

(a) The Printing Papers business approved a restructuring plan at

the Maresquel, France plant in an effort to improve efficiencies.
Charges associated with the plan included $1 million of asset
write-downs to salvage value, $7 million of severance costs
covering the termination of 80 employees and other cash costs
of $1 million. Management also implemented a reduction in
force initiative at several of its Coated and SC mills resulting in
severance charges of $18 million covering the termination of
245 employees. Also, an additional charge of $1 million was
recorded to write down the remaining assets at the Erie,
Pennsylvania mill to salvage value.

(b) The Industrial Packaging business recorded a charge of $3

million for severance costs relating to the Las Palmas, Canary
Islands facility in the second phase of an effort to consolidate
duplicative facilities and eliminate excess internal capacity.
Redundancies associated with this charge included 56 employees.

The Consumer Packaging business approved a plan to shut
down the Hopkinsville, Kentucky Foodservice plant due to the
facility’s financial shortfalls, a continuing weak economy,
reduced demand from its Quick Service Restaurant (QSR)
customers and increased competition for remaining QSR
volumes. Charges associated with this shutdown included $10
million to write down assets to their estimated realizable value
of $4 million, $3 million of severance costs covering the
termination of 327 employees, and other exit costs of $1
million. The Hopkinsville plant had revenues of $47 million,
$31 million and $24 million in 2002, 2001 and 2000,
respectively. This plant had operating losses of $8 million in
2002, $1 million in 2001 and zero in 2000. Management also
implemented a business-reorganization plan for the Foodservice
group that included $2 million to write down assets to salvage
value, $3 million of severance costs covering the termination of
113 employees and other cash costs of $1 million. The
Consumer Packaging charge also included $4 million of asset

write-offs and $1 million of other cash charges associated with
its international joint ventures.

The following table and discussion present details related to
the 2002 third-quarter charge:

(c) The Forest Products business charge of $12 million resulted
from management’s decision to exit the development of the
wood plastic composite business and shut down the Whelen
Springs, Arkansas lumber mill. Charges associated with the
wood plastic composite business consisted of $10 million of
asset write-downs to salvage value and $1 million of other exit
costs. The Whelen Springs lumber mill was closed due to the
impact of the strong dollar on export sales. The Whelen Springs
shut-down charge consisted of $1 million of exit costs.

(d) The Distribution business (xpedx) implemented a plan to

consolidate duplicative facilities and reduce ongoing operating
logistics and selling and administrative expenses. Charges
associated with this plan included $1 million of asset write-downs
to salvage value, $2 million of severance costs covering the
termination of 68 employees, and other cash costs of $3 million.

(e) The Specialty Businesses approved a plan to shut down the

Valkeakoski, Finland chemicals plant, as well as a management
plan to implement headcount reduction programs within the
Chemicals group. Charges associated with the Valkeakoski
shutdown included $8 million of other cash costs not including
severance. The Valkeakoski plant had revenues of $20 million,
$19 million and $19 million in 2002, 2001 and 2000,
respectively. This plant had operating earnings of $1 million in
both 2002 and 2001, and $2 million in 2000. Charges
associated with the headcount reduction programs consisted of
$3 million of severance covering 11 employees to be terminated
and $1 million of other related costs. The Specialty Businesses
also implemented a plan to restructure manufacturing
operations at the Polyrey facility in France. The plan includes
consolidation of decorative high-pressure laminate production
in order to optimize efficiencies and provide higher levels of
quality and service. Charges associated with the restructuring
included $2 million of severance costs covering the termination
of 46 employees and $1 million of other exit costs. Other
charges included a $1 million reserve for facility environmental
costs at the Natchez, Mississippi facility.

(f) CHH recorded a charge of $11 million for severance costs

associated with a reduction-in-force at its Kinleith, New Zealand
facility as part of a continuing program to improve the cost
structure at the mill. Redundancies associated with the charge
included 260 employees.

In millions
Specialty Businesses

and Other

Carter Holt Harvey
Other

(a)
(b)
(c)

Asset
Write-downs

Severance
and Other

$-
5
4
$9

$ 3
7
-
$10

Total

$ 3
12
4
$19

(a) The Specialty Businesses charge of $3 million relates to the
severance costs for 43 employees in Arizona Chemical’s U.S.
operations to reduce costs.

(b) The CHH severance and other charge of $7 million relates

primarily to severance for job reductions at the Kinleith, New
Zealand mill (102 employees) and at packaging operations in
Australia (45 employees). The Kinleith reductions are part of a
continuing program to improve the cost structure at the mill.
In addition, CHH recorded a $5 million loss related to a write-
down of non-refundable tax credits to their estimated
realizable value.

(c) This $4 million charge relates to the write-down to zero of
International Paper’s investment in Forest Express, a joint
venture engaged in electronic commerce transaction processing
for the Forest Products Industry.

The following table and discussion present details related to
the 2002 second-quarter charge:

In millions
Printing Papers
Industrial and

Asset
Write-downs
$39

(a)

Severance
and Other
$18

Consumer Packaging (b)
(c)

Distribution
Administrative Support

Groups

(d)

3
-

-
$42

-
7

12
$37

Total
$57

3
7

12
$79

(a) The Printing Papers business approved a plan to permanently
shut down the Hudson River, New York mill by December 31,
2002, as many of the specialty products produced at the mill
were not competitive in current markets. The assets of the mill
are currently being marketed for sale. Impairment charges
associated with the shutdown included $39 million to write the
assets down to their estimated realizable value of approximately
$5 million, $9 million of severance costs covering the
termination of 294 employees, and other cash costs of $7
million. The Hudson River mill had revenues of $61 million,
$80 million and $139 million in 2002, 2001 and 2000,
respectively, and operating losses of $15 million in 2002 and
$22 million in 2001, and operating earnings of $9 million in
2000. The Printing Papers business also recorded an additional

charge of $2 million related to the termination of 52 employees
in conjunction with the business’s plan to streamline and
realign administrative functions at several of its locations.

NOTE 7 BUSINESSES HELD FOR SALE AND

DIVESTITURES

(b) The Consumer Packaging business approved the first phase of a
plan to consolidate duplicative facilities and eliminate excess
internal capacity. The $3 million charge recorded relates to the
write-down of assets to their estimated salvage value.

million reflects the termination of 145 employees in conjunction
with the business’s plan to consolidate duplicative facilities and
eliminate excess internal capacity.

(d) During the second quarter of 2002, International Paper

implemented the second phase of its cost reduction program to
realign its administrative functions across all business and staff
support groups. As a result, a $12 million severance charge was
recorded covering the termination of 102 employees.

The following table presents a roll forward of the severance
and other costs included in the 2002 restructuring plans:

In millions
Opening Balance (second quarter 2002)
Additions (third quarter 2002)
Additions (fourth quarter 2002)
2002 Activity

Cash charges

2003 Activity

Cash charges
Reclassifications:

Deferred payments to severed employees
Environmental remediation and other exit costs

Reversals of reserves no longer required

Balance, December 31, 2003

Severance
and Other
$ 37)
10)
72)

(15)

(77)

(2)
(15)
(10)
-)

The severance charges recorded in the second, third and
fourth quarters of 2002 related to 1,989 employees. As of
December 31, 2003, 1,849 employees had been terminated
and 140 employees retained.

Discontinued Operations:

In the third quarter of 2004, International Paper entered into
an agreement to sell its Weldwood of Canada Limited
(Weldwood) business to West Fraser Timber Co., Ltd. of
Vancouver, Canada (West Fraser), for approximately C$1.26
billion in cash, subject to certain adjustments at closing.
Accordingly, a $323 million pre-tax loss on impairment ($711
million after taxes), including a $101 million pre-tax credit
from cumulative translation adjustments, was recorded in
Discontinued operations to write down the assets of Weldwood
to their estimated net realizable value upon sale. The Company
completed the sale of Weldwood in the fourth quarter for
C$1.23 billion. International Paper’s net cash proceeds received
from the sale were approximately U.S. $1.1 billion. All periods
presented have been restated to present the operating results
of Weldwood as a discontinued operation.

Revenues associated with this discontinued operation were
$1,021 million, $791 million and $708 million for 2004,
2003 and 2002, respectively.

Earnings and earnings per share related to Weldwood were
as follows:

In millions,
except per share amounts
Earnings (loss) from

discontinued operation
Earnings from operations
Income tax expense

Earnings from operations, net

of taxes
Asset impairment
Income tax expense (a)

Asset impairment, net of taxes

Earnings (loss) from

discontinued operation, net
of taxes

Earnings (loss) per common
share from discontinued
operation
Earnings from operations, net

of taxes

Asset impairment, net of taxes

Earnings (loss) per common
share from discontinued
operation, net of taxes

2004)

2003)

2002)

$ 153)
(50)

$ 15)
(6)

$ 35)
(12)

103)
(323)
(388)

(711)

9)
-)
-)

23)
-)
-)

$ (608)

$ 9)

$ 23)

$ 0.22)
(1.47)

$0.01)
-)

$0.05)
-)

$(1.25)

$0.01)

$0.05)

(a) Reflects the low historic tax basis in Weldwood that was

carried over in connection with the acquisition of Champion in
June 2000.

Assets and liabilities of Weldwood, included in International
Paper’s consolidated balance sheet at December 31, 2003 as
Assets and Liabilities of businesses held for sale, were as follows:

In millions
Accounts receivable, net
Inventories
Plants, properties and equipment, net
Forestlands
Investments
Goodwill
Other assets
Assets of business held for sale

Accounts payable
Accrued payroll and benefits
Other accrued liabilities
Deferred income taxes
Other liabilities
Minority interest
Liabilities of business held for sale

2003
$ 86
129
738
90
86
548
3
$1,680

$82
16
4
212
78
5
$ 397

In the second quarter of 2004, CHH completed the sale of its
Tissue business to Svenska Cellulosa Aktiebolaget (SCA). As a
result of this sale, International Paper recognized a gain of
$268 million before taxes and minority interest ($90 million
after taxes and minority interest). This gain on sale is
included along with the net income of the Carter Holt Harvey
Tissue business prior to the sale in Discontinued operations
in the accompanying consolidated statement of operations.
Additionally, all periods presented have also been restated to
present the operating results of the Tissue business as a
discontinued operation.

Revenues associated with this discontinued operation were
$153 million in 2004, $433 million in 2003 and $369 million
in 2002, respectively.

Earnings and earnings per share related to the Tissue
business were as follows:

In millions,
except per share amounts
Earnings from discontinued

operation
Earnings from operations
Income tax expense
Minority interest, net of taxes

2004)

2003)

2002)

$ 13)
(3)
(5)

$ 39)
(15)
(12)

$ 30)
(6)
(12)

Earnings from operations, net of
taxes and minority interest

12)

Gain on sale
Income tax expense
Minority interest, net of taxes
Gain on sale, net of taxes and

minority interest

268)
(69)
(109)

90)

-)
-)
-)

Earnings from discontinued
operation, net of taxes and
minority interest

Earnings per common share

from discontinued operation
Earnings from operations, net of
taxes and minority interest
Gain on sale, net of taxes and

$ 95)

$ 12)

$ 0.01)

$0.03)

$0.02)

minority interest

0.19)

Earnings per common share from
discontinued operation, net of
taxes and minority interest

$ 0.20)

$0.03)

$0.02)

The assets and liabilities of the Tissue business, included in
International Paper’s consolidated balance sheet at December
31, 2003 as a component of Assets and Liabilities of
businesses held for sale, were as follows:

In millions
Accounts receivable, net
Inventories
Plants, properties and equipment, net
Other assets
Assets of business held for sale

Accounts payable
Accrued payroll and benefits
Other accrued liabilities
Other liabilities
Minority interest
Liabilities of business held for sale

2003
$ 41
87
277
19
$424

$ 34
15
8
18
173
$248

Other Divestitures:

In December 2004, International Paper committed to plans
for the sale in 2005 of its Fine Papers business and its
Maresquel mill and Papeteries de France distribution
business in France. As a result, charges of $11 million before
taxes ($8 million after taxes), $34 million before and after
taxes, and $11 million before taxes ($12 million after taxes),
respectively, were recorded to write down the assets of these
entities to their estimated fair values less costs to sell. In
October 2004, International Paper sold two box plants
located in China to International Paper Pacific Millennium,
resulting in a pre-tax loss of $14 million ($4 million after
taxes). Finally, also in the fourth quarter, a $9 million loss
before taxes ($6 million after taxes) was recorded to adjust
estimated gains/losses of businesses previously sold.

In July 2004, International Paper signed an agreement to
sell Scaldia Papier B.V., and its subsidiary, Recom B.V. in
the Netherlands, to Stora Enso for approximately $36
million in cash. This sale was completed in the third
quarter and resulted in a loss of $34 million (no impact
from taxes or minority interest). In addition, a $4 million
loss (no impact from taxes or minority interest) was
recorded to adjust the estimated loss on sale of Papeteries
de Souche L.C. in France.

In the second quarter of 2004, a $27 million loss before and
after taxes was recorded to write down the assets of
Papeteries de Souche L.C. in France to their estimated
realizable value. In addition, a $9 million loss before taxes
and minority interest ($5 million after taxes and minority
interest) was recorded to write down the assets of Food Pack
S.A. in Chile to their estimated realizable value.

In the first quarter of 2004, a $9 million gain before taxes
($6 million after taxes) was recorded to adjust estimated
gains/losses of businesses previously sold.

The net 2004 pre-tax losses totaling $144 million discussed
above are included in Net losses (gains) on sales and
impairments of businesses held for sale in the accompanying
consolidated statement of operations.

In the fourth quarter of 2003, International Paper recorded a
$34 million charge to write down the assets of its Polyrey
business in France to their estimated fair value. In addition, a
$13 million pre-tax gain ($8 million after taxes) was
recorded to adjust estimated gains/losses of businesses
previously sold.

In the third quarter of 2003, a $1 million charge before and
after taxes was recorded to adjust estimated gains/losses of
businesses previously sold.

In the second quarter of 2003, a $10 million pre-tax charge
($6 million after taxes) was recorded to adjust estimated
gains/losses of businesses previously sold.

The net 2003 pre-tax losses, totaling $32 million, discussed
above are included in Net losses (gains) on sales and
impairments of businesses held for sale in the accompanying
consolidated statement of operations.

In the fourth quarter of 2002, International Paper recorded a
$10 million pre-tax credit ($4 million after taxes) to adjust
estimated accrued costs of businesses previously sold.

In the third quarter of 2002, International Paper completed
the sale of its Decorative Products operations to an affiliate of
Kohlberg & Co. for approximately $100 million in cash and a
note receivable with a fair market value of $13 million. This
transaction resulted in no gain or loss as these assets had
previously been written down to fair market value. Also
during the third quarter of 2002, a net gain of $3 million
before taxes ($1 million after taxes) was recorded related to
adjustments of previously estimated accrued costs of
businesses held for sale.

(1) a $2 million net loss associated with the sales of the
Wilmington, North Carolina carton plant and CHH’s
distribution business;

(2) an additional loss of $12 million to write down the
net assets of Decorative Products to fair market
value;

(3) $11 million of additional expenses relating to the
decision to continue to operate Arizona Chemical,
including a $3 million adjustment of estimated
accrued costs incurred in connection with the prior
sale effort and an $8 million charge to permanently
close a production facility; and

(4) a $10 million charge for additional expenses relating

to prior divestitures.

The net tax credit associated with these charges reflects the
reversal of an Arizona Chemical impairment tax charge in a
prior period. The net 2002 pre-tax gains, totaling $41
million, discussed above are included in Net losses (gains)
on sales and impairments of businesses held for sale in the
accompanying consolidated statement of operations.

previously classified as a separate line item on the Company’s
consolidated balance sheet, and recorded approximately $1.3
billion of borrowings from these trusts as Long-term debt.

In June 1998, IP Finance (Barbados) Limited, a non-U.S.
wholly-owned consolidated subsidiary of International Paper,
issued $550 million of preferred securities with a dividend
payment based on LIBOR. These preferred securities were
redeemed in June 2003 with the proceeds of debt issuances
(see Note 12).

Timberlands Capital Corp. II, Inc., a wholly-owned
consolidated subsidiary of International Paper, issued $170
million of 4.5% preferred securities in March 2003. These
securities were not mandatorily redeemable and were classified
in the consolidated balance sheet as a Minority interest. In
November 2004, these securities became mandatorily
redeemable and were reclassified from Minority interest to
Current maturities of long-term debt pursuant to SFAS No. 150
and redeemed in December 2004 (see Note 12).

Distributions paid under all of the preferred securities noted
above were $52 million, $111 million and $115 million in
2004, 2003 and 2002, respectively. The expense related to
these preferred securities is shown in Minority interest
expense in the consolidated statement of operations, except
for $32 million in 2004 and $44 million in 2003 included in
Interest expense subsequent to the adoption of FIN 46 and
reclassifications mandated under SFAS No. 150.

NOTE 9 INCOME TAXES

The components of International Paper’s earnings (loss)
from continuing operations before income taxes and minority
interest by taxing jurisdiction were:

In millions
Earnings (loss)

U.S.
Non-U.S.

Earnings from continuing

operations before income
taxes and minority interest

2004)

2003)

2002)

$271)
475)

$(249)
541)

$(73)
379)

$746)

$292)

$306)

NOTE 8 PREFERRED SECURITIES OF

SUBSIDIARIES

In March 2003, Southeast Timber, Inc. (Southeast Timber), a
consolidated subsidiary of International Paper, issued $150
million of preferred securities to a private investor with future
dividend payments based on LIBOR. Southeast Timber, which
through a subsidiary initially held approximately 1.5 million
acres of forestlands in the southern United States, is
International Paper’s primary vehicle for future sales of
Southern forestlands. The preferred securities may be put
back to International Paper by the private investor upon the
occurrence of certain events, and have a liquidation
preference that approximates their face amount. The $150
million preferred third-party interest is included in Minority
interest in the accompanying consolidated balance sheet.

The agreement with the private investor also places certain
limitations on International Paper’s ability to sell forestlands
in the Southern United States outside of Southeast Timber. In
addition, because Southeast Timber is a separate legal entity,
the assets of Southeast Timber and its subsidiaries, consisting
principally of forestlands having a book value of
approximately $280 million at December 31, 2004, will not
be available to satisfy future liabilities and obligations of
International Paper, although the value of International
Paper’s interests in Southeast Timber and its subsidiaries will
be available for these purposes.

In September 1998, International Paper Capital Trust III
issued $805 million of International Paper-obligated
mandatorily redeemable preferred securities. Prior to July 1,
2003, International Paper Capital Trust III was a wholly-
owned consolidated subsidiary of International Paper (see
Note 4). Its sole assets were International Paper 7.875%
debentures. The obligations of International Paper Capital
Trust III related to its preferred securities were unconditionally
guaranteed by International Paper. In January 2004,
International Paper redeemed these securities at par plus
accrued interest.

In the third quarter of 1995, International Paper Capital Trust
(the Trust) issued $450 million of International Paper-
obligated mandatorily redeemable preferred securities. Prior
to July 1, 2003, the Trust was a wholly-owned consolidated
subsidiary of International Paper (see Note 4) and its sole
assets were International Paper 5.25% convertible
subordinated debentures. In February 2005, International
Paper redeemed these securities at 100.5% of par plus
accrued interest.

Effective July 1, 2003, as required by FIN 46, International
Paper deconsolidated International Paper Capital Trust III
and International Paper Capital Trust, holding approximately
$1.3 billion of mandatorily redeemable preferred securities,

The provision (benefit) for income taxes by taxing
jurisdiction was:

2004)

2003)

2002)

In millions
Current tax provision

U.S. federal
U.S. state and local
Non-U.S.

$ 161)
24)
135)
$ 320)

Deferred tax provision (benefit)

U.S. federal
U.S. state and local
Non-U.S.

$ (26)
5)
(93)
$(114)
Income tax provision (benefit) $ 206)

$ 173)
11)
100)
$ 284)

$(271)
(72)
(54)
$(397)
$(113)

$ 175)
54)
88)
$ 317)

$(231)
(146)
(12)
$(389)
$ (72)

International Paper made income tax payments, net of
refunds, of $254 million, $253 million and $270 million in
2004, 2003 and 2002, respectively.

A reconciliation of income tax expense (benefit) using the
statutory U.S. income tax rate compared with actual income
tax expense (benefit) follows:

In millions
Earnings from continuing

operations before income
taxes and minority interest
Statutory U.S. income tax rate
Tax expense using statutory

U.S. income tax rate

State and local income taxes
Tax rate and permanent differences

2004)

2003)

2002)

$746)
35%)

261)
19)

$ 292)
35%

$306)
35%

102)
(41)

107)
(60)

on non-U.S. earnings

(67)

(131)

(47)

Permanent differences on sales of

non-strategic assets

Non-deductible business expenses
Retirement plan dividends
Tax benefit on export sales
Minority interest
Net U.S. tax on non-U.S. dividends
Tax credits
Other, net
Income tax expense (benefit)
Effective income tax rate

-)
12)
(7)
(7)
(35)
52)
(37)
15)
$206)
28%

11)
14)
(7)
(12)
(37)
17)
(56)
27)
$(113)
-39%

(70)
13)
-)
(4)
(40)
26)
-)
3)
$(72)
-24%

The tax effects of significant temporary differences
representing deferred tax assets and liabilities at December
31, 2004 and 2003 were as follows:

In millions
Deferred tax assets:

2004)

2003)

Postretirement benefit accruals
Prepaid pension costs
Alternative minimum and other tax credits
Net operating loss carryforwards
Compensation reserves
Legal reserves
Other
Gross deferred tax assets
Less: valuation allowance
Net deferred tax assets

348)
320)
519)
1,540)
186)
98)
467)
3,478)
(137)
$ 3,341)

Deferred tax liabilities:

Plants, properties and equipment
Forestlands
Other
Total deferred tax liabilities

$(2,814)
(1,215)
(263)
$(4,292)

$ 372)
322)
474)
1,767)
196)
147)
449)
3,727)
(179)
$ 3,548)

$(2,867)
(1,153)
(264)
$(4,284)

Net deferred tax liabilities

$ (951)

$ (736)

Deferred tax assets and liabilities are recorded in the
accompanying consolidated balance sheet under the captions
Deferred income tax assets, Deferred charges and other
assets, Other accrued liabilities and Deferred income taxes.
The increase in 2004 in Deferred income taxes principally
reflects the use of U.S. net operating loss carryforwards.

The valuation allowance for deferred tax assets as of January
1, 2004 was $179 million. The net change in the total
valuation allowance for the year ended December 31, 2004
was a decrease of $42 million.

The 2004 second-quarter provision for income taxes
included a $54 million credit before minority interest ($27
million after minority interest) from the reduction of
valuation reserves for capital loss carryovers and a $32
million charge for the adjustment of deferred tax balances.
The reduction of valuation reserves reflected capital gains
generated by the sale of the CHH Tissue business.

During 2003, International Paper recorded decreases totaling
$123 million in the provision for income taxes for significant
items occurring in 2003, including a $13 million reduction in
the fourth quarter ($26 million before minority interest) for a
favorable settlement with Australian tax authorities of net
operating loss carryforwards, a $60 million reduction in the
third quarter reflecting a favorable revision of estimated tax
accruals upon filing the 2002 federal income tax return and
increased research and development credits, and a $50 million

reduction in the second quarter reflecting a favorable tax audit
settlement and benefits from an overseas tax program.

During the fourth quarter of 2002, International Paper
completed a review of its deferred income tax accounts,
including the effects of state tax credits and the taxability of the
Company’s operations in various state taxing jurisdictions. As a
result of this review, the Company recorded a decrease of
approximately $46 million in the income tax provision in the
2002 fourth quarter, reflecting the effect of the estimated state
income tax effective rate applied to these deferred tax items.

International Paper has federal and non-U.S. net operating
loss carryforwards that expire as follows: years 2005 through
2014 - $169 million, years 2015 through 2024 - $2.7 billion,
and indefinite carryforwards - $829 million. International
Paper has tax benefits from net operating loss carryforwards
for state taxing jurisdictions of approximately $326 million
that expire as follows: years 2005 through 2014 - $84
million, and years 2015 through 2024 - $242 million.
International Paper also has federal, non-U.S. and state tax
credit carryforwards that expire as follows: years 2005
through 2014 - $52 million, years 2015 through 2024 - $119
million, and indefinite carryforwards - $405 million.

Deferred taxes are not provided for temporary differences of
approximately $2.7 billion, $2.5 billion and $1.8 billion as of
December 31, 2004, 2003 and 2002, respectively, representing
earnings of non-U.S. subsidiaries that are intended to be
permanently reinvested. Computation of the potential deferred
tax liability associated with these undistributed earnings and
other basis differences are not practicable.

International Paper is currently being audited by various
federal, state and non-U.S. taxing authorities for the tax
periods 1995 through 2003. Some of these audits are
expected to conclude in 2005. The Company believes that it is
adequately accrued for any possible audit adjustments. While
the overall resolution of these examinations cannot be
determined at this time, the Company may realize a tax
benefit, the effects of which could be material to the reported
operating results for any given period, if such positions are
ultimately sustained.

In October 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act provides for a special
one-time deduction of 85% of certain foreign earnings that
are repatriated. International Paper may elect to apply this
provision to qualifying earnings repatriations in 2005. As of
December 31, 2004, International Paper has started an
evaluation of the effects of the repatriation provision, but
does not expect to be able to complete this evaluation until
the second quarter of 2005. While no repatriation decisions
have been made as of December 31, 2004, the range of
possible amounts that the Company is considering for

repatriation is between zero and $1.8 billion. The related
potential range of deferred taxes that would have to be
provided should a repatriation decision be made is between
zero and $300 million.

NOTE 10 COMMITMENTS AND CONTINGENT

LIABILITIES

Certain property, machinery and equipment are leased under
cancelable and non-cancelable agreements. At December 31,
2004, total future minimum rental commitments under non-
cancelable leases were $918 million, due as follows: 2005 -
$211 million; 2006 - $170 million; 2007 - $141 million;
2008 - $115 million; 2009 - $67 million; and thereafter -
$214 million. Rent expense was $259 million, $262 million
and $267 million for 2004, 2003 and 2002, respectively.

Unconditional purchase obligations have been entered into
during the ordinary course of business for the purchase of
certain pulpwood, logs, wood chips, raw materials, energy
and services. At December 31, 2004, total unconditional
purchase obligations were $6,853 million, due as follows:
2005 - $2,723 million; 2006 - $447 million; 2007 - $354
million; 2008 - $337 million; 2009 - $292 million; and
thereafter - $2,700 million.

International Paper entered into an agreement in 2000 to
guarantee, for a fee, an unsecured contractual credit
agreement of an unrelated third party customer. The
guarantee, which expires in 2008, was made in exchange for
a ten-year contract as the exclusive paper supplier to the
customer. Both the loan to the customer and the guarantee
are unsecured. Under the terms of the guarantee, International
Paper could be required to make future payments up to a
maximum of $110 million if the third party were to default
under the credit agreement. There is no liability recorded on
International Paper’s books for the guarantee. It is possible
that payments may be required under this guarantee
arrangement in the future, although it is uncertain how much
or when such payments, if any, might be required.

In connection with sales of businesses, property, equipment,
forestlands, and other assets, International Paper commonly
makes representations and warranties relating to such
businesses or assets, and may enter into indemnification
arrangements with respect to tax and environmental liabilities,
breaches of representations and warranties, and other
matters. Where any liabilities for such matters are probable
and subject to reasonable estimation, accrued liabilities are
recorded at the time of sale as a cost of the transaction.
International Paper believes that possible future unrecorded
liabilities for these matters, if any, would not have a material
adverse effect on its consolidated financial statements.

Exterior Siding and Roofing Litigation

Three nationwide class action lawsuits relating to exterior siding
and roofing products manufactured by Masonite that were filed
against International Paper have been settled in recent years.

The first suit, entitled Judy Naef v. Masonite and International
Paper, was filed in December 1994 (Hardboard Lawsuit).
The plaintiffs alleged that hardboard siding manufactured by
Masonite fails prematurely, allowing moisture intrusion that
in turn causes damage to the structure underneath the siding.
The class consisted of all U.S. property owners having
Masonite hardboard siding installed on and incorporated into
buildings between January 1, 1980 and January 15, 1998.
The Court granted final approval of the settlement on January
15, 1998. The settlement provides for monetary
compensation to class members meeting the settlement
requirements on a claims-made basis, which requires a class
member to individually submit proof of damage to, or caused
by, Masonite product, proof of square footage involved, and
proofs of various other matters in order to qualify for
payment with respect to a claim. It also provides for the
payment of attorneys’ fees equaling 15% of the settlement
amounts paid to class members, with a non-refundable
advance of $47.5 million plus $2.5 million in costs. Those
amounts were paid to class counsel in 1998. For siding that
was installed between January 1, 1980 and December 31,
1989, the deadline for filing claims expired January 18, 2005,
and for siding installed between January 1, 1990 through
January 15, 1998, claims must be made by January 15, 2008.

The second suit, entitled Cosby, et. al. v. Masonite
Corporation, et. al., was filed in 1997 (Omniwood Lawsuit).
The plaintiffs made allegations with regard to Omniwood
siding manufactured by Masonite which were similar to those
alleged in the Hardboard Lawsuit. The class consisted of all
U.S. property owners having Omniwood siding installed on
and incorporated into buildings from January 1, 1992 to
January 6, 1999. The settlement relating to the Omniwood
Lawsuit provides that qualified claims must be made by
January 6, 2009 for Omniwood siding that was installed
between January 1, 1992 and January 6, 1999.

The third suit, entitled Smith, et. al. v. Masonite Corporation,
et. al., was filed in 1995 (Woodruf Lawsuit). The plaintiffs
alleged that Woodruf roofing manufactured by Masonite is
defective and causes damage to the structure underneath the
roofing. The class consisted of all U.S. property owners who
had incorporated and installed Masonite Woodruf roofing
from January 1, 1980 to January 6, 1999. The settlement
relating to the Woodruf Lawsuit provides that for product
installed between January 1, 1980 and December 31, 1989,
claims must be made by January 6, 2006, and for product
installed between January 1, 1990 and January 6, 1999,
claims must be made by January 6, 2009.

The Court granted final approval of the settlements of the
Omniwood and Woodruf Lawsuits on January 6, 1999. The
settlements provide for monetary compensation to class
members meeting the settlement requirements on a claims-
made basis, which requires a class member to individually
submit proof of damage to, or caused by, Masonite product,
proof of square footage involved, and proofs of various other
matters. The settlements also provide for payment of
attorneys’ fees equaling 13% of the settlement amounts paid
to class members with a non-refundable advance of $1.7
million plus $75,000 in costs for each of the two cases. Those
amounts were paid in 1999.

The liability for these matters was retained after the sale of
Masonite to Premdor Inc. in 2001.

Claim Filing and Determination

Once a claim is determined to be valid under the respective
settlement agreement covering the claim, the amount of the
claim is determined by reference to a negotiated
compensation formula established under the settlement
agreements designed to compensate the homeowner for all
damage to the structure. The compensation formula is based
on (1) the average cost per square foot for product
replacement, including material and labor as calculated by
industry standards, in the area in which the structure is
located, adjusted for inflation, or (2) the cost of appropriate
refinishing as determined by industry standards in such area,
adjusted for inflation. Persons receiving compensation
pursuant to this formula also agree to release International
Paper and Masonite from all other property damage claims
relating to the product in question.

In connection with the products involved in the lawsuits
described above, where there is damage, the process of
degradation, once begun, continues until repairs are made.
International Paper estimates that approximately 4 million
structures have installed products that are the subject of the
Hardboard Lawsuit, 300,000 structures have installed products
that are subject to the Omniwood Lawsuit and 86,000
structures have installed products that are the subject of the
Woodruf Lawsuit. Masonite stopped selling the products
involved in the Hardboard Lawsuit in May 2001, the products
involved in the Woodruf Lawsuit in May 1996, and the products
involved in the Omniwood Lawsuit in September 1996.

Persons who are class members under the Hardboard,
Omniwood and Woodruf Lawsuits who do not pursue
remedies under the respective settlement agreement
pertaining to such suits may have recourse to warranties, if
any, in existence at the expiration of the respective terms
established under the settlement agreements for making
claims. The warranty period generally extends for 25 years
following the installation of the product in question and,

although the warranties vary from product to product, they
generally provide for a payment of up to two times the
purchase price.

Reserve Analysis

The following table presents an analysis of the net
reserve activity related to the Hardboard, Omniwood and
Woodruf Lawsuits for the years ended December 31, 2004,
2003 and 2002.

In millions
Balance, December

31, 2001

Additional provision
Payments
Insurance collections
Balance, December

31, 2002

Payments
Insurance collections
Balance, December

31, 2003
Payments
Insurance collections
Balance, December

Hard-)
board)

Omni-)
wood) Woodruf)

$179)
305)
(161)
34)

357)
(129)
33)

261)
(111)
8)

$20)
134)
(16)
-)

138)
(21)
-)

117)
(20)
-)

$9)
11)
(8)
-)

12)
(3)
-)

9)
(5)
-)

Total)

$208)
450)
(185)
34)

507)
(153)
33)

387)
(136)
8)

31, 2004

$158)

$97)

$4)

$259)

Additional Provisions

In the third quarter of 2001, a determination was made that
an additional provision would be required to cover an
expected shortfall in the reserves that had arisen since the
third quarter of 2000 due to actual claims experience
exceeding projections. An additional $225 million was added
to the existing reserve balance at that time. This increase was
based on third party consultants’ statistical studies of future
costs, which analyzed trends in the claims experience through
August 31, 2001. The amount was based on a statistical
outcome that assumed that Hardboard claims growth
continued through mid-2002, then declined by 50% per year.
Omniwood claims growth was assumed to continue through
mid-2002, decline by 50% in 2003 and thereafter increase at
the rate of 10% per year. Woodruf claims were assumed to
decline at a rate of 50% per year. Unit costs per claim were
assumed to hold at the 2001 level. The statistical model used
to develop this outcome also included assumptions on the
geographic patterns of claims rates and assumptions related
to the cost of claims, including forecasts relating to the rate
of inflation. Average claim costs were calculated from
historical claims records, taking into consideration structure
type, location and source of the claim.

During 2002, tracking of the actual versus projected number
of claims filed and average cost per claim indicated that
although total claims costs were approximately equal to
projected amounts, the number of claims filed was higher
than projected, offsetting the effect of lower average claims
payment amounts. Accordingly, updated projections were
developed by two third-party consultants utilizing the most
current claims experience data. Principal assumptions used
in the development of these projections were that the number
of Hardboard claims filed, which account for approximately
85% of all claims costs, would average slightly above current
levels until January 2005, then would decline by about 70%
in 2005 and remain flat to the end of the claims period.
Average claims costs were assumed to continue to decline at
the rate experienced during the last twelve months.

While management believes that the assumptions used in
developing these outcomes represent the most probable
scenario, factors which could cause actual results to vary from
these assumptions include: (1) area specific assumptions as to
growth in claims rates could be incorrect, (2) locations where
previously there had been little or no claims could emerge as
significant geographic locations, and (3) the cost per claim
could vary materially from that projected.

The first consultant provided two statistical outcomes, with
the higher outcome indicating a required provision of
approximately $430 million. The second consultant provided
a range of possible outcomes, with the most probable
outcome indicating a required provision of approximately
$475 million. The estimate ranged from a low (a 95%
probability that future charges would exceed this amount) of
$338 million to a high (5% probability that future charges
would exceed this amount) of $635 million. Using these
projections, management determined that a provision of $450
million should be recorded in the fourth quarter of 2002 as
an estimate of the most probable outcome based on the
consultants’ projections.

During 2004 and 2003, claims filed and average costs per
claim were in line with 2002 projections and no adjustments
of reserve balances were required.

Reserve Balances

At December 31, 2004, net reserves for these matters totaled
$259 million, including $158 million for the Hardboard
Lawsuit, $97 million for the Omniwood Lawsuit and $4
million for the Woodruf Lawsuit.

At December 31, 2004, there were $33 million of costs
associated with claims inspected and not paid ($27 million
for Hardboard, $5 million for Omniwood and $1 million for
Woodruf) and $29 million of costs associated with claims in
process and not yet inspected ($24 million for claims related

to the Hardboard Lawsuit, $4 million for claims related to the
Omniwood Lawsuit and $1 million for claims related to the
Woodruf Lawsuit). In addition, there were approximately $11
million of costs associated with administrative and legal fees
incurred but not paid prior to year-end. The estimated claims
reserve includes $187 million for unasserted claims that are
probable of assertion.

While additional reserve balances may be required for future
payments under the Woodruf Lawsuit, International Paper
believes that the aggregate reserve balance for claims arising
in connection with exterior siding and roofing products,
described above, are adequate, and that additional amounts
will be recovered from its insurance carriers in the future
relating to these claims (described below). International
Paper is unable to estimate at this time the amount of
additional charges, if any, which may be required for these
matters in the future.

Claims Statistics

The average settlement cost per claim for the years ended
December 31, 2004, 2003, and 2002 for the Hardboard,
Omniwood and Woodruf Lawsuits is set forth in the table below:

Average Settlement Cost Per Claim

Omniwood
Hardboard
Single Multi-
Single Multi-
Family
Family
Family
Family
In thousands
$4.2
$3.1 $4.3
December 31, 2004 $2.3
$ 5.4
$ 3.0 $ 3.8
$ 2.2
December 31, 2003
$ 7.7
$ 4.3 $ 4.4
$ 2.4
December 31, 2002

Woodruf
Single Multi-
Family
Family
$4.0
$4.2
$ 1.2
$ 3.9
$ 9.3
$ 4.7

The above information is calculated by dividing the amount of
claims paid by the number of claims paid.

Through December 31, 2004, net settlement payments totaled
$866 million ($713 million for claims relating to the
Hardboard Lawsuit, $105 million for claims relating to the
Omniwood Lawsuit and $48 million for claims relating to the
Woodruf Lawsuit), including $51 million of non-refundable
attorneys’ advances discussed above ($47.5 million for the
Hardboard Lawsuit and $1.7 million for each of the
Omniwood Lawsuit and Woodruf Lawsuit). Also, payments of
$50 million have been made to the attorneys for the plaintiffs
in the Hardboard, Omniwood and Woodruf Lawsuits. In
addition, through December 31, 2004, International Paper
had received $223 million related to the Hardboard Lawsuit
from our insurance carriers.

The following table shows an analysis of claims statistics
related to the Hardboard, Omniwood and Woodruf Lawsuits
for the years ended December 31, 2004, 2003 and 2002. The
table reflects an increase in the number of claims filed in
December 2004 on the eve of the January 2005 deadline for
filing certain claims under the Hardboard Lawsuit settlement
agreement. These increases were anticipated in prior claim
projections and did not adversely affect the evaluation of the
adequacy of reserve balances at December 31, 2004.

Claims Activity

In thousands
No. of
Claims Pending

Hardboard

Omniwood

Woodruf

Total

Single)
Family)

Multi-)
Family)

Single)
Family)

Multi-)
Family)

Single)
Family)

Multi-)
Family)

Single)
Family)

Multi-)
Family)

December 31, 2001
No. of Claims Filed
No. of Claims Paid
No. of Claims Dismissed

December 31, 2002
No. of Claims Filed
No. of Claims Paid
No. of Claims Dismissed

30.0)
48.3)
(36.0)
(13.7)

28.6)
45.0)
(30.9)
(16.3)

26.4)
December 31, 2003
56.0)
No. of Claims Filed
No. of Claims Paid
(28.6)
No. of Claims Dismissed (14.9)

5.4)
10.9)
(9.2)
(3.1)

4.0)
9.2)
(7.1)
(3.3)

2.8)
8.0)
(3.7)
(2.1)

December 31, 2004

38.9)

5.0)

1.4)
3.5)
(2.6)
(0.4)

1.9)
4.9)
(4.1)
(0.9)

1.8)
5.2)
(4.0)
(0.6)

2.4)

1.5)
1.4)
(1.3)
(0.5)

1.1)
1.0)
(0.9)
(0.4)

0.8)
0.6)
(0.4)
(0.1)

0.9)

0.2)
0.1)
-)
-)

0.3)
-)
-)
-)

32.9)
53.2)
(39.9)
(14.6)

31.6)
50.9)
(35.9)
(17.6)

29.0)
61.8)
(33.0)
(15.6)

0.3)

42.2)

5.9)
11.5)
(9.6)
(3.1)

4.7)
9.5)
(7.3)
(3.3)

3.6)
8.0)
(3.8)
(2.1)

5.7)

0.3)
0.5)
(0.4)
-)

0.4)
0.3)
(0.2)
-)

0.5)
-)
(0.1)
-)

0.4)

Total)

38.8)
64.7)
(49.5)
(17.7)

36.3)
60.4)
(43.2)
(20.9)

32.6)
69.8)
(36.8)
(17.7)

47.9)

Insurance Matters

In November 1995, International Paper and Masonite
commenced a lawsuit in the Superior Court of the State of
California against certain of their insurance carriers (the
Indemnification Lawsuit) because of their refusal to
indemnify International Paper and Masonite for, among other
things, the settlement relating to the Hardboard Lawsuit and
the refusal of one insurer, Employer’s Insurance of Wausau
(Wausau), to provide a defense of that lawsuit. During the fall
of 2001, a trial of Masonite’s claim that Wausau breached its
duty to defend (the Breach of Duty Lawsuit) was conducted in
a state court in California. The jury found that Wausau had
breached its duty to defend Masonite and awarded Masonite
$13 million for its expense to defend the Hardboard Lawsuit;
an additional $12 million in attorneys’ fees and interest for
Masonite’s expense to prosecute the Breach of Duty Lawsuit
based on a finding that Wausau had acted in bad faith in
refusing to defend the Hardboard Lawsuit and an additional
$68 million in punitive damages. In a post-trial proceeding,
the court awarded an additional $2 million in attorneys’ fees
which Masonite had incurred in the trial of the Breach of
Duty Lawsuit.

The trial of the Indemnification Lawsuit against 22 insurers
(the Defendants) began in April 2003 to recover $470
million paid to claimants pursuant to the settlement of the
Hardboard Lawsuit through May 2003. In July 2003, the jury
determined that $383 million of International Paper’s
payments to settle these claims are covered by its insurance
policies (the Phase I Verdict). In the current phase of the
case the court will determine how much of the $383 million
can be allocated to the policies of the Defendants. The
Company anticipates that, before a judgment is entered, the
California court will also make a determination about
indemnification for future claims based on the Phase I
Verdict. The court will also determine whether amounts paid
and to be paid to the plaintiff class counsel pursuant to the
settlement of the Hardboard Lawsuit, and administrative
expenses that have been and will be incurred in connection
with that settlement, are covered by insurance.

A judgment has not yet been entered on the verdict in the
Indemnification Lawsuit. It is difficult to predict when the
judgment will be entered. This judgment will be subject to
appeal when entered. Because of the uncertainties inherent in
the litigation, including the outcome of any appeal,
International Paper is unable to estimate the amount that it
ultimately may recover against its insurance carriers.

The Company is presently engaged in court-ordered
mediation with several of the Defendants.

During 2004, International Paper reached settlements with
Wausau, with respect to both the Indemnification and the

Breach of Duty Lawsuits, and with four other insurance
companies under which International Paper received $164
million, including approximately $118 million received in 2004,
and an additional payment of $46 million in January 2005.

In addition, the Company has begun arbitration
proceedings against American Excess Insurance Association
and ACE Insurance Company, Ltd., to recover additional
insurance proceeds.

As of December 31, 2004, International Paper had received
an aggregate of $223 million in settlement payments from
certain of its insurance carriers which had been named as
defendants in the Indemnification Lawsuit or which otherwise
provided International Paper with insurance coverage for
hardboard siding.

Under an alternative risk-transfer agreement, International
Paper contracted with a third party for payment in an amount
up to $100 million for certain costs relating to the
Indemnification Lawsuit if payments by International Paper
with respect thereto exceeded a specified retention that was
indexed to account for inflation over a several year period.
The agreement with the third party was in excess of liability
insurance recoveries obtained by International Paper, which
are the subject of the separate litigation described above.
Accordingly, International Paper believes that the obligation
of the third party with respect to this agreement did not
constitute “other valid and collectible insurance” that would
either limit or otherwise affect the Company’s right to collect
insurance available to it and Masonite under the insurance
policies, which are the subject of the Indemnification Lawsuit.
At December 31, 2001, International Paper had received the
$100 million from the third party.

A dispute between International Paper and the third party,
concerning a number of issues, including the relationship of
the contract funding obligation to insurance proceeds
recovered in the Indemnification Lawsuit, was the subject of
an arbitration commenced in 2002 by the third party in
London, England and scheduled to begin in February 2004.
Before the hearing started, the parties settled the dispute.
Under the settlement, International Paper agreed to pay the
third party a portion of insurance proceeds recovered by
International Paper under its insurance policies, beginning
on January 1, 2004 and thereafter, up to a maximum of $95
million. The precise amount that International Paper will pay
to the third party under the settlement will depend upon, and
will be a specified portion of insurance recoveries received
by International Paper after January 1, 2004. As of December
31, 2004, approximately $32 million had been paid to the
third party under this settlement.

Antitrust Matters

On May 14, 1999 and May 18, 1999, two lawsuits were filed
in federal court in the Eastern District of Pennsylvania against
International Paper, the former Union Camp Corporation
(acquired by International Paper in 1999), and other
manufacturers of linerboard (the Defendants). These suits
allege that the Defendants conspired to fix prices for
corrugated sheets and containers during the period from
October 1, 1993 through November 30, 1995. These lawsuits,
which seek injunctive relief as well as treble damages and
other costs associated with the litigation, were consolidated
and, on September 4, 2001, certified as a class action. On
September 22, 2003, International Paper, along with
Weyerhaeuser Co. and Georgia-Pacific Corp., agreed with the
class plaintiffs to settle the litigation for an aggregate amount
of $68 million. The settlement, of which International Paper’s
and Union Camp’s share totaled $24.4 million, was approved
by the court in an order entered on December 10, 2003.

Twelve complaints with multiple plaintiffs who opted out of
the class action described above, have been filed in various
federal district courts around the country. These suits allege
that the defendants conspired to fix prices for corrugated
sheets and containers during the period from October 1,
1993 through February 28, 1997. One opt-out plaintiff
voluntarily dismissed its complaint on October 10, 2003.
Another opt-out plaintiff settled its case. All of the remaining
federal opt-out cases have been consolidated for pre-trial
purposes in the federal court for the Eastern District of
Pennsylvania. Discovery in the federal opt-out cases is
currently scheduled to conclude in June 2005. Additionally,
one opt-out case was originally filed in Kansas state court, but
has been removed to federal court and transferred to the
Eastern District of Pennsylvania. The plaintiff in that case has
filed a motion to remand the case to Kansas state court. The
Company is vigorously defending these cases and believes it
has valid defenses. However, due to the complexity of
evaluating the factors upon which damages might be based
(including, but not limited to, the uncertainties of the class
period, defendants’ sales to various opt-out plaintiffs, and
other defendants’ potential settlements), the Company cannot
assess its potential exposure at this time.

In 2000, purchasers of high-pressure laminates filed a
number of purported class actions under the federal antitrust
laws alleging that International Paper’s Nevamar division
(which was part of the Decorative Products division)
participated in a price-fixing conspiracy with competitors
between January 1, 1994 and June 30, 2000. In 2000 and
2001, indirect purchasers of high-pressure laminates also
filed similar purported class action cases under various state
antitrust and consumer protection statutes in Arizona,
California, Florida, Maine, Michigan, Minnesota, New Mexico,
New York, North Carolina, North Dakota, South Dakota,

Tennessee, West Virginia, Wisconsin and the District of
Columbia. In the third quarter of 2002, International Paper
completed the sale of the Decorative Products operations, but
retained any liability for these cases. In June 2003, the federal
district court certified the consolidated federal cases as a
class action. In 2004, the federal and all of the state cases
were settled for a total of $38.5 million. The federal
settlement has been approved by the court, and the state
cases have all received preliminary approval and are
proceeding toward final approval.

On September 16, 2002, International Paper was served in
Federal District Court in Columbia, South Carolina with a
class action lawsuit by a group of private landowners alleging
that International Paper and certain of its fiber suppliers,
known as Quality Suppliers, engaged in an unlawful
conspiracy to artificially depress the prices at which
International Paper procures fibers for its mills. The suit
seeks injunctive relief as well as treble damages and other
costs associated with the litigation. On March 31, 2004, the
case was certified as a class action. International Paper then
asked the U.S. Court of Appeals for the Fourth Circuit for
permission to appeal the District Court’s order granting class
certification, but that request was denied. Discovery and
issues concerning class notice are ongoing. On January 10,
2005, with the District Court’s approval, International Paper
filed motions requesting dismissal of the plaintiffs’ claim
based on plaintiffs’ lack of standing to sue and decertification
of the class. The motions are scheduled for hearing on April
7, 2005.

In May 2004, the press reported that European, U.S. and
Canadian antitrust authorities were investigating possible
cartel activity relating to publication papers. Following these
press reports, a number of private plaintiffs filed purported
class actions on behalf of purchasers of publication papers in
various U.S. federal and state courts. These class actions
allege that manufacturers of publication papers, including
International Paper, participated in a price fixing consipiracy
from 1993 to the present. The cases filed in federal court
assert a violation of the federal antitrust laws, while the cases
filed in the state court allege violations of state antitrust and
consumer protection statutes. These lawsuits seek injunctive
relief, as well as treble damages and other costs associated
with the litigation. The federal cases were consolidated for
pre-trial purposes in December 2004 in the federal court for
the District of Connecticut. Discovery and related pretrial
proceedings have not yet begun. Discovery in the state cases
is expected to be coordinated with the consolidated federal
cases. The Company believes it has valid defenses and intends
to vigorously defend these cases. However, at this early stage
the Company cannot assess its potential exposure.

Summary

International Paper is also involved in various other inquiries,
administrative proceedings and litigation relating to contracts,
sales of property, environmental protection, tax, antitrust,
personal injury and other matters, some of which allege
substantial monetary damages. While any proceeding or
litigation has the element of uncertainty, International Paper
believes that the outcome of any of the lawsuits or claims that
are pending or threatened, or all of them combined, including
the preceding antitrust matters, will not have a material
adverse effect on its consolidated financial statements.

NOT E 11 SUPPLEMENTARY FI NAN CIAL

STATEMENT INFORMATION

Inventories by major category were:

In millions at December 31
Raw materials
Finished pulp, paper and packaging

products

Finished lumber and panel products
Operating supplies
Other
Inventories

2004
$ 371

1,796
184
351
16
$2,718

2003
$ 406

1,662
127
506
66
$2,767

The last-in, first-out inventory method is used to value most of
International Paper’s U.S. inventories. Approximately 70% of
total raw materials and finished products inventories were
valued using this method. If the first-in, first-out method had
been used, it would have increased total inventory balances
by approximately $170 million and $133 million at December
31, 2004 and 2003, respectively.

Plants, properties and equipment by major classification were:

In millions at December 31
Pulp, paper and packaging facilities

Mills
Packaging plants

Wood products facilities
Other plants, properties and equipment
Gross cost
Less: Accumulated depreciation
Plants, properties and equipment, net

2004

2003

$22,165
5,874
1,411
1,925
31,375
17,943
$13,432

$21,234
5,826
1,232
2,091
30,383
17,123
$13,260

million, $855 million and $904 million, respectively. Total interest
expense was $840 million in 2004, $875 million in 2003 and
$891 million in 2002. Interest income was $97 million, $103
million and $106 million in 2004, 2003, and 2002, respectively.
The following tables present changes in the goodwill balances
as allocated to each business segment for the years ended
December 31, 2004 and 2003.

Balance)
January 1,)
2004)
$2,878

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Carter Holt Harvey
Corporate
Total

(a)

1,361
334
190
-
30
$4,793

)

Balance
Additions/ December 31,
2004
$2,876

Other) Reductions)
(c)
$ 1)
$ (3)

(b)

(e)

(f)

9)
(35)
-)
35)
(6)
$ 4)

(d)

(f)

235)
-)
-)
(35)
-)
$197)

1,605
299
190
-
24
$4,994

(a) Restated for the reclassification of Weldwood to Discontinued

operations

(b) Represents the effects of foreign currency translations and

reclassifications from other long-term assets

Assets of businesses held for sale

(d) Includes the effects of the acquisition of Box USA ($238
million) offset by the sale of Food Pack S.A. ($3 million)

(e) Represents the effects of the sale of Scaldia Papier B.V. ($23

million) and the reclassification of the goodwill of Papeteries de
France to Assets of businesses held for sale ($12 million)

(f) Represents goodwill recorded by International Paper upon the
acquisition of Plantation Timber Products and the subsequent
write-off following an impairment evaluation

In millions
Printing Papers
Industrial and Consumer

Packaging
Distribution
Forest Products
Corporate
Total

Balance
January 1,
2003
$2,864

1,358
326
187
24
$4,759

(a)

Balance
December 31,
2003
$2,878

(b)

Other
$14

3
8
3
6
$34

1,361
334
190
30
$4,793

Interest costs related to the development of certain long-term
assets are capitalized and amortized over the related assets’
estimated useful lives. Capitalized net interest costs were $11
million in 2004, $9 million in 2003 and $12 million in 2002.
Interest payments made during 2004, 2003 and 2002 were $807

(a) Restated for the reclassification of Weldwood to Discontinued

operations

(b) Represents the effects of foreign currency translations and

reclassifications from other long-term assets

The following table presents an analysis of activity related to
asset retirement obligations since January 1, 2003:

NOTE 12 DEBT AND LINES OF CREDIT

In millions
Asset retirement obligation at

January 1

Net transition adjustment
New liabilities
Liabilities settled
Net adjustments to existing liabilities
Accretion expense
Asset retirement obligation at

December 31

2004)

2003)

$48)
-)
6)
(8)
(6)
1)

$41)

$20)
22)
-)
(4)
8)
2)

$48)

This liability is included in Other liabilities in the accompanying
consolidated balance sheet together with tax contingency
reserves and pension and postretirement liabilities.

The following table presents changes in minority interest
balances for the years ended December 31, 2004 and 2003:

In millions
Balance, beginning of year
Sale of preferred securities of a

subsidiary

Minority interest related to sale of CHH

Tissue business

Currency translation adjustment
Reclassification of limited partnership

interests to debt

CHH share repurchase (a)
Dividends paid
Minority interest expense
Other, net
Balance, end of year

2004)
$1,622)

2003)
$1,202)

150 )

307)
125)

(338)
(158)
(59)
43)
6)
$1,548)

-)
250)

-)
-)
(114)
109)
25)
$1,622)

(a) In August 2004, Carter Holt Harvey used a portion of the funds

generated in connection with the second quarter sale of its Tissue
business to repurchase shares from its shareholders, including
approximately $158 million that was paid to minority shareholders.

In December 2004, International Paper completed the sale of
1.1 million acres of forestlands in Maine and New Hampshire
to a private forest investment company for $244 million. Since
International Paper has some continuing interest in these
forestlands through a long-term fiber supply agreement, no
gain was recognized in 2004 on this transaction. However, the
net cash proceeds from the transaction of approximately $242
million are included as a source of cash in the accompanying
consolidated statement of cash flows. The deferred gain on the
transaction totaling $114 million at December 31, 2004,
included in Other liabilities in the accompanying consolidated
balance sheet, will be amortized to earnings in future periods
over the term of the fiber supply agreement.

In December 2004, Timberlands Capital Corp. II, Inc., a
wholly-owned consolidated subsidiary of International Paper,
redeemed $170 million of 4.5% preferred securities. In
November 2004, these preferred securities were reclassified
from Minority interest to Current maturities of long-term debt
pursuant to SFAS No. 150. Additionally during the fourth
quarter of 2004, International Paper redeemed approximately
$295 million of mostly domestic debt, including $108 million
of 9.77% notes with a maturity date in December 2009 and
$88 million of 6.9% industrial development bonds with a
maturity date in August 2022.

In November 2004, CHH borrowed $425 million under their
multi-currency and commercial paper credit facilities at
interest rates ranging from 5.5% to 6.8% to be repaid during
2005. The proceeds from the borrowings were used to repay
approximately $305 million of 8.875% notes with a maturity
date in December 2004 and to settle maturing cross-currency
and interest rate swaps.

In August 2004, an International Paper wholly-owned
subsidiary issued 500 million of Euro-denominated long-term
debt (equivalent to approximately $619 million at issuance)
with an initial interest rate of EURIBOR plus 55 basis points
that can vary depending upon the credit rating of the
Company and a maturity date in August 2009. Also in August
2004, International Paper repurchased $168 million of
limited partnership interests in Georgetown Equipment
Leasing Associates, L.P. and Trout Creek Equipment Leasing,
L.P. In June 2004, these partnership interests had been
reclassified from Minority interest to Current maturities of
long-term debt pursuant to SFAS No. 150. Additionally, during
the third quarter of 2004, approximately $500 million of debt
was redeemed, including $150 million of 8.125% notes with
a maturity date in June 2024 and $193 million of debt
assumed in connection with the Box USA acquisition.

In June 2004, an International Paper wholly-owned
subsidiary issued $650 million of long-term debt with an
interest rate of LIBOR plus 62.5 basis points that can vary
depending upon the credit rating of the Company and a
maturity date in June 2007, which refinanced $650 million of
long-term debt with an interest rate of LIBOR plus 100 basis
points and a maturity date in August 2004.

In March 2004, International Paper issued $600 million of
4.00% notes due April 2010 and $400 million of 5.25% notes
due April 2016. The proceeds from these issuances were
used in April 2004 to retire approximately $1.0 billion of
8.125% coupon rate debt with an original maturity date in
July 2005.

A pre-tax early debt retirement expense of $92 million related
to the above 2004 redemptions is included in Restructuring
and other charges in the accompanying consolidated
statement of operations.

A pre-tax early debt retirement expense of $1 million related
to the 2003 redemptions discussed above is included in
Restructuring and other charges in the accompanying
consolidated statement of operations.

In October 2002, International Paper completed a private
placement with registration rights of $1.0 billion aggregate
principal amount of 5.85% notes due in October 2012. In
November 2002, the sale of an additional $200 million
principal amount of 5.85% notes due in October 2012 was
completed. The net proceeds of these sales were used to
refinance most of International Paper’s $1.2 billion aggregate
principal amount of 8% notes due in July 2003, that were
issued in connection with the Champion acquisition. The pre-
tax early debt retirement cost of $41 million is included in
Restructuring and other charges in the accompanying
consolidated statement of operations.

Also during 2002, approximately $1.8 billion of long-term
debt was repaid, including about $800 million of Champion
acquisition debt. Increases in 2002 included approximately
$800 million from new borrowings, and non-cash increases
of approximately $620 million, including $460 million
relating to the consolidation of a debt obligation of a special
purpose entity following the modification of the terms of the
related agreement.

In December 2003, International Paper completed a private
placement with registration rights of $500 million of 4.25%
notes due in January 2009 and $500 million of 5.50% notes
due in January 2014. The net proceeds from the notes were
used in January 2004 for the redemption of all of the
outstanding $805 million aggregate principal amount of
International Paper Capital Trust III 7.875% preferred
securities originally due in December 2038 and for the
repayment or early retirement of other debt.

In conjunction with the Company’s adoption of FIN 46 and
FIN 46(R) (see Note 4), Long-term debt at December 31,
2003 (1) increased by $50 million due to the consolidation
of an entity that was formerly treated as an operating lease
arrangement; (2) decreased by $460 million due to the
deconsolidation of an entity that had previously been
consolidated; and (3) increased by a net $100 million upon
the deconsolidation of an entity created in June 2002. The net
$100 million increase included an addition to debt of $450
million representing International Paper’s obligations to the
deconsolidated entity and a reduction of $350 million due to
the deconsolidation of third-party debt owed by the entity.

Also, related to the application of FIN 46 to certain entities,
effective July 1, 2003, International Paper deconsolidated two
trusts with holdings of approximately $1.3 billion of
mandatorily redeemable preferred securities, previously
classified as a separate line item on the Company’s balance
sheet, and recorded approximately $1.3 billion of borrowings
from the trusts as Long-term debt.

In December 2003, International Paper exercised its option
to redeem the securities of one of the trusts effective in
January 2004, and consequently, reclassified $830 million to
Current maturities of long-term debt. In February 2005,
International Paper redeemed the preferred securities of the
remaining trust, which were classified in Long-term debt at
December 31, 2004.

The implementation of FIN 46 and FIN 46(R) had no adverse
affect on existing debt covenants.

In March 2003, International Paper completed a private
placement with registration rights of $300 million of 3.80%
notes due in April 2008 and $700 million of 5.30% notes due
in April 2015. Proceeds from the notes were used to repay
approximately $450 million of commercial paper and long-
term debt and to redeem $550 million of preferred securities
of IP Finance (Barbados) Limited, a non-U.S. consolidated
subsidiary of International Paper.

A summary of long-term debt follows:

In millions at December 31
8 7/8% to 10% notes - due 2011 - 2012
8 7/8% notes
9.25% debentures - due 2011
8 3/8% to 9 1/2% debentures - due 2015 - 2024
8 1/8% notes
7 7/8% subordinated debentures
7% to 7 7/8% notes - due 2005 - 2007
6 7/8% notes - due 2023 - 2029
6.75% notes - due 2011
6.65% notes - due 2037
6.5% notes - due 2007
6.4% to 7.75% debentures - due 2025 - 2027
5.85% notes - due 2012
5 1/4% convertible subordinated

debentures - due 2025

5.25% to 5.5% notes - due 2014 - 2015
5 3/8% euro notes - due 2006
5 1/8% debentures - due 2012
3.8% to 4.25% notes - due 2008 - 2010
Zero-coupon convertible debentures - due 2021
Medium-term notes - due 2006 - 2009 (a)
Floating rate notes - due 2006 - 2010 (b)
Environmental and industrial development

bonds - due 2005 - 2033 (c,d)

Commercial paper and bank notes (e)
Other (f)
Total (g)
Less: Current maturities
Long-term debt

2004

2003
$ 175 $ 392
305
-
125
125
300
300
1,000
-
830
-
1,041
649
544
394
1,000
1,000
94
97
149
149
791
797
1,202
1,202

464
1,596
334
102
1,399
1,141
43
1,794

464
1,197
308
99
799
1,099
52
1,127

2,150
227
500
14,638
506
$14,132

2,317
53
249
15,537
2,087
$13,450

(a) The weighted average interest rate on these notes was 8.1% in

2004 and 2003.

(b) The weighted average interest rate on these notes was 2.9% in
2004 and 2.4% in 2003. Includes $670 million of Euro
borrowings with a weighted average interest rate of 2.7% in
2004.

2004 and 5.8% in 2003.

(d) Includes $22 million of bonds at December 31, 2004 and $23

million of bonds at December 31, 2003, which may be tendered
at various dates and/or under certain circumstances.

(e) The weighted average interest rate was 6.1% in 2004 and 4.2% in

2003. Includes $162 million of New Zealand dollar commercial
paper borrowings with an interest rate of 6.8% in 2004.
(f) Includes $245 million of Australian dollar borrowings with a
fixed interest rate of 5.5% and $29 million of New Zealand
dollar borrowings with a fixed interest rate of 6.8% in 2004.
Also includes $54 million at December 31, 2004 and $86
million at December 31, 2003 related to interest rate swaps
treated as fair value hedges.

(g) The fair market value was approximately $15.3 billion at

December 31, 2004 and $16.4 billion at December 31, 2003.

Total maturities of long-term debt over the next five years are
2005 - $506 million; 2006 - $882 million; 2007 - $1.2
billion; 2008 - $326 million; and 2009 - $1.3 billion.

At December 31, 2004 and 2003, International Paper
classified $87 million and $1.5 billion, respectively, of
tenderable bonds, commercial paper and bank notes and
Current maturities of long-term debt as Long-term debt.
International Paper has the intent and ability to renew or
convert these obligations, as evidenced by the available bank
credit agreements described below.

At December 31, 2004, International Paper’s unused
contractually committed bank credit agreements amounted to
$3.2 billion. The agreements generally provide for interest rates
at a floating rate index plus a pre-determined margin dependent
upon International Paper’s credit rating. In March 2004,
International Paper replaced its maturing $750 million bank
credit agreement with a five-year, $1.25 billion bank credit
facility maturing in March 2009. Concurrently, an existing three-
year bank credit agreement maturing in March 2006 was
reduced from $1.5 billion to $750 million. These agreements
have a facility fee of 0.15% that is payable quarterly. In addition,
in November 2004, International Paper amended its receivables
securitization program established in December 2001 to
increase the line of credit from $650 million to $1.2 billion of
commercial paper-based financings, based on the amount of
qualifying receivables. The program extends through November
2007 with a facility fee of 0.20%. There were no borrowings
under either the bank credit agreements or receivables
securitization program at December 31, 2004.

In November 2004, CHH entered into a short-term multi-
currency credit facility with a NZ$400 million line of credit that
extends through August 2005 with a facility fee of 0.05%. Also,
CHH has an existing NZ$ 325 million multi-currency credit
facility that supports its commercial paper program. This facility
matures in two tranches from 2006 to 2008. The facility fee
ranges from 0.27% to 0.32% at current credit ratings and is
payable quarterly. The unused portion of these facilities at
December 31, 2004 amounted to approximately NZ$344 million.

At December 31, 2004, outstanding debt included
approximately $227 million of commercial paper and bank
notes with interest rates that fluctuate based on market
conditions and the Company’s credit rating.

Maintaining a strong investment-grade rating is an
important element of International Paper’s corporate
finance strategy. At December 31, 2004, the Company held
long-term credit ratings of BBB (negative outlook) and
Baa2 (negative outlook) by Standard & Poor’s (S&P) and
Moody’s Investor Services (Moody’s), respectively. The
Company currently has short-term credit ratings by S&P
and Moody’s of A-3 and P-2, respectively.

Contingently Convertible Securities

Included in debt at December 31, 2004 and 2003 were $2.1
billion principal amount at maturity of zero-coupon
convertible senior debentures with a 20-year term. This debt
accretes to face value at maturity at a rate of 3.75% per
annum. Beginning on June 20, 2004, and every June 20th and
December 20th until maturity, the debentures are subject to
an increased accretion rate if the closing sales price of the
Company’s common stock is equal to or less than 60% of the
then current conversion price of the notes for any 20 trading
days out of the last 30 consecutive trading days ending three
business days prior to June 20, 2004, or later semiannual
date. The conversion price of the notes as of December 31,
2004 was $56.96, and the bonds were not subject to an
increased accretion rate for the semiannual period beginning
December 20, 2004.

These debentures may be converted into shares of the
Company’s common stock at a conversion ratio of 9.5111
shares per $1,000 principal amount at maturity of
debentures, which was equal to an initial conversion price of
$50.01 per share of the Company’s common stock. The
debenture holders may convert their debentures into the
Company’s common stock prior to maturity under any of the
following circumstances: (1) the closing sales price of the
Company’s common stock for at least 20 trading days in the
30 consecutive trading days ending on the day prior to the
surrender date is more than 120% (declining by .256% at the
end of each semi-annual period over the life of the
debentures to 110%) of the then-current conversion price;
(2) International Paper’s credit rating is downgraded by each
of Moody’s and S&P to below Baa3 and BBB-, respectively;
(3) the Company has called the notes for redemption; (4) the
Company distributes to all holders of the Company’s common
stock certain rights entitling them to purchase, for a period
expiring within 60 days, common stock at less than the
closing sales price of the Company’s common stock at the
time; or (5) the Company distributes to all holders of our
common stock, the assets, debt securities or certain rights to
purchase the Company’s debt securities, which distribution
has a per share value exceeding 12.5% of the closing sales
price of the Company’s common stock on the day preceding
the declaration for such distribution.

Beginning in the fourth quarter of 2004, as required by a
recent FASB consensus, the dilutive effect of the convertible
notes has been reflected in diluted earnings per share in
periods when dilutive (see the caption “Information About
Capital Structure – Contingently Convertible Securities” in
Note 4), with prior periods restated.

Security holders have the right to require repurchase of these
securities on June 20th in each of the years 2006, 2011 and
2016, at a repurchase price equal to the accreted principal

amount to the repurchase date. The repurchase may be for
International Paper common stock or cash, or a combination
of both, at the Company’s option.

International Paper also has the option to redeem the
securities for cash after June 19, 2006. On or after June 20,
2006 and prior to June 20, 2008, the redemption may only
occur if the closing sales price of the Company’s common
stock exceeds 120% of the then-current conversion price for
at least 20 trading days in the 30 consecutive trading days
ending on the date redemption notice is given. On or after
June 20, 2008, the redemption price will be equal to the
then-accreted principal amount plus any accrued and unpaid
cash interest to the redemption date.

NOTE 13 DERIVATIVES AND HEDGING

ACTIVITIES

International Paper periodically uses derivatives and other
financial instruments to hedge exposures to interest rate,
commodity and currency risks. For hedges that meet the
criteria under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” International Paper, at
inception, formally designates and documents the instrument
as a hedge of a specific underlying exposure, as well as the
risk management objective and strategy for undertaking each
hedge transaction. Because of the high degree of effectiveness
between the hedging instrument and the underlying exposure
being hedged, fluctuations in the value of the derivative
instruments are generally offset by changes in the value or
cash flows of the underlying exposures being hedged.
Derivatives are recorded in the consolidated balance sheet at
fair value, determined using available market information or
other appropriate valuation methodologies, in other current
or noncurrent assets or liabilities. The earnings impact
resulting from the change in fair value of the derivative
instruments is recorded in the same line item in the
consolidated statement of operations as the underlying
exposure being hedged. The financial instruments that are
used in hedging transactions are assessed both at inception
and quarterly thereafter to ensure they are effective in
offsetting changes in either the fair value or cash flows of the
related underlying exposures. The ineffective portion of a
financial instrument’s change in fair value, if any, would be
recognized currently in earnings together with the changes in
fair value of any derivatives not designated as hedges.

Interest Rate Risk

Interest rate swaps may be used to manage interest rate risks
associated with International Paper’s debt. Some of these
instruments qualify for hedge accounting in accordance with
SFAS No. 133 and others do not. Interest rate swap
agreements with a total notional amount at December 31,

2004 of approximately $500 million and maturities ranging
from two to 19 years do not qualify as hedges under SFAS No.
133 and, consequently, were recorded at fair value on the
transition date by a pre-tax charge of approximately $20
million to earnings in 2001 upon adoption of SFAS No. 133.
For the years ended December 31, 2004, 2003 and 2002, the
change in fair value of these swaps was immaterial.

The remainder of International Paper’s interest rate swap
agreements qualify as fully effective fair value hedges under
SFAS No. 133. At December 31, 2004 and 2003, outstanding
notional amounts for its interest rate swap fair value hedges
amounted to approximately $2.2 billion and $2.1 billion,
respectively. The fair values of these swaps were net assets of
approximately $70 million and $113 million at December 31,
2004 and 2003, respectively.

In 2004, International Paper cash settled interest rate
swaption contracts for a loss of $10 million, which was
recorded in earnings.

In April 2004, interest rate swaps with a notional value of $500
million were terminated in connection with the early retirement
of International Paper’s $1.0 billion notes due in July 2005.
The resulting gain of approximately $14 million is included in
Restructuring and other charges in the accompanying
consolidated statement of operations (see Note 6).

In November 2002, interest rate swaps with a notional value
of $550 million were terminated in connection with the early
retirement of International Paper’s $1.2 billion notes due in
July 2003. The resulting gain of approximately $6 million is
included in Restructuring and other charges in the
accompanying consolidated statement of operations (see
Note 6).

During 2002, International Paper entered into agreements to
fix interest rates on an anticipated $1.15 billion issuance of
debt. Upon issuance of the debt in the fourth quarter of 2002,
these agreements generated a pre-tax loss of $2.8 million that
was recorded in Accumulated other comprehensive income
(OCI). This amount is being amortized to interest expense
over the term of the bonds through October 30, 2012,
yielding an effective interest rate of 5.94%.

Commodity Risk

To minimize volatility in earnings due to large fluctuations in
the price of commodities, International Paper has used swap
and option contracts to manage risks associated with market
fluctuations in energy prices. Such cash flow hedges are
accounted for by deferring the after-tax quarterly change in
fair value of the outstanding contracts in OCI. On the date a
contract matures, the gain or loss is reclassified into cost of
products sold concurrently with the recognition of the

commodity purchased. For the year ended December 31,
2004, the reclassification from OCI to earnings was
immaterial. For the years ended 2003 and 2002, the
reclassifications to earnings were after-tax gains of $24 million
and after-tax losses of $10 million, respectively. These
amounts represent the after-tax cash settlements on the
maturing energy hedge contracts. Unrealized after-tax losses of
$2 million and after-tax gains of $12 million and $24 million
were recorded to OCI during the years ended December 31,
2004, 2003 and 2002, respectively. There were no outstanding
energy hedge contracts as of December 31, 2004.

Foreign Currency Risk

International Paper’s policy has been to hedge certain
investments in non-U.S. operations with borrowings
denominated in the same currency as the operation’s
functional currency, or by entering into long-term cross-
currency and interest rate swaps or short-term foreign
exchange contracts. These financial instruments are effective
as a hedge against fluctuations in currency exchange rates.
Gains or losses from changes in the fair value of these
instruments, which are offset in whole or in part by
translation gains and losses on the non-U.S. operation’s net
assets hedged, are recorded as translation adjustments in
OCI. Upon liquidation or sale of the foreign investments, the
accumulated gains or losses from the revaluation of the
hedging instruments, together with the translation gains and
losses on the net assets, are included in earnings. For the
years ended December 31, 2004, 2003 and 2002, net losses
included in the cumulative translation adjustment on
derivative and debt instruments hedging foreign net
investments amounted to $74 million, $89 million and $46
million after taxes and minority interest, respectively.
Cumulative after-tax losses of $50 million on net investment
hedges were included in the loss on sale of Weldwood in
Discontinued operations in 2004.

Long-term cross-currency and interest rate swaps and short-
term currency swaps have been used to mitigate the risk
associated with changes in foreign exchange rates, affecting
the fair value of debt denominated in a foreign currency. In
2004, CHH paid $180 million to settle these hedges
concurrent with the repayment of the related debt. Prior to
the settlement, the impact on earnings from the derivative
revaluations were substantially offset by the earnings impact
from remeasuring the foreign currency debt each period.

Foreign exchange contracts (including forward, swap and
purchase option contracts) are also used to hedge certain
transactions, primarily trade receipts and payments
denominated in foreign currencies, to manage volatility
associated with these transactions and to protect International
Paper from currency fluctuations between the contract date
and ultimate settlement. These contracts, most of which have

been designated as cash flow hedges, had maturities of five
years or less as of December 31, 2004. For the years ended
December 31, 2004, 2003 and 2002, net unrealized gains
totaling $72 million, $53 million and $49 million after taxes
and minority interest, respectively, were recorded to OCI. Net
gains after taxes and minority interest of $26 million, $41
million and $14 million were reclassified to earnings for the
years ended December 31, 2004, 2003 and 2002,
respectively. Of the net gains reclassified to earnings in 2004,
$6 million related to hedges that are no longer probable. As
of December 31, 2004, gains of $40 million after taxes and
minority interest are expected to be reclassified to earnings in
2005. Other contracts are used to offset the earnings impact
relating to the variability in exchange rates on certain short-
term monetary assets and liabilities denominated in non-
functional currencies and are not designated as hedges.
Changes in the fair value of these instruments, recognized
currently in earnings to offset the remeasurement of the
related assets and liabilities, were not significant.

International Paper does not hold or issue financial
instruments for trading purposes. The counterparties to swap
agreements and foreign exchange contracts consist of a
number of major international financial institutions.
International Paper continually monitors its positions with
and the credit quality of these financial institutions and does
not expect nonperformance by the counterparties.

NOT E 14 CAPITAL STOCK

The authorized capital stock at both December 31, 2004 and
2003 consisted of 990,850,000 shares of common stock, $1
par value; 400,000 shares of cumulative $4 preferred stock,
without par value (stated value $100 per share); and
8,750,000 shares of serial preferred stock, $1 par value. The
serial preferred stock is issuable in one or more series by the
Board of Directors without further shareholder action.

NOTE 15 RETIREMENT PLANS

U.S. Defined Benefit Plans

International Paper maintains pension plans that provide
retirement benefits to substantially all domestic employees
hired prior to July 1, 2004. These employees generally are
eligible to participate in the plans upon completion of one
year of service and attainment of age 21. Employees hired
after June 30, 2004, who are not eligible for this pension plan
will receive an additional company contribution to their
savings plan (see “Other Plans” on page 74).

The plans provide defined benefits based on years of credited
service and either final average earnings (salaried

employees), hourly job rates or specified benefit rates
(hourly and union employees).

International Paper makes contributions that are sufficient to
fully fund its actuarially determined costs, generally equal to
the minimum amounts required by the Employee Retirement
Income Security Act (ERISA). International Paper made no
contribution in 2003 or 2004, and does not expect to make
any contributions in 2005 or 2006, to the qualified defined
benefit plan. The nonqualified plan is only funded to the
extent of benefits paid which are expected to be $21 million
in 2005.

Net Periodic Pension Expense (Income)

Service cost is the actuarial present value of benefits
attributed by the plans’ benefit formula to services rendered
by employees during the year. Interest cost represents the
increase in the projected benefit obligation, which is a
discounted amount, due to the passage of time. The expected
return on plan assets reflects the computed amount of
current year earnings from the investment of plan assets
using an estimated long-term rate of return.

Net periodic pension expense (income) for qualified and
nonqualified U.S. defined benefit plans comprised the following:

In millions
Service cost
Interest cost
Expected return on plan assets
Actuarial loss
Amortization of prior service

2004)
$ 115)
467)
(592)
94)

2003)
$ 107)
469)
(598)
57)

2002)
$ 96)
466)
(663)
7)

cost

27)

25)

19)

Net periodic pension expense

(income) (a)

$ 111)

$ 60)

$ (75)

(a) Excludes $3.4 million, $8.3 million and $2.6 million in 2004,

2003 and 2002, respectively, in curtailment losses, and $1.4
million, $6.3 million and $2.4 million in 2004, 2003 and 2002,
respectively, of special termination benefits, in connection with a
cost reduction program and facility rationalizations that were
recorded in Restructuring and other charges in the consolidated
statement of operations. Also excludes $0.3 million and $8.8
million of curtailment losses in 2003 and 2002, respectively, and
$10.6 million of settlement gains in 2002, related to the
divestitures of Masonite, Flexible Packaging, Decorative Products
and other smaller businesses that were recorded in Net losses
(gains) on sales and impairments of businesses held for sale in
the consolidated statement of operations.

The increase in 2004 U.S. pension expense, and the change
in 2003 to net pension expense from income in 2002, were
principally due to a reduction in 2003 in the expected long-

term rate of return on plan assets and an increase in the
amortization of unrecognized actuarial losses, with smaller
impacts from reductions in the discount rate and the
assumed rate of future compensation increase.

International Paper evaluates its actuarial assumptions
annually as of December 31 (the measurement date) and
considers changes in these long-term factors based upon
market conditions and the requirements of SFAS No. 87,
“Employers’ Accounting for Pensions.” These assumptions
are used to calculate benefit obligations as of December 31 of
the current year and pension expense to be recorded in the
following year.

Weighted average assumptions used to determine net pension
expense (income) for 2004, 2003 and 2002 were as follows:

Discount rate
Expected long-term return

2004%
6.00%

on plan assets

8.75%
Rate of compensation increase 3.25%

2003%
6.50%

8.75%
3.75%

2002%
7.25%

9.25%
4.50%

Weighted average assumptions used to determine benefit
obligations as of December 31, 2004 and 2003 were as follows:

Discount rate
Rate of compensation increase

2004%
5.75%
3.25%

2003%
6.00%
3.25%

The expected long-term rate of return on plan assets is based
on projected rates of return for current and planned asset
classes in the plan’s investment portfolio. Projected rates of
return are developed through an asset/liability study, in which
projected returns for each of the plan’s asset classes are
determined after analyzing historical experience and future
expectations of returns and volatility of the various asset
classes. Based on the target asset allocation for each asset
class, the overall expected rate of return for the portfolio is
developed considering the effects of active portfolio
management and expenses paid from plan assets. The
discount rate assumption is determined based on a yield
curve that incorporates approximately 570 Aa-graded bonds.
The plan’s projected cash flows are then matched to the yield
curve to develop the discount rate. To calculate pension
expense for 2005, the Company will use an expected long-
term rate of return on plan assets of 8.50%, a discount rate
of 5.75% and an assumed rate of compensation increase of
3.25%. The Company estimates that it will record net pension
expense of approximately $210 million for its U.S. defined
benefit plans in 2005, principally reflecting an increase in the
amortization of unrecognized actuarial losses over a shorter
average remaining service period, a decrease in the assumed

discount rate to 5.75% in 2005 from 6.00% in 2004, and a
decrease in the expected return on assets to 8.50% in 2005
from 8.75% in 2004.

The following illustrates the effect on pension expense for
2005 of a 25 basis point decrease in these assumptions:

In millions
Expense/(Income):
Discount rate
Expected long-term return on plan assets
Rate of compensation increase

Investment Policy / Strategy

2005)

$22)
16)
(5)

Plan assets are invested to maximize returns within prudent
levels of risk and to maintain full funding of the benefit
obligations. The target allocations by asset class are
summarized in the following table. Investments are diversified
across classes and within each class to minimize risk. The
investment policy permits the use of swaps, options, forwards
and futures contracts. Periodic reviews are made of
investment policy objectives and investment managers.

International Paper’s pension plan asset allocation by type of
fund at December 31, 2004 and 2003, and target allocations
by asset category are as follows:

Asset Category
Equity securities
Debt securities
Real estate
Other
Total

Target
Allocations
52% - 63%
26% - 34%
5% - 10%
2% - 8%

Percentage of
Plan Assets
at December 31,

2004
62%
27%
8%
3%
100%

2003
62%
27%
8%
3%
100%

No plan assets were invested in International Paper common
stock at December 31, 2004 or 2003.

At December 31, 2004, total future pension benefit payments
are estimated as follows:

$ 516
511
508
510
514
2,746

In millions
2005
2006
2007
2008
2009
2010 - 2014

Minimum Pension Liability Adjustment

At December 31, 2002, International Paper’s qualified defined
benefit pension plan had a prepaid benefit cost of approximately
$1.7 billion. At the same date, the market value of the plan assets
was less than the accumulated benefit obligation (ABO) for this
plan. In accordance with the requirements of SFAS No. 87, the
prepaid asset was reversed and an additional minimum liability
of $2.7 billion was established equal to the shortfall of the
market value of plan assets below the ABO plus the prepaid
benefit cost. This resulted in an after-tax direct charge to
Accumulated other comprehensive income (OCI) of $1.5 billion,
with no impact on earnings, earnings per share or cash. This
reduction to Shareholders’ equity had no adverse affect on
International Paper’s debt covenants.

Strong actual returns on plan assets in the fourth quarters of
2004 and 2003 increased the market value of plan assets by
more than the increase in the ABO, resulting in a reduction in
the required additional minimum pension liability. As a result,
credits to after-tax OCI were recognized in the amount of $41
million and $163 million at December 31, 2004 and 2003,
respectively. International Paper also incurred adjustments to
the nonqualified plan additional minimum liabilities and
recorded charges to OCI of $8 million and $13 million, at
December 31, 2004 and 2003, respectively.

The following table summarizes the projected and
accumulated benefit obligations and fair values of plan assets
for the qualified and nonqualified defined benefit plans at
December 31, 2004 and 2003:

In millions
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets

2004
$8,294
7,927
6,745

2003
$7,899
7,572
6,436

Unrecognized Actuarial Losses

SFAS No. 87 provides for delayed recognition of actuarial gains
and losses, including amounts arising from changes in the
estimated projected plan benefit obligation due to changes in
the assumed discount rate, differences between the actual and
expected return on plan assets, and other assumption changes.
These net gains and losses are recognized prospectively over a
period that approximates the average remaining service period
of active employees expected to receive benefits under the
plans (approximately 13 years) to the extent that they are not
offset by gains and losses in subsequent years. Unrecognized
actuarial losses shown in the following table were $2.6 billion
in 2004 and 2003. While actual future amortization charges
will be affected by future gains/losses, amortization of
cumulative unrecognized losses as of December 31, 2004 is
expected to increase pension expense by approximately $53

million in 2005 and $41 million in 2006, while decreasing
expense by $14 million in 2007.

The following table shows the changes in the benefit
obligation and plan assets for 2004 and 2003, and the plans’
funded status and amounts recognized in the consolidated
balance sheet as of December 31, 2004 and 2003. The
benefit obligation as of December 31, 2004 increased by
$395 million, principally as a result of a decrease in the
discount rate used in computing the estimated benefit
obligation. Plan assets increased by $309 million, principally
reflecting higher actual market returns.

In millions
Change in projected benefit obligation:

2004)

2003)

Benefit obligation, January 1
Service cost
Interest cost
Actuarial loss
Benefits paid
Acquisitions
Restructuring
Special termination benefits
Plan amendments
Benefit obligation, December 31

$ 7,899)
115)
467)
288)
(537)
1)
1)
1)
59)
$ 8,294)

Change in plan assets:

Fair value of plan assets, January 1
$ 6,436)
Actual return on plan assets
797)
Company contributions
49)
Benefits paid
(537)
Acquisitions
-)
Divestitures
-)
Fair value of plan assets, December 31 $ 6,745)
$(1,549)
2,632)
330)
$ 1,413)

Funded status
Unrecognized actuarial loss
Unamortized prior service cost
Prepaid benefit costs
Amounts recognized in the consolidated

$ 7,111)
107)
469)
555)
(486)
-)
(13)
6)
150)
$ 7,899)

$ 5,584)
1,318)
18)
(486)
4)
(2)
$ 6,436)
$(1,463)
2,645)
300)
$ 1,482)

balance sheet consist of:
Accrued benefit liability
Intangible asset
Minimum pension liability adjustment
included in accumulated other
comprehensive income

Net amount recognized

$(1,182)
330)

$(1,136)
300)

2,265)
$ 1,413)

2,318)
$ 1,482)

Non-U.S. Defined Benefit Plans

Generally, International Paper’s non-U.S. pension plans are
funded using the projected benefit as a target, except in
certain countries where funding of benefit plans is not
required. Net periodic pension expense for non-U.S. plans
was as follows:

2004)
In millions
Service cost
$ 32)
Interest cost
34)
Expected return on plan assets
(29)
Actuarial loss
5)
Amortization of prior service cost
1)
Curtailment gain
-)
Estimated expenses
1)
Net periodic pension expense (a) $ 44)

2003)
$ 28)
29)
(24)
5)
1)
(1)
1)
$ 39)

2002)
$ 22)
25)
(24)
1)
1)
-)
1)
$ 26)

(a) Excludes $19.4 million of net settlement gains and $1.2 million
of curtailment gains in 2004 related to the divestitures of
Weldwood, Papeteries de Souche and the CHH Tissue business
that were recorded in Net losses (gains) on sales and
impairments of businesses held for sale in the consolidated
statement of operations.

The following table shows the changes in the benefit
obligation for 2004 and 2003.

In millions
Change in projected benefit obligation:

Benefit obligation, January 1
Obligations for additional plans
Service cost
Interest cost
Plan participants’ contributions
Plan amendments
Divestitures
Settlement / curtailment gains
Actuarial loss
Benefits paid
Effect of foreign currency exchange

rate movements

Benefit obligation, December 31

2004)

$ 587)
9)
32)
34)
7)
(3)
(292)
-)
10)
(41)

22)
$ 365)

2003)

$422)
15)
28)
29)
4)
-)
-)
(1)
18)
(24)

96)
$587)

The fair value of plan assets for non-U.S. plans amounted to
$255 million and $423 million at December 31, 2004 and
2003, respectively. The reduction in plan assets is mainly due to
the sale of Weldwood. For non-U.S. plans with accumulated
benefit obligations in excess of plan assets, the projected benefit
obligations, accumulated benefit obligations, and fair values of
plan assets totaled $272 million, $240 million, and $164
million, respectively. Plan assets consist principally of common
stock and fixed income securities. Adjustments to the non-U.S.
plans’ additional minimum liabilities resulted in a credit to OCI
of $1 million and a charge of $4 million after taxes and
minority interest at December 31, 2004 and 2003, respectively.

Other Plans

International Paper sponsors defined contribution plans
(primarily 401(k)) to provide substantially all U.S. salaried

and certain hourly employees of International Paper an
opportunity to accumulate personal funds, and to provide
additional benefits to employees hired after June 30, 2004 for
their retirement. Contributions may be made on a before-tax
basis to substantially all of these plans.

As determined by the provisions of each plan, International
Paper matches the employees’ basic voluntary contributions
and, for employees hired after June 30, 2004, contributes an
additional percentage of pay. Such contributions to the plans
totaled approximately $87 million, $95 million and $66
million for the plan years ending in 2004, 2003 and 2002,
respectively. The net assets of these plans were approximately
$4.3 billion as of the 2004 plan year-end including
approximately $789 million (18.5%) in International Paper
common stock.

NOTE 16 POSTRETIREMENT BENEFITS

U.S. Postretirement Benefits

International Paper provides certain retiree health care and
life insurance benefits covering a majority of U.S. salaried and
certain hourly employees. These employees are generally
eligible for benefits upon retirement and completion of a
specified number of years of creditable service. Excluded
from company-provided medical benefits are salaried
employees whose age plus years of employment with the
Company total less than 60 as of January 1, 2004.
International Paper does not fund these benefits prior to
payment and has the right to modify or terminate certain of
these plans in the future.

On December 8, 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) was
signed into law. This Act introduces a prescription drug
benefit under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D.

In accordance with FSP FAS 106-2, the effects of the Act on
International Paper’s plans have been recorded prospectively
beginning July 1, 2004. This resulted in a reduction in 2004
of net postretirement benefit cost of approximately $8
million and a reduction of the accumulated postretirement
benefit obligation of approximately $110 million, which is
treated as a reduction of unrecognized actuarial losses that
are amortized to expense over the average remaining service
period of employees eligible for postretirement benefits. In
addition, net postretirement benefit cost in 2004 was
reduced by $5 million, and the accumulated postretirement
benefit obligation by $56 million, reflecting assumptions
about plan participation.

The components of postretirement benefit expense in 2004,
2003 and 2002 were as follows:

In millions
Service cost
Interest cost
Actuarial loss
Amortization of prior service cost
Net postretirement benefit cost (a)

2004)
$ 6)
52)
35)
(40)
$ 53)

2003)
$ 7)
54)
23)
(29)
$ 55)

2002)
$ 8)
59)
12)
(20)
$ 59)

(a) Excludes $1.0 million, $5.3 million and $1.2 million of

curtailment gains in 2004, 2003 and 2002, respectively, and
$1.0 million and $1.3 million of special termination benefits in
2004 and 2003, respectively, related to cost reduction programs
and facility rationalizations that were recorded in Restructuring
and other charges in the consolidated statement of operations.
Also excludes $1 million of curtailment gains in 2002 related to
the divestitures of Masonite, Flexible Packaging, Decorative
Products and other smaller businesses that were recorded in
Net losses (gains) on sales and impairments of businesses held
for sale in the consolidated statement of operations.

International Paper evaluates its actuarial assumptions
annually as of December 31 (the measurement date) and
considers changes in these long-term factors based upon
market conditions and the requirements of SFAS No. 106,
“Employers’ Accounting for Postretirement Benefits Other
Than Pensions.”

The discount rate assumptions used to determine net cost for
the years ended December 31, 2004, 2003 and 2002 were as
follows:

Discount rate

2004%
6.00%

2003%
6.38%

2002%
7.25%

The weighted average assumptions used to determine the benefit
obligation at December 31, 2004 and 2003 were as follows:

Discount rate
Health care cost trend rate assumed

2004%
5.75%

2003%
6.00%

for the next year

10.00%

Rate that the cost trend rate gradually

declines to

Year that the rate reaches the rate

it is assumed to remain

5.00%

2009

2008

A 1% increase in the assumed annual health care cost trend
rate would have increased the accumulated postretirement
benefit obligation at December 31, 2004 by approximately
$54 million. A 1% decrease in the annual trend rate would
have decreased the accumulated postretirement benefit
obligation at December 31, 2004 by approximately $50
million. The effect on net postretirement benefit cost from a
1% increase or decrease would be approximately $4 million.

The plan is only funded in an amount equal to benefits paid.
The following table presents the changes in benefit obligation
and plan assets for 2004 and 2003:

In millions
Change in benefit obligation:

Benefit obligation, January 1
Service cost
Interest cost
Participants’ contributions
Actuarial (gain) loss
Benefits paid
Plan amendments
Restructuring
Special termination benefits
Benefit obligation, December 31

Change in plan assets:

Fair value of plan assets, January 1
Company contributions
Participants’ contributions
Benefits paid
Fair value of plan assets, December 31

Funded status
Unamortized prior service cost
Unrecognized actuarial loss
Accrued benefit cost

2004)

2003)

$1,000)
6)
52)
38)
(118)
(138)
(5)
2)
1)
$ 838)

$ -)
100)
38)
(138)
$ -)
$ (838)
(229)
357)
$ (710)

$ 890)
7)
54)
31)
292)
(134)
(141)
-)
1)
$ 1,000)

$ -)
103)
31)
(134)
$ -)
$(1,000)
(267)
510)
$ (757)

At December 31, 2004, estimated total future postretirement
benefit payments, net of participant contributions, and estimated
future Medicare Part D subsidy receipts are as follows:

In millions
2005
2006
2007
2008
2009
2010 - 2014

Benefit
Payments
$ 95
94
92
89
86
390

Subsidy)
Receipts)
$ -)
(11)
(11)
(11)
(11)
(55)

Under the program, officers and certain other employees may
be granted options to purchase International Paper common
stock. The option price is the market price of the stock on
the close of business on the day prior to the date of grant.
Options must be vested before they can be exercised. Upon
exercise of an option, a replacement option may be granted
under certain circumstances with an exercise price equal to
the market price at the time of exercise and with a term
extending to the expiration date of the original option.

Beginning in 2005, U.S. employees will no longer receive
stock option awards. These benefits will be replaced with
performance share awards or enhanced management
incentive plan awards.

For pro forma disclosure purposes, the fair market value of
each option grant has been estimated on the date of the grant
using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in
2004, 2003 and 2002, respectively:

2004%

2003%

2002%

Initial Options (a)

Risk-Free Interest Rate
Price Volatility
Dividend Yield
Expected Term in Years

Replacement Options (b)
Risk-Free Interest Rate
Price Volatility
Dividend Yield
Expected Term in Years

3.23%
24.41%
2.53%
3.50

2.14%
22.83%
2.30%
1.60

2.46%
24.06%
2.71%
3.50

1.59%
23.70%
2.57%
1.75

3.29%
33.99%
2.74%
3.50

2.92%
38.62%
2.33%
1.80

(a) The average fair market values of initial option grants during

2004, 2003 and 2002 were $6.90, $5.86 and $8.77, respectively.

(b) The average fair market values of replacement option

grants during 2004, 2003 and 2002 were $4.76, $4.39 and
$8.59, respectively.

Non-U.S. Postretirement Benefits

In addition to the U.S. plan, certain Canadian and Brazilian
employees are eligible for retiree health care and life insurance.
Net postretirement benefit costs for our non-U.S. plans were $5
million for 2004, which excludes $22.1 million of income for
settlements related to the divestiture of Weldwood that were
recorded in net losses on sales in Discontinued operations in
the consolidated statement of operations, and $5 million for
2003. The benefit obligation for these plans was $20 million in
2004 and $43 million in 2003. The reduction in benefit
obligation reflects the sale of Weldwood.

NOTE 17 INCENTIVE PLANS

International Paper currently has a Long-Term Incentive
Compensation Plan (LTICP) that includes a Stock Option
Program, a Restricted Performance Share Program and a
Continuity Award Program, administered by a committee of
nonemployee members of the Board of Directors
(Committee) who are not eligible for awards. Also, stock
appreciation rights (SAR’s) have been awarded to employees
of a non-U.S. subsidiary, with 5,435 and 9,710 issued and
outstanding at December 31, 2004 and 2003, respectively. We
also have other performance-based restricted share/unit
programs available to senior executives and directors.

International Paper applies the provisions of APB Opinion No.
25, “Accounting for Stock Issued to Employees,” and related
interpretations and the disclosure provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” in accounting
for our plans.

Stock Option Program

International Paper accounts for stock options using the
intrinsic value method under APB Opinion No. 25. Under this
method, compensation expense is recorded over the related
service period when the market price exceeds the option price
at the measurement date, which is the grant date for
International Paper’s options. No compensation expense is
recorded as options are issued with an exercise price equal to
the market price of International Paper stock on the grant date.

The following summarizes the status of the Stock Option
Program and the changes during the three years ending
December 31, 2004:

Outstanding at

December 31, 2001
Granted
Exercised
Forfeited
Expired

Outstanding at

December 31, 2002
Granted
Exercised
Forfeited
Expired

Outstanding at

December 31, 2003
Granted
Exercised
Forfeited
Expired

Outstanding at

Options (a,b))

29,110,125)
11,927,766)
(1,345,421)
(1,841,489)
(696,961)

37,154,020)
11,315,401)
(2,778,038)
(1,823,244)
(1,062,311)

42,805,828)
9,663,303)
(4,726,957)
(1,059,215)
(1,248,052)

Weighted)
Average)
Exercise)
Price)

$ 41.28
37.36
34.62
40.51
51.24

40.11
37.08
31.87
41.19
51.71

39.51
39.70
34.60
40.86
51.40

December 31, 2004

45,434,907)

$39.70

(a) The table does not include Continuity Award tandem stock

options described below. No fair market value is assigned to
these options under SFAS No. 123. The tandem restricted
shares accompanying these options are expensed over their
vesting period.

Performance - Based Restricted Shares

Under the Restricted Performance Share Program, contingent
awards of International Paper common stock are granted by
the Committee. Shares are earned on the basis of
International Paper’s financial performance over a period of
consecutive calendar years as determined by the Committee.
Under a Restricted Performance Share Program approved
during 2001 and amended in 2004, awards vesting over a
three-year period were granted in 2002, 2003 and 2004.
Compensation expense for this variable plan is recorded over
the applicable vesting period.

The following summarizes the activity of all performance-based
programs for the three years ending December 31, 2004:

Outstanding at December 31, 2001

Granted (a)
Issued
Forfeited

Outstanding at December 31, 2002

Granted (a)
Issued
Forfeited

Outstanding at December 31, 2003

Granted (a)
Issued
Forfeited

Outstanding at December 31, 2004

Shares)
1,214,100)
583,690)
(330,437)
(190,013)
1,277,340)
658,155)
(586,237)
(164,803)
1,184,455)
1,581,442)
(391,691)
(128,957)
2,245,249)

(a) The weighted average fair value of performance shares

granted was $42.95, $35.34 and $40.09 in 2004, 2003 and
2002, respectively.

(b) The table includes options outstanding under an acquired

company plan under which options may no longer be granted.

Continuity Award Program

The Continuity Award Program provides for the granting of
tandem awards of restricted stock and/or nonqualified stock
options to key executives. Grants are restricted and awards
conditioned on attainment of specified age and years of
service requirements. Awarding of a tandem stock option
results in the cancellation of the related restricted shares. The
Continuity Award Program also provides for awards of
restricted stock to key employees.

The following table summarizes information about stock
options outstanding at December 31, 2004:

Options Outstanding
Weighted
Average
Remaining
Life

Weighted
Average
Exercise
Price

Options
Outstanding
as of
12/31/04

Range of
Exercise
Prices

$29.31-$33.80

6,995,810

$33.81-$39.77

20,253,440

$39.78-$45.74

12,435,641

$45.75-$51.71

2,023,345

$51.72-$57.68

594,292

$57.69-$63.65

2,954,179

$63.66-$66.81

178,200

45,434,907

6.6

7.7

6.8

3.6

0.8

4.5

5.0

6.8

$31.80

$37.16

$41.38

$47.37

$54.52

$59.10

$64.70

$39.70

Options Exercisable
Options
Outstanding
as of
12/31/04

Weighted
Average
Exercise
Price

6,880,025

6,407,275

7,737,871

2,023,345

594,292

2,954,179

178,200

26,775,187

$31.77

$36.34

$41.84

$47.37

$54.52

$59.10

$64.70

$40.69

The following summarizes the activity of the Continuity Award
Program for the three years ending December 31, 2004:

Outstanding at December 31, 2001

Granted (a)
Issued
Forfeited (b)

Outstanding at December 31, 2002

Granted (a)
Issued
Forfeited (b)

Outstanding at December 31, 2003

Granted (a)
Issued
Forfeited (b)

Outstanding at December 31, 2004

Shares)
344,098)
14,000)
(79,526)
(40,500)
238,072)
149,500)
(60,912)
(22,500)
304,160)
31,500)
(22,700)
(26,461)
286,499)

(a) The weighted average fair value of restricted shares granted was

$43.20, $37.20 and $43.88 in 2004, 2003 and 2002, respectively.

(b) Also includes restricted shares canceled when tandem stock
options were awarded. No tandem options were awarded in
2004, 2003 or 2002.

At December 31, 2004 and 2003, a total of 20.3 million and
14.9 million shares, respectively, were available for grant
under the LTICP. In 2004, shareholders approved an
additional 14 million shares to be used for restricted stock,
including grants of performance-based restricted stock, as
well as stock options, SARs and performance-based restricted
stock units. In 2003, shareholders had approved an additional
10 million shares to be made available for grant, with 100
thousand of these shares reserved specifically for the granting
of restricted stock. No additional shares were made available
during 2002. A total of 14.9 million shares and 2.3 million
shares were available for the granting of restricted stock as of
December 31, 2004 and 2003, respectively.

The compensation cost charged to earnings for all the
incentive plans under the LTICP was $29 million for both
2004 and 2003, and $28 million for 2002.

Interim Financial Results (Unaudited) (a)

In millions, except per share amounts and stock prices

1st Quarter

2nd Quarter)

3rd Quarter)

4th Quarter

Year)

2004
Net Sales
Gross Margin
Earnings From Continuing Operations

(b)

Before Income Taxes and Minority Interest
Earnings (Loss) From Discontinued Operations
Net Earnings (Loss)
Basic Earnings Per Share of Common Stock
Earnings From Continuing Operations
Earnings (Loss) From Discontinued Operations
Net Earnings (Loss)

Diluted Earnings Per Share of Common Stock

Earnings From Continuing Operations
Earnings (Loss) From Discontinued Operations
Net Earnings (Loss)

Dividends Per Share of Common Stock
Common Stock Prices

High
Low

2003
Net Sales
Gross Margin
Earnings From Continuing Operations

(b)

Before Income Taxes and Minority Interest
Earnings (Loss) From Discontinued Operations
Net Earnings
Basic Earnings Per Share of Common Stock
Earnings From Continuing Operations
Earnings (Loss) From Discontinued Operations
Net Earnings

Diluted Earnings Per Share of Common Stock
Earnings From Continuing Operations
Earnings (Loss) From Discontinued Operations
Net Earnings

Dividends Per Share of Common Stock
Common Stock Prices

High
Low

$6,138
1,518

$6,229)
1,599)

$6,578)
1,720)

$6,603
1,715

$25,548)
6,552)

(c)

(d)

(c,d)

96
22
73

(e)

(d)

(d,e,f)

110)
131)
193)

332)
(678)
(470)

(g)

(d)

(d,g)

(h)

(d)

(d,h)

208
12
169

746)
(513)
(35)

(c,e,g,h)

(d)

(c-h)

(c)

(d)

(c,d)

(c)

(d)

(c,d)

$ 0.10
0.05
0.15

$ 0.10
0.05
0.15
0.25

$45.01
39.80

$ 5,803
1,508

(e,f)

(d)

(d,e,f)

$ 0.13)
0.27)
0.40)

(e,f)

(d)

(d,e,f)

$ 0.13)
0.27)
0.40)
0.25)

$44.81)
37.91)

(g)

(d)

(d,g)

$ 0.43)
(1.40)
(0.97)

(g)

(d)

(d,g)

$ 0.42)
(1.33)
(0.91)
0.25)

$44.65)
38.22)

$ 5,965)
1,540)

$ 6,053)
1,536)

(h)

(d)

(d,h)

(h)

(d)

(d,h)

$ 0.32
0.03
0.35

$ 0.32
0.03
0.35
0.25

$42.52
37.12

$ 6,134
1,493

$ 0.98)
(1.05)
(0.07)

(c,e,f,g,h)

(d)

(c-h)

(c,e,f,g,h)

(d)

(c-h)

$ 0.98)
(1.05)
(0.07)
1.00

$ 45.01)
37.12)

$ 23,955)
6,077)

(i)

(d)

(d,i,j)

128
1
44

(k)

(d)

(d,k,l)

92)
(5)
88)

(m)

(d)

(d,m,n)

65)
9)
122)

(o)

(d)

(d,o,p)

7
16
48

(i,k,m,o)

(d)

(d,i-p)

292)
21)
302)

$ 0.11
-
0.09

(i)

(d)

(d,i,j)

$ 0.20)
(0.01)
0.19)

(k,l)

(d)

(d,k,l)

$ 0.23)
0.02)
0.25)

(m,n)

(d)

(d,m,n)

$ 0.08
0.03
0.10

(o,p)

(d)

(d,o-q)

(i)

(d)

(d,i,j)

$ 0.11
-
0.09
0.25

$ 38.65
33.09

(k,l)

(d)

(d,k,l)

$ 0.19)
(0.01)
0.18)
0.25)

$ 39.39)
33.17)

(m,n)

(d)

(d,m,n)

$ 0.23)
0.02)
0.25)
0.25)

$ 41.50)
35.31)

(o,p)

(d)

(d,o-q)

$ 0.07
0.03
0.10
0.25

$ 43.32
36.57

(i,k-p)

(d)

(d,i-q)

0.62)
0.04)
0.63)

(i,k-p)

(d)

(d,i-q)

$ 0.61)
0.04)
0.63)
1.00)

$ 43.32)
33.09)

Note: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amount may not
equal to the sum of the four quarters.

Footnotes to Interim Financial Results

(a) All periods presented have been restated to reflect the

Carter Holt Harvey Tissue business and the Weldwood of
Canada Limited business as Discontinued operations.

(b) Gross margin represents net sales less cost of products sold.

(c) Includes a $14 million charge before taxes ($9 million
after taxes) for organizational restructuring programs, a
$16 million charge before taxes ($10 million after taxes)
for losses on early debt extinguishment, a credit of $9
million before taxes ($6 million after taxes) to adjust
estimated gains/losses of businesses previously sold, and
a credit of $7 million before taxes ($4 million after
taxes) for the net reversal of restructuring and
realignment reserves no longer required.

(d) Includes net income of Weldwood and Carter Holt

Harvey’s Tissue business prior to their sales in the fourth
and second quarters of 2004, respectively. Also included
in the 2004 second quarter is a gain of $268 million
before taxes and minority interest ($90 million after taxes
and minority interest) for sale of the Carter Holt Tissue
business; in the 2004 third quarter is a charge of $306
million before taxes ($716 million after taxes) to write
down the assets of Weldwood to their estimated net
realizable value; and in the 2004 fourth quarter is a
charge of $17 million before taxes ($5 million credit
after taxes) to adjust the loss on the sale of Weldwood.

(e) Includes a $42 million charge before taxes and minority

interest ($23 million after taxes and minority interest) for
organizational restructuring programs, a $65 million
charge before taxes ($40 million after taxes) for losses
on early debt extinguishment, a charge of $36 million
before taxes and minority interest ($32 million after taxes
and minority interest) for estimated losses of businesses
held for sale, and a credit of $5 million before taxes and
minority interest ($3 million after taxes and minority
interest) for the net reversal of restructuring and
realignment reserves no longer required.

(f) Includes a $5 million increase, net of minority interest, in
the income tax provision reflecting an adjustment of
deferred tax balances and a reduction of valuation
reserves for capital loss carryovers.

for losses on early debt extinguishment, a credit of $103
million before taxes ($64 million after taxes) for
insurance recoveries, a net charge of $38 million before
and after taxes for estimated losses of businesses sold or
held for sale, and a credit of $6 million before taxes ($4
million after taxes) for the net reversal of restructuring
and realignment reserves no longer required.

(h) Includes a $10 million charge before taxes ($6 million

after taxes) for litigation settlements, a $6 million charge
before minority interest ($3 million after minority
interest) for the impairment of goodwill, a $3 million
charge before taxes ($2 million after taxes) for losses on
early debt extinguishment, a credit of $20 million before
taxes ($12 million after taxes) for insurance recoveries
related to the hardboard siding and roofing litigation, a
charge of $79 million before taxes ($64 million after
taxes) for estimated losses of businesses sold or held for
sale, and a credit of $17 million before taxes ($11
million after taxes) for the net reversal of restructuring
and realignment reserves no longer required.

(i) Includes a $23 million charge before taxes and minority

interest ($14 million after taxes and minority interest) for
asset shutdowns of excess internal capacity and cost
reduction actions.

(j) Includes a charge of $10 million after taxes for the

cumulative effect of an accounting change to record the
charge for the adoption of SFAS No. 143, “Accounting for
Asset Retirement Obligations.”

(k) Includes a pre-tax charge of $51 million ($32 million
after taxes) for facility shutdown costs and severance
costs associated with organizational restructuring
programs, a $20 million pre-tax charge ($12 million
after taxes) for legal reserves, a $10 million charge
before taxes ($6 million after taxes) for early debt
retirement costs, a $10 million pre-tax charge ($6
million after taxes) to adjust previous estimated
gains/losses of businesses previously sold, and a $9
million credit before taxes and minority interest ($5
million after taxes and minority interest) for the reversal
of restructuring reserves no longer required.

(l) Includes a $50 million reduction of the income tax

provision resulting from settlements of prior period tax
issues and benefits from an overseas tax program.

(g) Includes an $18 million charge before taxes and minority
interest ($11 million after taxes and minority interest) for
organizational restructuring programs, a charge of $29
million before minority interest ($15 million after
minority interest) for the impairment of goodwill, a
charge of $8 million before taxes ($5 million after taxes)

(m)Includes a pre-tax charge of $71 million ($43 million

after taxes) for facility closure costs and severance costs
associated with organizational restructuring programs, a
$14 million charge before taxes ($9 million after taxes)
for legal reserves, an $8 million charge before taxes
($7 million after taxes) for early debt retirement costs, a

$1 million pre-tax charge ($1 million after taxes) to
adjust estimated gains/losses of businesses previously
sold, and an $8 million pre-tax credit ($5 million after
taxes) for the net reversal of restructuring and
realignment reserves no longer required.

(n) Includes a decrease in the income tax provision of $60
million reflecting a favorable revision of estimated tax
accruals upon filing the 2002 federal income tax return
and increased research and development credits.

(o) Includes a $91 million charge before taxes and minority

interest ($55 million after taxes and minority interest) for
asset shutdowns of excess internal capacity and cost
reduction actions, a $29 million pre-tax charge ($18
million after taxes) for legal reserves, a credit of $19
million before taxes ($12 million after taxes) for gains on
early extinguishment of debt, a $21 million charge before
taxes ($26 million after taxes) for net losses on sales and
impairments of businesses held for sale, and a $23
million credit before taxes ($15 million after taxes) for
the reversal of restructuring reserves no longer required.

(p) Includes a $13 million credit after minority interest
related to a favorable settlement with Australian tax
authorities of net operating loss carryforward credits.

(q) Includes a charge of $3 million after taxes for the

cumulative effect of an accounting change to record the
transitional charge for the adoption of FIN 46,
“Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.”

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH

ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of December 31, 2004, an evaluation was carried out
under the supervision and with the participation of the
Company’s management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures, as defined in Rule 13a-
15 under the Securities Exchange Act (the Act). Based upon
this evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company’s disclosure
controls and procedures are effective to ensure that
information required to be disclosed by us in reports we file
under the Act is recorded, processed, summarized, and
reported by management of the Company on a timely basis in
order to comply with the Company’s disclosure obligations
under the Act and the SEC rules thereunder.

Management’s Report on Internal Control Over
Financial Reporting

As of December 31, 2004, management has assessed the
effectiveness of the Company’s internal control over financial
reporting. In a report included on page 35, management
concluded that, based on its assessment, the Company’s
internal control over financial reporting is effective as of
December 31, 2004.

Changes in Internal Control over Financial Reporting

During the fourth quarter of 2004, there were no changes in
the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

The following information is being provided in lieu of filing
a Form 8-K to report our entry into a material definitive
agreement under Item 1.01:

Consistent with the Company’s compensation philosophy and
its objective to attract and retain top talent, the Management
Development and Compensation Committee of the Board,
composed entirely of independent non-employee directors,
reviews the base salaries of senior management on an annual
basis and makes adjustments, as necessary, to recognize
individual performance against objectives, promotions and

competitive compensation levels. In connection with this
annual review, on March 7, 2005, the Management
Development and Compensation Committee and the Board of
Directors made changes to the salaries of the Company’s
named executive officers, effective as of April 1, 2005.

The adjustment to Mr. Faraci’s base salary was made in
recognition of both his performance against objectives as
Chairman and CEO, as well as competitive market salary levels.

The salary adjustments for each of the named executive
officers are set forth in Exhibit 10.17.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF

THE REGISTRANT

Information concerning our directors is hereby
incorporated by reference to our definitive proxy statement
which will be filed with the Securities and Exchange
Commission (SEC) within 120 days of the close of our fiscal
year. The Audit and Finance Committee of the Board of
Directors has at least one member who is a financial expert.
Further information concerning the composition of the
Audit and Finance Committee and our audit committee
financial experts is hereby incorporated by reference to our
definitive proxy statement that will be filed with the SEC
within 120 days of the close of our fiscal year. Information
with respect to our executive officers is set forth on pages 4
and 5 in Part I of this Form 10-K under the caption,
“Executive Officers of the Registrant.” Executive officers of
International Paper are elected to hold office until the
next annual meeting of the Board of Directors following the
annual meeting of shareholders and until election of
successors, subject to removal by the Board.

The Company’s Code of Business Ethics is applicable to all
employees of the Company, including the chief executive officer
and senior financial officers, as well as the Board of Directors.
No amendments or waivers of the Code have occurred. We
intend to disclose any amendments to our Code of Business
Ethics and any waivers from a provision of our Code of
Business Ethics granted to our directors, chief executive officer
and senior financial officers on our Internet Web site within
five business days following such amendment or waiver.

We make available free of charge on our Internet Web site
at www.internationalpaper.com, and in print to any
shareholder who requests, our Corporate Governance
Principles, our Code of Business Ethics and the charters of
our Audit and Finance Committee, Management
Development and Compensation Committee, Governance
Committee and Public Policy and Environment Committee.
Requests for copies may be directed to the corporate

secretary at our corporate headquarters.

Information with respect to compliance with Section 16(a) of the
Securities and Exchange Act is hereby incorporated by reference
to our definitive proxy statement that will be filed with the SEC
within 120 days of the close of our fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to the compensation of executives and
directors of the Company is hereby incorporated by reference to
our definitive proxy statement that will be filed with the SEC
within 120 days of the close of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

A description of the security ownership of certain beneficial
owners and management and equity compensation plan
information is hereby incorporated by reference to our definitive
proxy statement which will be filed with the SEC within 120 days
of the close of our fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

A description of certain relationships and related transactions is
hereby incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120 days of the
close of our fiscal year.

(3.1)

(3.2)

(3.3)

(3.4)

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND

(4.1)

SERVICES

Information with respect to fees paid to, and services rendered
by, our principal accountant and our policies and procedures for
pre-approving those services is hereby incorporated by reference
to our definitive proxy statement which will be filed with the SEC
within 120 days of the close of our fiscal year.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT

SCHEDULES

(a) (1) Financial Statements – See Item 8. Financial Statements

and Supplementary Data.

(2) Financial Statement Schedules – The following additional
financial data should be read in conjunction with the
financial statements in Item 8. Schedules not included with
this additional financial data have been omitted because

(4.2)

(4.3)

(4.4)

they are not applicable, or the required information is
shown in the financial statements or the notes thereto.

Additional Financial Data
2004, 2003 and 2002

Report of Independent Registered Public Accounting Firm

on Financial Statement Schedule for 2004 and 2003........86

Consolidated Schedule: II-Valuation and Qualifying

Accounts...........................................................................87

(3)

Exhibits:

Form of Restated Certificate of Incorporation of
International Paper Company (incorporated by
reference to the Company’s Report on Form 8-K dated
November 20, 1990, File No. 1-3157).

Certificate of Amendment to the Certificate of
Incorporation of International Paper Company
(incorporated herein by reference to Exhibit (3) (i) to
the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, File No. 1-3157).

Certificate of Amendment of the Certificate of
Incorporation of International Paper Company
(incorporated by reference to Exhibit 3.1 of the
Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001, File No. 1-3157).

By-laws of the Company, as amended (incorporated by
reference to the Company’s Annual Report on Form
10-K for the year ended December 31, 2001, File No.
1-3157).

Specimen Common Stock Certificate (incorporated
by reference to Exhibit 2-A to the Company’s
registration statement on Form S-7, No. 2-56588,
dated June 10, 1976).

Indenture, dated as of April 12, 1999, between
International Paper and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 4.1 to
International Paper’s Report on Form 8-K filed on June
29, 2000, File No. 1-3157).

Floating Rate Notes Supplemental Indenture, dated as
of June 14, 2000, between International Paper and
The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.2 to International Paper’s Report
on Form 8-K filed on June 29, 2000, File No. 1-3157).

8% Notes Due July 8, 2003 Supplemental Indenture,
dated as of June 14, 2000, between International
Paper and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.3 to

(4.5)

(4.6)

(4.7)

(4.8)

(4.9)

(4.10)

(4.11)

(10.1)

International Paper’s Report on Form 8-K filed on
June 29, 2000, File No. 1-3157).

8 1/8% Notes Due July 8, 2005 Supplemental
Indenture dated as of June 14, 2000, between
International Paper and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 4.4
to International Paper’s Report on Form 8-K filed
on June 29, 2000, File No. 1-3157).

Form of new 8 1/8% Notes due July 8, 2005
(incorporated by reference to Exhibit 4.1 to
International Paper Company’s Registration
Statement on Form S-4 dated October 23, 2000, as
amended November 15, 2000, File No. 333-48434).

Zero Coupon Convertible Senior Debentures due
June 20, 2021 (incorporated by reference to
Exhibit 4.2 to International Paper Company’s
Registration Statement on Form S-3 dated June 20,
2001, as amended September 7, 2001, October 31,
2001 and January 16, 2002, File No. 333-69082).

6.75% Notes due 2011 Supplemental Indenture
between International Paper Company and The
Bank of New York (incorporated by reference to
Exhibit 4.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30,
2001, File No. 1-3157).

4.25% Notes due 2009 and 5.50% Notes due 2014
Supplemental Indenture dates as of December 15,
2003, between International Paper Company and
The Bank of New York (incorporated by reference
to Exhibit 4.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31,
2003, File No. 1-3157).

4.00% Notes due 2010 and 5.25% Notes due 2016
Supplemental Indenture, dated as of March 18,
2004, between International Paper Company and
The Bank of New York, as Trustee (incorporated
by reference to Exhibit 4.1 to the Company’s
Report on Form 8-K dated March 19, 2004, File
No. 1-3157).

In accordance with Item 601 (b) (4) (iii) (A) of
Regulation S-K, certain instruments respecting long-
term debt of the Company have been omitted but
will be furnished to the Commission upon request.

Amended and Restated Long-Term Incentive
Compensation Plan, as of February 2, 2005
(incorporated by reference to Exhibit 99.1 of the
Company’s Report on Form 8-K dated February 11,
2005, File No. 1-3157).

(10.2)

Form of Confidentiality and Non-Competition

Agreement entered into by Company employees who
may receive restricted stock awards pursuant to the
Long-Term Incentive Compensation Plan of the
Company (incorporated by reference to Exhibit 10.2
of the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003, File No. 1-3157).

(10.3) Management Incentive Plan, amended and restated

as of January 1, 2003 (incorporated by reference
to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended March 31,
2003, File No. 1-3157).

(10.4)

(10.5)

Form of individual non-qualified stock option
agreement under the Company’s Long-Term
Incentive Compensation Plan (incorporated by
reference to Exhibit 10.6 to the Company’s Annual
Report on Form 10-K for the fiscal year ended
December 31, 2001, File No. 1-3157).

Form of individual executive continuity award
under the Company Long-Term Incentive
Compensation Plan (incorporated by reference to
Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31,
1999, File No. 1-3157).

(10.6a)

Form of Change of Control Agreement for Chief
Executive Officer (incorporated by reference to
Exhibit 10.8a to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31,
2001, File No. 1-3157).

(10.6b)

Form of Change of Control Agreement--Tier I
(incorporated by reference to Exhibit 10.8b to the
Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, File No. 1-3157).

(10.6c)

Form of Change of Control Agreement--Tier II
(incorporated by reference to Exhibit 10.8c to the
Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, File No. 1-3157).

(10.7)

(10.8)

(10.9)

Unfunded Supplemental Retirement Plan for Senior
Managers, as amended (incorporated by reference
to Exhibit 10.9 to the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31,
2001, File No. 1-3157).

International Paper Company Unfunded Savings
Plan (incorporated by reference to Exhibit 10.11 to
the Company’s Form 10K/A for the year 2000 dated
January 16, 2002, File No. 1-3157).

International Paper Company Pension Restoration
Plan for Salaried Employees (incorporated by
reference to Exhibit 10.12 to the Company’s Form
10K/A for the year 2000 dated January 16, 2002,

File No. 1-3157).

(10.10) $650 million credit agreement dated as of June 28,
2004, among the Company, Ngahere Aotearoa, the
Lenders Party thereto, Bank of Tokyo - Mitsubishi
Trust Company. As Syndication Agent, Mizoho
Corporate Bank, USA, as Documentation Agent, and
Deutsche Bank AG New York Branch, as
Administrative Agent (incorporated by reference to
Exhibit 10.1 and the Company’s Report on Form 8-K
dated July 1, 2004, File No. 1-3157).

(10.11) $1.5 Billion 3-Year Credit Agreement dated as of

March 6, 2003 between International Paper
Company, the Lenders Party thereto, Citibank, N.A.,
as Syndication Agent, Bank of America, N.A., BNP
Paribas and Deutsche Bank Securities Inc., as
Documentation Agents and J.P. Morgan Securities
Inc. and Salomon Smith Barney Inc., as Joint Lead
Arrangers and Joint Bookrunners (incorporated by
reference to Exhibit 10.1 of the Company’s
Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003, File No. 1-3157).

(10.12) 5-Year Credit Agreement, dated as of March 30,
2004, between International Paper Company, the
lenders party thereto, Bank of America, N.A., as
syndication agent, BNP Paribas, Citibank, N.A. and
Deutsche Bank Securities inc., as Co-
Documentation Agents, J.P. Morgan Securities Inc.
and Banc of America Securities LLC, as Lead
Arrangers and Joint Bookrunners, and JPMorgan
Chase Bank, as Administrative Agent (incorporated
by reference to Exhibit 10.1 to the Company’s
Report on Form 8-K dated April 2, 2004, File No.
1-3157).

(10.13) Amended and Restated Credit and Security

Agreement dated as of November 17, 2004 among
Red Bird Receivables, Inc., as Borrower,
International Paper Financial Services, Inc., as
Servicer, International Paper Company, as
Performance Guarantor, The Conduits from Time to
Time Party thereto, The Bank of Tokyo-Mitsubishi,
Ltd., New York Branch, as Gotham Agent, JPMorgan
Chase Bank, N.A., as Prefco Agent, BNP Paribas,
Acting through its New York Branch, as StarBird
Agent, Citicorp North America, Inc., as CAFCO
Agent and Wachovia Bank, National Association as
Blue Ridge Agent and as Administrative Agent
(incorporated by reference to Exhibit 10.01 to the
Company’s Report on Form 8-K/A dated December
9, 2004, File No. 1-3157).

(10.14) EUR500 million 5-year credit facility, dated as of

August 26, 2004, among the Company, as

Guarantor, International Paper Investments
(France) S.A.S., a French wholly-owned subsidiary
of the Company, as Borrower, BNP Paribas,
Barclays Capital and ABN AMRO N.V., as mandated
lead arrangers, certain financial institutions named
therein and BNP Paribas, as facility agent.

Form of Indemnification Agreement for Directors
(incorporated by reference to Exhibit 10.13 to the
Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, File No. 1-
3157).

Supplemental Pension Benefit Agreement between
International Paper Company and Christopher P.
Liddell dated December 14, 2004 (incorporated
by reference to Exhibit 10.1 to the Company’s
Report on Form 8-K dated December 20, 2004,
File No. 1-3157).

(10.15)

(10.16)

(10.17) Amendments to Compensation for Named Executive

Officers.

(11)

Statement of Computation of Per Share Earnings.

(12)

Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.

(21)

List of Subsidiaries of Registrant.

(23)

Consent of Independent Auditors.

(24)

Power of Attorney.

(31.1)

(31.2)

(32)

(99.1)

(99.2)

Certification by John V. Faraci, Chairman and Chief
Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

Certification by Christopher P. Liddell, Chief
Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.

Board Policy on Severance Agreements with Senior
Executives (incorporated by reference to Exhibit
99.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2003,
File No. 1-3157).

Board Policy on Change of Control Agreements
(Incorporated by reference to Exhibit 99.2 to
the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, File
No. 1-3157).

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Shareholders of
International Paper Company
Stamford, Connecticut

We have audited the consolidated financial statements of
International Paper Company and subsidiaries (the
“Company”) as of December 31, 2004 and 2003, and for each
of the three years in the period ended December 31, 2004,
management’s assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31,
2004, and the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2004, and have
issued our reports thereon dated March 7, 2005; such
consolidated financial statements and reports are included in
your 2004 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the
consolidated financial statement schedule of the Company
listed in Item 15. This consolidated financial statement
schedule is the responsibility of the Company’s management.
Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement
schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

NEW YORK, N.Y.
MARCH 7, 2005

INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

In millions

For the Year Ended December 31, 2004

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance at
End
of Period

SCHEDULE II

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts - current
Restructuring reserves

In millions

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts - current
Restructuring reserves

In millions

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts - current
Restructuring reserves

$135
81

$18
74

$-
-

(a)

(b)

$(25)
(155)

$128
-

For the Year Ended December 31, 2003

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance at
End
of Period

$167
104

$20
160

$-
-

(a)

(b)

$(52)
(183)

$135
81

For the Year Ended December 31, 2002

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance at
End
of Period

$178
321

$29
119

$-
-

(a)

(b)

$(40)
(336)

$167
104

(a) Includes write-off, less recoveries, of accounts determined to be uncollectible and other adjustments.
(b) Includes payments and deductions for reversals of previously established reserves that were no longer required.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL PAPER COMPANY

/S/ MAURA A. SMITH
By: _______________________

Maura A. Smith
Senior Vice President, General Counsel
and Corporate Secretary

POWER OF ATTORNEY

March 10, 2005

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Maura A. Smith and
Andrea L. Dulberg, jointly and severally, as his or her true and lawful attorney-in-fact and agent, acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to
this annual report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact full power and authority to do and reform each and every
act and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:

Signature

Title

/S/ JOHN V. FARACI

__________________________
John V. Faraci

Chairman of the Board, Chief
Executive Officer and Director

Date

March 10, 2005

/S/ ROBERT M. AMEN

President and Director

March 10, 2005

__________________________
Robert M. Amen

/S/ MARTHA FINN BROOKS

Director

March 10, 2005

__________________________
Martha Finn Brooks

/S/ SAMIR G. GIBARA

Director

March 10, 2005

__________________________
Samir G. Gibara

/S/ JAMES A. HENDERSON

Director

March 10, 2005

__________________________
James A. Henderson

/S/ W. CRAIG MCCLELLAND

Director

March 10, 2005

__________________________
W. Craig McClelland

Signature

/S/ DONALD F. MCHENRY

__________________________
Donald F. McHenry

Title

Director

Date

March 10, 2005

/S/ CHARLES R. SHOEMATE

Director

March 10, 2005

__________________________
Charles R. Shoemate

/S/ WILLIAM G. WALTER

Director

March 10, 2005

__________________________
William G. Walter

/S/ CHRISTOPHER P. LIDDELL
__________________________
Christopher P. Liddell

Senior Vice President and
Chief Financial Officer

March 10, 2005

/S/ ROBERT J. GRILLET

Vice President-Finance and Controller

March 10, 2005

__________________________
Robert J. Grillet

2004 Listing of Facilities
(all facilities are owned except as
noted otherwise)

Svetogorsk, Russia
Inverurie, Scotland

PRINTING PAPERS

INDUSTRIAL AND
CONSUMER PACKAGING

Business Papers, Coated Papers,

INDUSTRIAL PACKAGING

Fine Papers and Pulp

U.S.:

Courtland, Alabama
Selma, Alabama

(Riverdale Mill)
Pine Bluff, Arkansas
Ontario, California leased

(C & D Center)
Cantonment, Florida
(Pensacola Mill)

Augusta, Georgia
Bastrop, Louisiana
(Louisiana Mill)
Springhill, Louisiana
(C & D Center)
Bucksport, Maine
Jay, Maine

(Androscoggin Mill)
Westfield, Massachusetts

(C & D Center)
Quinnesec, Michigan
Sturgis, Michigan
(C & D Center)
Sartell, Minnesota
Ticonderoga, New York
Riegelwood, North Carolina
Hamilton, Ohio
Saybrook, Ohio leased
(C & D Center)
Hazleton, Pennsylvania
(C & D Center)

Eastover, South Carolina
Georgetown, South Carolina
Sumter, South Carolina
(C & D Center)

Franklin, Virginia (2 locations)

International:

Arapoti, Parana, Brazil
Mogi Guacu, São Paulo, Brazil
Maresquel, France
Saillat, France
Kwidzyn, Poland

Containerboard

U.S.:

Prattville, Alabama
Savannah, Georgia
Terre Haute, Indiana
Ft. Madison, Iowa
Mansfield, Louisiana
Pineville, Louisiana
Vicksburg, Mississippi

International:
Arles, France

Corrugated Container

U.S.:

Bay Minette, Alabama
Decatur, Alabama
Dothan, Alabama leased
Conway, Arkansas
Fordyce, Arkansas leased
Jonesboro, Arkansas
Russellville, Arkansas
Carson, California
Hanford, California
Modesto, California
San Leandro, California leased
Stockton, California
Vernon, California
Putnam, Connecticut
Auburndale, Florida
Jacksonville, Florida leased
Lake Wales, Florida
Forest Park, Georgia
Savannah, Georgia
Stockbridge, Georgia leased
Bedford Park, Illinois leased
Chicago, Illinois
Des Plaines, Illinois
Litchfield, Illinois leased
Northlake, Illinois
Fort Wayne, Indiana

A-1

APPENDIX 1

Hartford City, Indiana
Portland, Indiana leased
Lexington, Kentucky
Louisville, Kentucky
Lafayette, Louisiana
Shreveport, Louisiana
Springhill, Louisiana
Auburn, Maine
Brownstown, Michigan
Howell, Michigan
Kalamazoo, Michigan
Minneapolis, Minnesota (2 locations)

1 leased

Houston, Mississippi
Kansas City, Missouri
North Kansas City, Missouri leased
Geneva, New York
King’s Mountain, North Carolina leased
Statesville, North Carolina
Bethesda, Ohio leased
Cincinnati, Ohio
Newark, Ohio
Solon, Ohio
Wooster, Ohio
Eighty-four, Pennsylvania
Lancaster, Pennsylvania
Mount Carmel, Pennsylvania
Sharpsburg, Pennsylvania
Washington, Pennsylvania
Georgetown, South Carolina
Laurens, South Carolina
Spartanburg, South Carolina
Morristown, Tennessee
Murfreesboro, Tennessee
Dallas, Texas
Edinburg, Texas (2 locations)
El Paso, Texas
Ft. Worth, Texas
San Antonio, Texas
Chesapeake, Virginia
Richmond, Virginia
Cedarburg, Wisconsin
Fond du Lac, Wisconsin

International:

Las Palmas, Canary Islands
Tenerife, Canary Islands
Rancagua, Chile
Arles, France
Chalon-sur-Saone, France
Chantilly, France
Creil, France

LePuy, France
Mortagne, France
Guadeloupe, French West Indies
Asbourne, Ireland
Bellusco, Italy
Catania, Italy
Pomezia, Italy
San Felice, Italy
Alcala, Spain leased
Almeria, Spain leased
Barcelona, Spain
Bilbao, Spain
Gandia, Spain
Valladolid, Spain
Thrapston, United Kingdom
Winsford, United Kingdom

Jeddah, Saudi Arabia
Taipei, Taiwan
Guacara,Venezuela

Foodservice

U.S.:

Visalia, California
Shelbyville, Illinois
Kenton, Ohio
Jackson, Tennessee

International:

Brisbane, Australia
Shanghai, China
Bogota, Columbia leased

Kraft Paper

Shorewood Packaging

Courtland, Alabama
Bastrop, Louisiana
Roanoke Rapids, North Carolina
Franklin, Virginia

CONSUMER PACKAGING

Bleached Board

Pine Bluff, Arkansas
Augusta, Georgia
Riegelwood, North Carolina
Prosperity, South Carolina
Texarkana, Texas

U.S.:

Waterbury, Connecticut
Indianapolis, Indiana
Louisville, Kentucky
Edison, New Jersey
Harrison, New Jersey leased
West Deptford, New Jersey
Hendersonville, North Carolina
Weaverville, North Carolina
Springfield, Oregon
Danville, Virginia
Newport News, Virginia
Roanoke, Virginia

Beverage Packaging

International:

U.S.:

Turlock, California
Plant City, Florida
Cedar Rapids, Iowa
Framingham, Massachusetts
Kalamazoo, Michigan
Raleigh, North Carolina

International:

London, Ontario, Canada
Longueuil, Quebec, Canada leased
Shanghai, China
Santiago, Dominican Republic
San Salvador, El Salvador leased
Ashrat, Israel
Fukusaki, Japan
Seoul, Korea

Brockville, Ontario, Canada
Smith Falls, Ontario, Canada
Toronto, Ontario, Canada
Guangzhou, China
Ebbw Vale, Wales, United Kingdom

DISTRIBUTION

xpedx

U.S.:

Stores Group
Chicago, Illinois
148 locations nationwide

138 leased

South Central Region
Greensboro, North Carolina

35 branches in the Southeast States

and Ohio

21 leased
Midwest Region

Denver, Colorado
37 branches in the Great Lakes,
Mid-America, Rocky Mountain
and South Plain States

22 leased

West Region

Downey, California
27 branches in the
Northwest and Pacific States

21 leased

Northeast Region

Hartford, Connecticut
22 branches in New England
and Middle Atlantic States

17 leased

International:

Mexico (15 locations)

all leased

Papeteries de France
Pantin, France (2 locations)

1 leased

FOREST PRODUCTS

Forest Resources

U.S.:

Approximately 6.8 million acres
in the South and North

International:

Approximately 1.2 million
acres in Brazil

Realty Projects

Daufuskie Island, South Carolina
(Haig Point Incorporated)

Wood Products

U.S.:

Chapman, Alabama
Citronelle, Alabama
Maplesville, Alabama
Opelika, Alabama
Thorsby, Alabama

A-2

Gurdon, Arkansas
Leola, Arkansas
McDavid, Florida
Whitehouse, Florida
Augusta, Georgia
Folkston, Georgia
Meldrim, Georgia
Springhill, Louisiana
Wiggins, Mississippi
Joplin, Missouri
Armour, North Carolina
Seaboard, North Carolina
Johnston, South Carolina
Newberry, South Carolina
Sampit, South Carolina
Camden, Texas
Corrigan, Texas
Henderson, Texas
New Boston, Texas
Franklin, Virginia

International:

Santana, Amapa, Brazil
Arapoti, Parana, Brazil

CARTER HOLT HARVEY

Forestlands

Approximately 785,000
acres in New Zealand owned & leased

Wood Products

Sawmills and Processing Plants
Morwell, Victoria, Australia
Oberon, New South Wales,

Australia

Mt. Gambier, South Australia,

Australia (2 plants)

Myrtleford, Victoria, Australia
Kopu, New Zealand
Nelson, New Zealand
Putaruru, New Zealand
Rotorua, New Zealand
Taupo, New Zealand
Tokoroa, New Zealand

Timber Merchants Warehousing -

Australia
Sydney, New South Wales leased
Brisbane, Queensland leased
Perth, Western Australia leased
Melbourne, Victoria leased

Plywood Mills

Myrtleford, Victoria, Australia
Tokoroa, New Zealand
Laminated Veneer Lumber

Auckland, New Zealand leased
Nangwarry, South Australia,

Australia

Marsden Point, New Zealand

Decorative Products Processing Plant

Auckland, New Zealand

Decorative Products Distribution Center
Christchurch, New Zealand leased
Panel Production Plants - New Zealand

Auckland
Kopu
Rangiora

Packaging

Case Manufacturing

Suva, Fiji
Auckland, New Zealand
Christchurch, New Zealand
Hamilton, New Zealand
Levin, New Zealand
Carton Manufacturing

Sydney, New South Wales,

Australia

Brisbane, Queensland,
Australia leased

Adelaide, South Australia,

Australia

Melbourne, Victoria,

Australia (2 locations) leased

Panel Production Plants - Australia

Oberon, New South Wales (2 plants)
Tumut, New South Wales
Gympie, Queensland leased
Mt. Gambier, South Australia (2 plants)
Bell Bay, Tasmania

Auckland, New Zealand
Corrugated Manufacturing

Melbourne, Australia leased
Sydney, Australia leased
Paper Bag Manufacturing
Auckland, New Zealand

Medium Density Fiberboard Plants

Paper Cups

Leshan City, Sichuan Province, China
Shishou City, Hubei Province, China

Flooring Overlay Panel Plant

Leshan City, Sichuan Province, China

Building Supplies Retail Outlets
Retail Outlets, 43 branches
in New Zealand (26 leased)

Frame and Truss

Brisbane, Queensland, Australia

Graphics (Pre-Press)

Melbourne, Victoria, Australia leased

SPECIALTY BUSINESSES
AND OTHER

Auckland, New Zealand (2 locations)

Chemicals

2 leased

Christchurch, New Zealand leased
Rotorua, New Zealand leased
Upper Hutt, New Zealand leased

Pulp and Paper

Kraft Paper, Pulp, Coated and
Uncoated Papers and Bristols
Kinleith, New Zealand

Pulp Mill

Kawerau, New Zealand

Cartonboard

Whakatane, New Zealand

Containerboard

Kinleith, New Zealand
Auckland, New Zealand
Fiber Recycling Operations

Auckland, New Zealand leased

U.S.:

Panama City, Florida
Pensacola, Florida
Port St. Joe, Florida
Savannah, Georgia
Valdosta, Georgia
Picayune, Mississippi
Dover, Ohio

International:
Oulu, Finland
Niort, France
Greaker, Norway
Sandarne, Sweden
Bedlington, United Kingdom
Chester-le-Street, United Kingdom

A-3

IP Mineral Resources

Houston, Texas leased

Chocolate Bayou Water Company

Alvin, Texas

Industrial Papers

U.S.:

Lancaster, Ohio
De Pere, Wisconsin
Kaukauna, Wisconsin
Menasha, Wisconsin

International:

Heerlen, Netherlands

Polyrey

Couze, France
Ussel, France

A-4

2004 CAPACITY INFORMATION

Printing Papers
Uncoated Freesheet
Bristols

Uncoated Papers and Bristols

Coated Freesheet
Coated Groundwood

Total Coated Papers
Uncoated Groundwood (SC Paper)

Total Coated and SC Papers

Dried Pulp*
Newsprint

Total Printing Papers

Industrial and Consumer Packaging
Containerboard
Kraft Paper
Bleached Board
Specialty Papers

Total Industrial and Consumer Packaging

APPENDIX II

(in thousands of short tons)

AMERICAS, OTHER

U.S.

Europe

THAN U.S.

Total

4,000
820
4,820
700
1,200
1,900
100
2,000
1,325
-
8,145

4,500
600
1,800
360
7,260

1,286
-
1,286
44
-
44
-
44
231
124
1,685

170
-
280
15
465

463
-
463
-
224
224
-
224
23
-
710

-
-
-
-
-

5,749
820
6,569
744
1,424
2,168
100
2,268
1,579
124
10,540

4,670
600
2,080
375
7,725

Carter Holt Harvey (CHH) (Pacific Rim)
owned 50.5% by International Paper

Pulp & Paper
Containerboard
Dried Pulp
Bleached Board

(in thousands of short tons)
441
579
120

Forest Products

U.S. Wood Business
21 Lumber mills (board. ft.)
5 Plywood mills (sq. ft. 3/8” basis)
1 Laminated Veneer Lumber mill (cubic ft.)
2 Pole plants (cubic ft.)

(Units - MM)
2,500
1,600
3
4

Wood Products
Medium Density Fiberboard (sq. ft. 3/4” basis)
Particle Board (sq. ft. 3/4” basis)
Plywood (sq. ft. 3/8” basis)
Laminated Veneer Lumber (sq. ft.)
Lumber (board ft.)

Forestlands

(Units - MM)
565
318
189
90
467

(M Acres)
785

* International Paper has a net surplus pulp position of 0.6 million tons.

This is the difference between the 1.6 million tons of dried pulp capacity and

1.0 million tons of dried pulp purchased and consumed.

Forest Resources
We own, manage or have an interest in more than 9 million
acres of forestlands worldwide. These forestlands and associated
acres are located in the following regions:
South
North

(M Acres)

5,985
840
6,825
785
1,220
8,830

502
502

Total U.S.

CHH
Brazil

Total

We have harvesting rights in:
Russia

Total

A-5

SENIOR LEADERSHIP

John V. Faraci
Chairman and
Chief Executive Officer

Robert M. Amen

President

Marianne M. Parrs
Executive Vice President

Newland A. Lesko
Executive Vice President

Michael J. Balduino
Senior Vice President and
President, Shorewood Packaging

H. Wayne Brafford
Senior Vice President
Industrial Packaging

Jerome N. Carter
Senior Vice President
Human Resources

C. Cato Ealy

Senior Vice President
Corporate Development

Thomas E. Gestrich
Senior Vice President
Consumer Packaging

Paul Herbert

Senior Vice President
Printing & Communications
Papers

William Hoel

Senior Vice President
Sales and Marketing

Thomas G. Kadien
Senior Vice President
and President, International
Paper Europe

Andrew R. Lessin
Senior Vice President
Internal Audit

Christopher P. Liddell
Senior Vice President and
Chief Financial Officer

Richard B. Lowe

Senior Vice President and
President, xpedx

Richard B. Phillips
Senior Vice President
Technology

LH Puckett

Senior Vice President
Coated and SC Papers

Maura Abeln Smith
Senior Vice President,
General Counsel and
Corporate Secretary

W. Dennis Thomas
Senior Vice President
Public Affairs and
Communications

W. Michael Amick Jr.

Vice President
Supply Chain – North America

David A. Bailey

Vice President, Business
Development
International Paper Europe

John N. Balboni
Vice President and
Chief Information Officer
Information Technology

Aleesa L. Blum
Vice President
Communications

Dennis J. Colley

Vice President
Containerboard

William P. Crawford

Vice President
Global Sourcing

Arthur J. Douville

Vice President
xpedx

Michael P. Exner

Vice President, Manufacturing
Containerboard and
Specialty Papers

Lyle J. Fellows

Vice President, Manufacturing
Coated and SC Papers

Greg Gibson
Vice President
Commercial Printing &
Imaging Papers

Robert Grillet

Vice President and Controller
Finance

Jeffrey A. Hearn

Vice President
Bleached Board

Robert M. Hunkeler

Timothy S. Nicholls

Vice President
Investments

Tommy S. Joseph

Vice President
Specialty Papers

Paul J. Karre
Vice President
Human Resources

Tim Kelly

Vice President, Manufacturing
and Technology
International Paper Europe

Timothy P. Keneally

Vice President
Specialty Packaging

Austin E. Lance
Vice President
Converting Papers

Mary Laschinger

Vice President
Wood Products

David A. Liebetreu

Vice President
Forest Resources

Gerald C. Marterer

Vice President
Arizona Chemical

Jonathan Mason

Vice President
Treasury

Brian McDonald
Vice President and
President
International Paper Asia

Mark McGuire
Vice President and
Deputy General Counsel
Legal

William A. Merrigan

Vice President
Global Supply Chain, Deliver

John L. Moorhead

Vice President
Imaging Papers

J. Scott Murchison

Vice President
Beverage Packaging and
Foodservice

Ted R. Niederriter
Vice President and
Deputy General Counsel
Legal

Vice President and
Chief Financial Officer
International Paper Europe

Larry Norton

Vice President, Manufacturing
Printing & Communications
Papers

Maximo Pacheco
Vice President and
President and Managing
Director
International Paper Brazil

Jean-Michel Ribieras

Vice President
Pulp

Carol L. Roberts

Vice President
Container, Americas

Ethel A. Scully
Vice President
Corporate Marketing

Barbara L. Smithers

Vice President
Legal

Darial R. Sneed
Vice President
Investor Relations

Peter Springford

Chief Executive Officer and
Managing Director
Carter Holt Harvey

Larry J. Stowell
Vice President

David B. Struhs

Vice President
Environmental Affairs

Mark S. Sutton
Vice President
European Container

Greg Wanta

Vice President, Manufacturing
Bleached Board

Robert W. Wenker
Vice President and
Chief Technology Officer
Information Technology

Lyn M. Withey
Vice President
Public Affairs

DIRECTORS

SHAREHOLDER INFORMATION

John V. Faraci

Chairman
and Chief Executive Officer
International Paper

Robert M. Amen

President
International Paper

Martha Finn Brooks
Chief Operating Officer
Novelis, Inc.

Samir G. Gibara
Retired Chairman
The Goodyear
Tire & Rubber Company

James A. Henderson

Retired Chairman
and Chief Executive Officer
Cummins Inc.

W. Craig McClelland

Retired Chairman
and Chief Executive Officer
Union Camp Corporation

Donald F. McHenry
Distinguished Professor
of Diplomacy
Georgetown University

Charles R. Shoemate
Retired Chairman, President
and Chief Executive Officer
Bestfoods

William G. Walter

Chairman, President and
Chief Executive Officer
FMC Corp.

Papers used in this annual report:
Coated cover: Carolina® C2S Cover, 8 pt.,
made by our employees
at the Riegelwood, N.C., Mill.

Coated paper: SavvyTM Gloss, 80 lb. text
made by our employees
at the Quinnesec, Mich., Mill.

Uncoated paper: Accent® Opaque,
Smooth, 50 lb. text
made by our employees
at the Ticonderoga, N.Y., Mill.

Printed in the United States
by Sandy Alexander, Clifton, N.J.

Design: Joseph Rattan Design, Dallas, Texas

Photography: Rusty Hill, Dallas, Texas;
Tracey Kroll, Stamford, Conn.;
and Ron Mueller, Stevensville, Mont.

Corporate Headquarters
International Paper Company
400 Atlantic Street
Stamford, Connecticut 06921
1-203-541-8000

Annual Meeting
The next annual meeting of shareholders will be held at 10:30 a.m., Tuesday, May 10, 2005
at the Marriott Columbia City Center, Columbia, South Carolina.

Transfer Agent and Registrar
Mellon Investor Services, our transfer agent, maintains the records of our registered shareholders
and can help you with a variety of shareholder related services at no charge including:

Change of name or address
Consolidation of accounts
Duplicate mailings
Dividend reinvestment enrollment
Lost stock certificates
Transfer of stock to another person
Additional administrative services

Please write or call:

Mellon Investor Services LLC
Overpeck Center
85 Challenger Road
Ridgefield Park, New Jersey 07660-2108
Telephone Number: 1-800-678-8715

Stock Exchange Listings
Common shares (symbol: IP) are traded on the following exchanges: New York, Swiss and
Amsterdam. International Paper options are traded on the Chicago Board of Options Exchange.

Direct Purchase Plan
Under our plan, you may invest all or a portion of your dividends, and you may purchase up
to $20,000 of additional shares each year. International Paper pays most of the brokerage
commissions and fees. You may also deposit your certificates with the transfer agent for
safekeeping. For a copy of the plan prospectus, call or write to the corporate secretary at
the corporate headquarters.

Independent Public Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

Reports and Publications
Additional copies of this annual report, SEC filings and other publications are available by
calling 1-800-332-8146 or writing to the investor relations department at corporate
headquarters. Copies of our most recent environment, health and safety report are available
by calling 1-901-419-3945. Additional information is also available on our Web site,
http://www.internationalpaper.com.

Investor Relations
Investors desiring further information about International Paper should contact the investor
relations department at corporate headquarters, 1-203-541-8625.