International Paper Company Annual Report 2005

FY2005 Annual Report · International Paper Company

Loading PDF…

Simpler. Stronger. In 2005, International Paper took bold
steps toward reshaping our company to focus on our best
opportunities, improve earnings, pay down debt and return
value to shareowners. By focusing on uncoated papers and
packaging – two key platform businesses where we have
advantages and can achieve cost-of-capital returns and prof-
itable growth – we are executing a “play-to-win” strategy to
achieve our goal of having the best returns in our industry
and being one of the best industrial companies in the world.

U N C O AT E D PA P E R S

PA C K A G I N G

In uncoated papers, we have significant opportunities
to win for both customers and shareowners because we have
low-cost facilities in the right places throughout the world
and relationships with the right customers. With more than
6.5 million tons of capacity worldwide, we have significant
capabilities in terms of product offerings, channel and market
access, global reach and product development. We believe
opportunities exist for excelling in this business by focusing
on the right grades and customers, and using technology to
drive innovation. Going forward, we will continue to reduce
costs and further optimize our assets in our U.S. mill system,
and with strong demand growth in emerging markets such
as Eastern Europe, Latin America and Asia, we will evaluate
opportunities to enhance our existing platforms in Poland,
Russia and Brazil.

A strong adjunct to International Paper’s uncoated
papers business is our distribution business, xpedx, which
offers significant synergies and supply chain opportunities for
our platform businesses and brings unique solutions to cus-
tomers through global relationships with key manufacturers.

We have a solid U.S. corrugated container and con-
tainerboard business that is earning the right to grow, and
our European box business is strong. We have strengthened
our U.S. industrial packaging business through acquiring
Box USA, and we will continue to reduce our manufacturing
and supply chain costs, increase our containerboard integra-
tion level, broaden our product offerings and improve our
positions in profitable corrugated box segments. Through our
international operations, we are well positioned to supply
local markets and serve our global customers who are moving
into emerging markets. We are also a top producer of coated
board with manufacturing capacity in the United States,
Eastern Europe and Russia, and our Shorewood and Food-
service businesses provide value-added, innovative packaging
to global customers. Going forward, we have significant
advantages in terms of both costs and customer base to cap-
italize on growth in the packaging markets we serve.

FINANCIAL HIGHLIGHTS

Dollar amounts and shares in millions, except per share amounts

F I N A N C I A L S U M M A RY
Net Sales
Operating Profit
Earnings from Continuing Operations Before Income Taxes and Minority Interest
Discontinued Operations
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 from Continuing Operations Before Special Items
P E R S H A R E O F C O M M O N S T O C K
Basic Earnings (Loss) Per Common Share
Earnings from Continuing Operations
Discontinued Operations
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 Earnings (Loss)
Earnings from Continuing Operations Before Special Items and

Cumulative Effect of Accounting Changes

Cash Dividends
Common Shareholders’ Equity
S H A R E H O L D E R P R O F I L E
Shareholders of Record at December 31
Shares Outstanding at December 31
Average Shares Outstanding
Average Shares Outstanding – assuming dilution

2005

2004

$24,097

$23,359

1,923 (b)
586 (c)
241 (d)
1,100 (c-e)

524
28,771
8,351
5.2% (c,e)
4.0%

$ 1.77 (c,e)
0.49 (d)
2.26 (c-e)

1.08

$ 1.74 (c,e)
0.47 (d)
2.21 (c-e)

1.08
1.00
17.03

26,621
490.5
486.0
509.7

2,040 (b)
724 (f)
(491) (g)
(35) (f-h)

618
34,217
8,254
3.7% (f,g)
4.3%

0.94 (f,h)
(1.01) (g)
(0.07) (f-h)

1.27

0.93 (f,h)
(1.00) (g)
(0.07) (f-h)

1.26
1.00
16.93

28,051
487.5
485.8
488.4

(a) All periods presented have been restated to reflect Carter Holt Harvey Limited (CHH) and Weldwood of Canada Limited (Weldwood) as discontinued operations.
(b) See the operating profit table on page 36 for details of operating profit by industry segment.
(c) Includes restructuring and other charges of $358 million before taxes ($225 million after taxes), including a $274 million charge before taxes ($174 million after taxes) for organizational restructuring and other
charges principally associated with the Company’s Transformation Plan, a $57 million charge before taxes ($35 million after taxes) for early extinguishment of debt, and a $27 million charge before taxes ($16
million after taxes) for legal reserves. Also included are a $258 million pre-tax credit ($151 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation, a $4 million
credit before taxes ($3 million after taxes) for the net reversal of restructuring reserves no longer required, a pre-tax charge of $111 million ($73 million after taxes) for net losses on sales and impairments of
businesses sold or held for sale, and interest income of $54 million before taxes ($33 million after taxes), including $43 million before taxes ($26 million after taxes) related to a settlement with the U.S.
Internal Revenue Service, and $11 million before taxes ($7 million after taxes) related to the collection of a note receivable from the 2001 sale of a business.

(d) Includes a gain of $29 million before taxes ($361 million after taxes and minority interest) from the 2005 sale of CHH.
(e) Includes a $446 million reduction in the income tax provision, including a reduction of $627 million from an agreement reached with the U.S. Internal Revenue Service concerning the 1997 through 2000

U.S. federal income tax audit, a charge of $142 million for deferred taxes related to earnings repatriations under the American Jobs Creation Act of 2004, and $39 million of other tax charges.

(f) Includes restructuring and other charges of $166 million before taxes ($103 million after taxes), including a $64 million charge before taxes ($40 million after taxes) for organizational restructuring programs,
a $92 million charge before taxes ($57 million after taxes) for early debt extinguishment costs, and a $10 million charge before taxes ($6 million charge after taxes) for legal settlements. Also included are
pre-tax credits of $123 million ($76 million after taxes) for net insurance recoveries related to the hardboard siding and roofing litigation, a $36 million credit before taxes ($22 million after taxes) for the
net reversal of restructuring reserves no longer required, and a pre-tax charge of $139 million ($125 million after taxes) for net losses on sales and impairments of businesses sold or held for sale.

(g) Includes a gain of $268 million before taxes and minority interest ($90 million after taxes and minority interest) from the 2004 sale of the CHH Tissue business, and a pre-tax charge of $323 million ($711

million after taxes) from the 2004 sale of Weldwood.

(h) Includes a $32 million net increase in the income tax provision reflecting an adjustment of deferred tax balances.

TO OUR SHAREOWNERS

2005 was a pivotal year for International Paper. We made big, important, hard choices about what the future of our
company is going to be. Our plan is straightforward – we are going to make International Paper a better, stronger and
more competitive company. What we’re out to accomplish is not to be the biggest, but the best paper and forest products
company in the world.

We’ve made a lot of progress toward that goal during the past few years, and I’d like to thank our employees for their
hard work in making this happen. I also want to recognize President Rob Amen and Senior Vice Presidents Richard Phillips
and Dennis Thomas upon their retirements. Their leadership played a part in moving IP from a 10 of 11 ROI ranking vs. our
industry peers in 1999 to a 3 of 11 ranking last year. Added to that, we have been recognized as the most admired company
in our industry for the fourth consecutive year by Fortune magazine.

While we are pleased with this progress, much more is required to break out of the pack and provide the kind of
returns and earnings we want to achieve and you expect. Faced with mature markets in North America, rising raw material
costs and an ever-changing global economy, we realized in 2005 that we needed to re-evaluate our strategy, further focus
our business portfolio and make some important and tough choices.

In July, we announced a major transformation plan to change and improve International Paper. We are building on the
strong foundation of our more than 100-year legacy by finding ways to grow profitably and at the same time preserve our
financial flexibility. Our plan contains four key components: focus the portfolio on businesses where we have a strong
position on a global basis – paper and packaging, improve these key platform businesses, divest non-core assets and selectively
redeploy proceeds.

F O C U S T H E P O R T F O L I O O N K E Y P L AT F O R M B U S I N E S S E S

Going forward, we will focus on uncoated papers and packaging (including our xpedx distri-
bution business). In both of these businesses, IP has competitive advantages and tremendous
potential to improve their profitability.

Uncoated Papers As the world leader in uncoated papers, we have significant capabilities
that go beyond world-class, low-cost facilities and include our product offerings, channel and
market access, global reach and product development. While uncoated papers demand has
matured in North America, there is strong demand growth in emerging markets of Eastern
Europe, Latin America and Asia – regions where we have low-cost manufacturing assets,
people on the ground, a strong commercial position and opportunities to earn well in
excess of cost of capital.

To further enhance our competitiveness in this platform business, we are con-
sidering selective investment in several of our U.S. mills. This means we will,
over time, operate in fewer, bigger, better and low-cost uncoated papers and con-
tainerboard mills. To accomplish this, we’re doing a number of things including:
~ Further investing in our best performing assets – i.e., rebuilding a paper
machine at our Eastover, S.C., uncoated papers mill to improve sheet quality of
envelope and imaging papers, and reduce manufacturing costs

~ Moving to reposition the Pensacola, Fla., mill from a third-quartile uncoated

papers mill into a low-cost lightweight linerboard mill

~ Continuing to rationalize high-cost manufacturing capacity

John Faraci
Chairman and Chief Executive Officer

“We made big, important, hard choices about
what the future of our company is going to be.
Our plan is straightforward – we are going to
make International Paper a better, stronger
and more competitive company.”

Packaging The second key platform business we’re focusing on is packaging,
which includes U.S. Industrial Packaging, International Container and Consumer
Packaging. We made this choice because IP has strong, leading positions from which to
compete globally. Like uncoated papers, this business also can earn cost of capital returns over a business cycle.

In addition, we are well positioned to capitalize on our position in the marketplace. We have a low-cost containerboard
mill system and a growing integrated corrugated box business in the United States. With box shipments forecasted to grow
at about 2% annually through 2007, opportunities exist for further improving this business.

Looking at our international box business, we have 36 plants outside North America, mostly in Western Europe. In
October, we acquired a 65% equity position in a box business in Morocco. We now have strong joint venture positions in
both Turkey and Morocco – the number one and two exporters of fruits and vegetables into Europe.

And on the Consumer Packaging front, IP is the leading global producer of coated board and has the ability to serve
packaging customers worldwide from facilities in North America, Russia and Poland. Our U.S. mills are among the lowest
cost bleached board producers in the world, and our Shorewood Packaging and Foodservice businesses provide value-added,
innovative packaging to global customers.

I M P R O V E T H E K E Y P L AT F O R M B U S I N E S S E S

An important part of the transformation plan is to improve the profitability of our key platform businesses to ensure
they are stronger and more competitive than ever. This includes targeting an average of $400 million of non-price profit
improvement per year, or $1.2 billion of improvement over a three-year period. We expect to achieve that by lowering
our manufacturing and supply chain costs, growing sales with target customers, improving mix and streamlining the
organization to further reduce our cost.

D I V E S T A S S E T S

Decisions around divestitures and restructuring are among the hardest to make, because of the impact on the lives
of employees and their families. It’s a positive reflection of our employees to see everyone continuing to work hard on
behalf of their businesses, even when it means they may not remain with the company.

We are pursuing strategic alternatives for Coated and Supercalendered Papers, Beverage Packaging, Arizona Chemical,
Kraft Papers, Wood Products and selected forestlands. The alternatives could involve sales, spin-offs or restructuring. This
evaluation process is underway, with decisions anticipated for some of these businesses in 2006. We completed the sale of
Carter Holt Harvey last September and feel very good about the level of interest and activity around all businesses currently
under evaluation.

R E D E P L O Y P R O C E E D S

While the amount of proceeds from divestitures will depend on a number of factors, we estimate completion of all
divestitures could realize $8-10 billion of proceeds, which gives us the opportunity to really change the face of International
Paper. We plan to use the after-tax proceeds to repay debt, to return value to shareowners and for selective investment in
projects to improve our key platform businesses on a global basis.

Taken together, all aspects of our transformation plan combine to improve profitability, earn cost of capital returns

and create long-term value for shareowners.

“As we look ahead, change and continuity
will continue to drive International Paper
– change to improve our capabilities
and results, and continuity as our values,
mission and principles remain the same.”

F I N A N C I A L P E R F O R M A N C E

Earnings from continuing operations before special items were $524
million or $1.08 per share in 2005, compared with $618 million or $1.26
per share in 2004. On the positive side, 2005 earnings were favorably impacted
by higher average sales prices, cost reduction initiatives, improved mill operations,
increased earnings from land sales, and lower interest expense, a $678 million
improvement versus 2004 earnings. Unfortunately, International Paper, like many other companies, experienced soaring
energy costs, which caused higher transportation costs, and high costs for other raw materials. Wood costs were at an all
time high, and taken together, these factors had a $425 million negative effect on 2005 earnings. That’s about $0.87 per
share. In addition to the energy situation, and despite an upturn in the fourth quarter, sale volumes were down for the
year, and we took a significant amount of lack-of-order downtime. All combined, these and other negative effects added
up to $772 million.

It was a tough end to a tough year. However, we believe the fourth quarter was a high-water mark for input costs and
demand was seasonally strong. In summary, the good news is that we were able to partially offset some of the negative
impacts through year-over-year operational and pricing improvements. And, including special items, principally $150
million of favorable insurance recoveries and a net positive $450 million adjustment to tax reserves, earnings from con-
tinuing operations were $859 million, up from $456 million in 2004. So while our results aren’t yet where they need to be,
we are taking the right steps to generate improved results long term.

L O O K I N G A H E A D

In last year’s letter to shareowners, I said 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. I also said we’ll have to make some tough
choices. Indeed, we made some of those choices in 2005, and we’ll have more to make. I’m absolutely convinced we have
the right strategy, plan and people in place. 2006 is all about great execution – improving our businesses, completing
divestments and redeploying proceeds.

As we look ahead, change and continuity will continue to drive International Paper – change to improve our capa-
bilities and results, and continuity as our values, mission and principles remain the same. We have a big agenda and I am
confident we’ll accomplish it. This is a multi-year plan to transform International Paper, so it won’t happen all at once.
However, we have milestones and metrics to measure our execution.

A lot will happen in 2006, and in taking each step, we will be closer to our goal of being not only the best paper and
forest products company, but one of the very best companies in the world. We remain committed to delivering performance
that generates the value you expect. And, as always, we appreciate the continuous support of our customers, employees
and shareowners to our future success.

John Faraci
Chairman and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
È Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2005

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

For the transition period from

COMMISSION FILE NO. 1-3157

INTERNATIONAL PAPER COMPANY

(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of incorporation or organization)

13-0872805
(I.R.S. Employer Identification No.)

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

06921
(Zip Code)

Registrant’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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes È No ‘

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act. Yes ‘ No È

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 90 days. Yes È 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 a large accelerated filer, an accelerated filer, or a non-accelerated

filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer È

Accelerated filer ‘

Non-accelerated filer ‘

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Act. Yes ‘ No È
The aggregate market value of the Company’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, 2005) was approximately $14,817,960,984.

The number of shares outstanding of the Company’s common stock, as of March 1, 2006 was 492,595,905.

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 con-
nection with registrant’s 2006 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, 2005

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 1A. RISK FACTORS

ITEM 1B. UNRESOLVED STAFF COMMENTS

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
Transformation Plan
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

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 and 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
AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES

PART IV.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Additional Financial Data
Report of Independent Registered Public Accounting Firm on

Financial Statement Schedule

Schedule II – Valuation and Qualifying Accounts

SIGNATURES

APPENDIX I 2005 LISTING OF FACILITIES

A-1

APPENDIX II 2005 CAPACITY INFORMATION A-4

PART I.

ITEM 1. BUSINESS

G E N E R A L

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, South America and Asia. We are a New
York corporation, incorporated in 1941 as the successor
to the New York corporation of the same name or-
ganized 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, 2005, the
Company operated 23 pulp, paper and packaging mills,
93 converting and packaging plants, 25 wood products
facilities and six specialty chemicals plants. Production
facilities at December 31, 2005, in Europe, Asia, Latin
America and South America included eight pulp, paper
and packaging mills, 55 converting and packaging
plants, two wood products facility, two specialty panels
and laminated products plants and five specialty chem-
icals plants. We distribute printing, packaging, graphic
arts, maintenance and industrial products principally
through over 270 distribution branches located primarily
in the United States. At December 31, 2005, we owned
or managed approximately 6.5 million acres of forest-
lands in the United States, mostly in the South, approx-
imately 1.3 million acres in Brazil and had, through
licenses and forest management agreements, harvesting
rights on government-owned forestlands in Russia. Sub-
stantially all of our businesses have experienced, and are
likely to continue to experience, cycles relating to in-
dustry capacity and general economic conditions.

For management and financial reporting purposes,
our businesses are separated into six segments: Printing
Papers; Industrial Packaging; Consumer Packaging; Dis-
tribution; Forest Products; and Specialty Businesses and
Other. A description of these business segments can be
found on pages 17 and 18 of Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and Results
of Operations. A discussion of the Company’s recently
announced Transformation Plan to concentrate on two
key
global platform businesses, Uncoated Papers
(including Distribution) and Packaging, can be found
on page 27 of Item 7.

From 2001 through 2005, International Paper’s capi-
tal expenditures approximated $5.3 billion, excluding
mergers and acquisitions. These expenditures reflect our
continuing efforts to improve product quality and envi-

ronmental performance, lower costs and improve forest-
lands. Capital spending for continuing operations in
2005 was approximately $1.2 billion and is expected to
be approximately $1.2 billion in 2006. This amount is
below our expected annual depreciation and amor-
tization expense of $1.4 billion. You can find more in-
formation about capital expenditures on page 24 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

Discussions of acquisitions can be found on page 24
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 15 and 16 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 im-
portant 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 amend-
ments 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 consid-
ered part of this or any other report that we filed with or fur-
nished to the SEC.

F I N A N C I A L I N F O R M A T I O N C O N C E R N I N G

I N D U S T R Y S E G M E N T S

The financial information concerning segments is
set forth on pages 36 and 37 of Item 8. Financial State-
ments and Supplementary Data.

F I N A N C I A L I N F O R M A T I O N A B O U T

I N T E R N A T I O N A L A N D D O M E S T I C O P E R A T I O N S

The financial information concerning international
and domestic operations and export sales is set forth on
page 37 of Item 8. Financial Statements and Supple-
mentary Data.

C O M P E T I T I O N A N D C O S T S

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 mar-

kets, both U.S. and non-U.S., in which the Company
sells its principal products are very competitive. These
products are in competition with similar products pro-
duced by other forest products companies, 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 im-
pact of prices and costs on operating profits on pages 11
through 23 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations. You can find information about the Company’s
manufacturing capacities on page A-4 of Appendix II.

M A R K E T I N G A N D D I S T R I B U T I O N

The Company sells paper, packaging products,
building materials and other products directly to end
users and converters, as well as through resellers and
paper distributors,
including our own merchant dis-
tribution network, and agents. We own a large mer-
chant 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 market our U.S. production of lumber and plywood
through independent distribution centers, as well as di-
rect to the retail and industrial market. Specialty prod-
ucts
channels of
distribution.

are marketed through various

S A L E S V O L U M E S B Y P R O D U C T

Sales volumes of major products for 2005, 2004 and

2003 were as follows:

Sales Volumes by Product (1) (2)

Printing Papers (In thousands of tons)

Brazil Uncoated Papers

447

461

447

2005

2004

2003

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)
Container of the Americas
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)

1,419

4,261

6,127

2,109

1,588

1,409

4,614

6,484

2,173

1,422

1,352

4,439

6,238

2,113

1,379

3,061

1,073

2,821
1,049

2,264
1,031

1,041

1,064

1,088

5,175

1,937

1,412

608

4,934

2,090

1,495

605

4,383

1,946

1,348

606

1,606

2,596

1,563

2,456

1,580

2,345

(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.

D E S C R I P T I O N O F P R I N C I P A L P R O D U C T S

(3) Includes internal sales to mills.

The Company’s principal products are described on
pages 17 through 18 of Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and Results
of Operations.

R E S E A R C H A N D D E V E L O P M E N T

formed for

The Company operates its primary research and
development center at Loveland, Ohio, with smaller fa-
cilities in Savannah, Georgia, a regional center for ap-
plied forest research in Bainbridge, Georgia, 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 bio-
technology companies
the purpose of
developing and commercializing improvements to in-
crease growth rates and improve wood and pulp quality.
We direct research and development activities to short-
term, long-term and technical assistance needs of cus-
tomers and operating divisions; to process, equipment
and product innovations; and to improve profits through
tree generation and propagation research. Activities in-
clude studies on improved forest species and manage-
innovation and improvement of pulping,
ment;
bleaching, chemical recovery, papermaking and coating

applications

processes; packaging design and materials development;
reduction of environmental discharges; re-use of raw
materials in manufacturing processes; recycling of con-
sumer and packaging paper products; energy con-
to
of
servation;
manufacturing operations;
innovations and improve-
ment 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 develop-
ment operations was $63 million in 2005, $67 million in
2004, and $71 million in 2003.

computer

controls

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

E N V I R O N M E N T A L P R O T E C T I O N

Information concerning the effects of the Compa-
ny’s compliance with federal, state and local provisions
enacted or adopted relating to environmental protection
matters is set forth on pages 32 and 33 of Item 7. Man-
agement’s Discussion and Analysis of Financial Con-
dition and Results of Operations.

E M P L O Y E E S

As of December 31, 2005, we had approximately
68,700 employees, 47,200 of whom were located in the
United States. Of the U.S. employees, approximately
30,100 are hourly, with unions representing approx-
imately 18,000 employees. Approximately 14,000 of the
union employees are represented by the United Steel
Workers (USW), the successor union to PACE, under
individual location contracts.

During 2005, new labor agreements were ratified at
three paper mills, with one paper mill contract carrying
over and settling in early 2006. During 2006, labor
agreements are scheduled to be negotiated at four paper
mill operations including Franklin, Virginia; Riegel-
wood, North Carolina; Roanoke Rapids, North Caro-
lina; and Terre Haute, Indiana.

During 2005, 19 labor agreements were settled in
non-paper mill operations. Settlements included paper
converting, chemical, distribution, consumer packaging
and woodlands operations. During 2006, 35 labor
agreements are scheduled to be negotiated in 33
non-paper mill operations, five of which are carry-overs
from past years.

E X E C U T I V E O F F I C E R S O F T H E R E G I S T R A N T

John V. Faraci, 56, chairman and chief executive
officer since 2003. Prior to this, Mr. Faraci was president
since 2003, and executive vice president and chief
financial officer from 2000 to 2003. Mr. Faraci joined
International Paper in 1974.

Robert M. Amen, 56, president since 2003. Pre-
viously, Mr. Amen served as executive vice president
responsible for the Company’s paper business, technol-
ogy and corporate marketing from 2000 to 2003.
Mr. Amen will retire from the Company on March 31,
2006.

Newland A. Lesko, 60, executive vice president-
manufacturing and technology since 2003. Mr. Lesko
previously served as
senior vice president-industrial
packaging from 1998 to 2003. Mr. Lesko joined Interna-
tional Paper in 1967.

financial officer

Marianne M. Parrs, 61, executive vice president
since 1999 and chief
since 2005.
Ms. Parrs previously served as executive vice president-
administration since 1999 responsible for information
technology, investor relations and global sourcing. She
continues to oversee those areas in her current role.
Ms. Parrs joined International Paper in 1974.

John N. Balboni, 58, senior vice president and chief
information officer since 2005. He previously served as
vice president and chief information officer from 2003
to 2005, and vice president-ebusiness from 2000 to
2003. Mr. Balboni joined the Company in 1988.

Michael J. Balduino, 55, senior vice president of the
Company and president of our Shorewood subsidiary
since 2000. Mr. Balduino joined International Paper in
1992.

H. Wayne Brafford, 54,

senior vice president-
printing and communications papers since 2005. Pre-
viously, Mr. Brafford served as senior vice president-
industrial packaging from 2003, and as vice president
and general manager-converting, specialty and pulp
from 1999 to 2003. Mr. Brafford joined International
Paper in 1975.

Jerome N. Carter, 57, senior vice president-human
resources since 1999. Since 2005, he also is responsible
for overseeing the communications function of the
Company. Mr. Carter joined International Paper in
1999.

C. Cato Ealy, 49, senior vice president-corporate
development since 2003. He previously served as vice
president-corporate development from 1996 to 2003.
Mr. Ealy joined International Paper in 1992.

Thomas E. Gestrich, 59, senior vice president and
president-IP Asia since 2005. Previously, Mr. Gestrich
served as
senior vice president-consumer packaging
since 2001. Prior to that, he served as vice president and
general manager-beverage packaging from 1999 to 2001.
Mr. Gestrich joined International Paper in 1990.

Paul Herbert, 56, senior vice president-strategic ini-
tiatives since 2005. He previously served as senior vice
president-printing and communications papers
from
2000 to 2005. Mr. Herbert joined International Paper in
1992.

Thomas G. Kadien, 49, senior vice president and
president-xpedx since 2005. Previously, Mr. Kadien
served as senior vice president-Europe from 2003 to
2005, and as vice president-commercial printing and
imaging papers from 2001 to 2003. Additionally, from
2000 to 2001, Mr. Kadien served as vice president-fine
papers. He joined International Paper in 1978.

Andrew R. Lessin, 63,

senior vice president-
internal audit since 2002. Mr. Lessin previously served
as vice president-finance from 2000 to 2002. He joined
International Paper in 1977.

Maximo Pacheco, 53, senior vice president since
2005 and president-IP do Brasil since 2004. Previously,
Mr. Pacheco served as senior vice president of IP do
Brasil
to that, he was
president-IP Latin America from 2000 to 2003.
Mr. Pacheco joined International Paper in 1994.

from 2003 to 2004. Prior

Carol L. Roberts, 46, senior vice president-IP pack-
aging solutions since 2005. She previously served as vice
president-container of
from 2000.
Ms. Roberts joined International Paper in 1981.

the Americas

Maura A. Smith, 50, senior vice president, general
counsel and corporate secretary since 2003. Since 2005,
Ms. Smith is also responsible for overseeing public affairs
for the Company. From 1998 to 2003, she served as se-
nior vice president, general counsel and corporate secre-
tary of Owens Corning and in addition, from 2000 to
2003, as chief restructuring officer of Owens Corning.
Ms. Smith joined International Paper in 2003.

Robert J. Grillet, 50, vice president-finance and
controller since 2003. He previously served as group se-
nior vice president-xpedx from 2000 to 2003.
Mr. Grillet joined International Paper in 1976.

Mary A. Laschinger, 45, vice president and
president-IP Europe since 2005. Ms. Laschinger pre-
viously served as vice president-wood products from
2004 to 2005 and as vice president-pulp from 2001 to
2004. Prior to that, she served as the general manager-
industrial papers from 1999 to 2001. Ms. Laschinger
joined International Paper in 1992.

R A W M A T E R I A L S

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

F O R W A R D - L O O K I N G S T A T E M E N T S

“expect,”

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,”
“project,”
“plan,”
“believe,”
“estimate,” “intend,” and words of a similar nature. 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. Below, we have listed specific risks and un-
certainties that you should carefully read and consider.
We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise.

“appear,”

ITEM 1A. RISK FACTORS

In addition to the risks and uncertainties discussed
elsewhere in this Annual Report on Form 10-K
(particularly in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations), or in the Company’s other filings with the
Securities and Exchange Commission, the following are
some important factors that could cause the Company’s
actual results to differ materially from those projected in
any forward-looking statement.

R I S K S R E L A T I N G T O I N D U S T R Y C O N D I T I O N S

Changes in the cost or availability of raw material
and energy. We rely heavily on certain raw materials
(principally wood fiber, caustic soda and polyethylene)
and energy sources (principally natural gas, coal and fuel
oil) in our manufacturing process. Our ability to increase
earnings has been, and will continue to be, affected by
changes in the costs and availability of such raw materi-
als and energy sources. We may not be able to fully off-
set the effects of higher raw material or energy costs
through hedging arrangements, price increases, pro-
ductivity improvements or cost reduction programs.

Changes in transportation costs. Our business de-
pends on the transportation of a large number of prod-
ucts, both domestically and internationally. In the
United States, an increase in transportation rates or fuel
surcharges and/or a reduction in transport availability in
truck and rail could negatively impact our ability to
provide products to our customers in a timely manner.
While we have benefited from supply chain initiatives
that provide adequate transportation availability, there
is no assurance that such availability can continue to be
effectively managed in the future.

Competition. We face intense competition, both
domestically and internationally, for our products in all
of our current operating segments, including the two key
platform businesses under our previously announced
Transformation Plan, uncoated papers and packaging.
Because our outlook depends on a forecast of our share
of industry sales, an unexpected reduction in that share
due to pricing or product strategies pursued by com-
petitors, unanticipated product or manufacturing diffi-
culty, a failure to price our products competitively,
competition from producers of substitute materials or
other similar factors could negatively impact our rev-
enues and financial results.

Product mix. Our results may be affected by a
change in the Company’s sales mix. Our outlook as-
sumes a certain volume mix of sales as well as a product
mix of sales. If actual results vary from this projected
volume and product mix of sales, our operations (for
example, by way of lack-of-order downtime) and our
results could be negatively impacted.

Pricing. Our outlook assumes that we will be suc-
cessful in implementing previously announced price in-
creases as well as other price increases that we may in
the future deem necessary and/or appropriate. Also, de-
lays in acceptance of these price increases would neg-
atively impact our results. Moreover, price discounting,
if required to maintain our competitive position, could
result in lower than anticipated price realizations.

Demand for our products. Demand for our products
is affected by general economic conditions in North
America, Europe, South America and Asia. Changes in
industrial non-durable goods production, consumer
spending, commercial printing and advertising activity,
white-collar employment levels, new home construction
and repair and remodeling activity, interest rates and
currency exchange rates may adversely affect our busi-
nesses and the results of operations.

R I S K S R E L A T I N G T O M A R K E T A N D E C O N O M I C

F A C T O R S

Changes in credit ratings issued by nationally
recognized statistical rating organizations. Maintaining
an investment grade credit rating for our long-term debt
continues to be an important element in our overall fi-
nancial strategy. Our debt ratings are, from time to time,
reviewed by the rating organizations and remain subject
to change. For example, in 2005, Moody’s downgraded
our debt from Baa2 to Baa3.

Pension and health care costs. Our pension and
health care benefits are dependent upon numerous fac-
tors resulting from actual plan experience and assump-
tions of
future experience. Pension plan assets are
primarily made up of equity and fixed income invest-
ments. Fluctuations in actual equity market returns as
well as changes in general interest rates may result in

increased or decreased pension costs in future periods.
Likewise, changes in assumptions regarding current dis-
count rates and expected rates of return on plan assets
could also increase or decrease pension costs. Future
pension funding requirements, and the timing of fund-
ing payments, could be affected by legislation currently
being considered in the U.S. Congress.

Natural disasters. The occurrence of a natural dis-
aster, such as a hurricane, tropical storm, earthquake,
tornado,
flooding or other unanticipated problems,
could cause operational disruptions which could impair
our profitability.

Changes in international conditions. Our results
could be substantially affected by foreign market risks in
the countries in which we have manufacturing facilities
or sell our products. Specifically, Brazil, Russia, Poland,
China and South Korea, where substantial manufactur-
ing facilities exist, are developing countries subject to
economic and political instability. Downturns in eco-
nomic activity, adverse foreign tax consequences or any
change in social, political or labor conditions in any of
these countries or regions could negatively affect our
financial results.

Changes in currency exchange rates. We are im-
pacted by the movement of various currencies relative to
the U.S. dollar. From time to time, we may hedge a por-
tion of the risk from our transactions and commitments
denominated in non-U.S. dollar currencies when we
deem it appropriate to do so. There can, however, be no
assurance that we will be able to fully protect ourselves
against substantial foreign currency fluctuations.

R I S K S R E L A T I N G T O T H E C O M P A N Y ’ S

T R A N S F O R M A T I O N P L A N

Ability to accomplish the Transformation Plan.
On July 19, 2005, the Company announced a three-part
plan (the “Transformation Plan”) to transform its busi-
ness portfolio to improve returns, strengthen the balance
sheet and return cash to shareholders. The Trans-
formation Plan includes narrowing the Company’s
business portfolio to two key global platform businesses:
uncoated papers (including the xpedx distribution busi-
ness) and packaging. Among the uncertainties that exist
to completing the Transformation Plan are uncertainties
relating to the Company’s ability to divest or spin-off
the businesses under evaluation as well as the timing,
terms and net proceeds of any such transactions.

Impact of

the Transformation Plan on the
Company’s relationships with its employees. The
Company has taken steps to incent and retain employ-
ees during the transformation, and has entered into re-
tention agreements with certain key employees who
would not remain with the Company if their respective
businesses are sold.

Ability to realize anticipated profit improvement
from the Transformation Plan. The profitability of the
Company’s two platform businesses, uncoated papers
and packaging, is subject to variable demand and the
Company’s ability to execute internal profit initiatives,
including ongoing supply chain and overhead initiatives
and volume/mix improvements. There can be no assur-
ance that profit improvements will be achieved.

R I S K S R E L A T I N G T O L E G A L P R O C E E D I N G S A N D

C O M P L I A N C E C O S T S

regulation by federal,

Unanticipated expenditures related to the cost of
gov-
compliance with environmental and other
ernmental regulations. Our operations are subject to
significant
state and local
environmental and safety authorities, both domestically
and internationally. There can be no assurance that the
costs of compliance with existing and new regulations
will not require significant capital expenditures, or that
existing reserves will be adequate to cover future un-
anticipated costs.

Results of legal proceedings. The costs and other
effects of pending litigation against the Company
and related insurance recoveries cannot be deter-
mined with certainty. Although the disclosure in
Item 3. “Legal Proceedings” contains management’s
current views of the impact such litigation will have
on our financial results, there can be no assurance
that the outcome of such proceedings will be as
expected.

This discussion of uncertainties is by no means
exhaustive, but is designed to highlight important fac-
tors that may impact our outlook. Obvious general
economic factors throughout the world (such as in-
flation, a sudden drop in consumer or business con-
fidence, or an unexpected collapse in stock markets)
do not warrant further discussion, but are noted to fur-
ther emphasize the myriad of contingencies that may
cause our actual results to differ from those currently
anticipated.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

F O R E S T L A N D S

The principal raw material used by International
Paper is wood in various forms. As of December 31,
2005, the Company or its subsidiaries owned or man-
aged approximately 6.5 million acres of forestlands in
the United States, 1.3 million acres in Brazil, and,
through licenses and forest management agreements,

maintained harvesting rights on government-owned for-
estlands in Russia. A discussion of possible sales or spin-
offs of segments or potentially all of the Company’s U.S.
forestlands under the Company’s Transformation Plan
can be found on page 27 of Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and Results
of Operations.

During 2005, the Company’s U.S. forestlands sup-
plied 12.7 million tons of roundwood to its U.S. facili-
ties, representing approximately 20% of its wood fiber
requirements. The balance of our fiber requirements
come from residual chips supplied by our Wood Products
operations, other chips purchased from other suppliers,
and from other private industrial and nonindustrial for-
estland owners, with only an insignificant amount com-
ing from public lands of the U.S. government. In
addition, in 2005, 3.4 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 (SFITM).
SFITM 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 SFITM standards by an independent
third party, and most of our forestlands outside of the
United States comply with similar local or regional sus-
tainable forestry programs as well.

M I L L S A N D P L A N T S

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

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 eco-
nomics of modernization or adopting other alternatives
for higher cost facilities.

C A P I T A L I N V E S T M E N T S A N D D I S P O S I T I O N S

Given the size, scope and complexity of our busi-
ness 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 dis-
cussion about the level of planned capital investments
for 2006 on page 26, and dispositions and restructuring
activities as of December 31, 2005, on pages 15 and 16
of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and on
pages 51 through 57 of Item 8. Financial Statements and
Supplementary Data. A discussion of businesses being

considered for possible sale or spin-off under the Compa-
ny’s Transformation Plan can be found on page 27 of
Item 7.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal pro-
ceedings is set forth on pages 32 and 33 of Item 7. Man-
agement’s Discussion and Analysis of Financial
Condition and Results of Operations, and on pages 59
through 64 of
Item 8. Financial Statements and
Supplementary Data.

ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year ended
December 31, 2005.

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 com-
mon stock and the high and low sales prices for the
Company’s common stock for each of the four quarters
in 2005 and 2004 are set forth on page 78 of Item 8.
Financial Statements and Supplementary Data.
In-
formation concerning the exchanges on which the
Company’s common stock is listed is set forth on the
back cover. As of March 1, 2006, there were approx-
imately 26,340 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

3,494 (a)

$38.86

Period

March 1, 2005 –
March 31, 2005

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

No activity occurred in months not presented above.

International Paper Company

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY (a)

Dollar amounts in millions, except per share amounts and stock prices

2005

2004

2003

2002

2001

R E S U L T S O F O P E R A T I O N S

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
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)
Earnings (loss) applicable to common shares

F I N A N C I A L P O S I T I O N
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

B A S I C P E R S H A R E O F C O M M O N S T O C K –
Earnings (loss) from continuing operations
Discontinued operations (c)
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)

D I L U T E D P E R S H A R E O F C O M M O N S T O C K –
Earnings (loss) from continuing operations
Discontinued operations (c)
Extraordinary items
Cumulative effect of accounting changes
Net earnings (loss)

Cash dividends
Common shareholders’ equity

C O M M O N S T O C K P R I C E S

High
Low
Year-end

F I N A N C I A L R A T I O S
Current ratio
Total debt to capital ratio
Return on equity
Return on investment from continuing operations

C A P I T A L E X P E N D I T U R E S

N U M B E R O F E M P L O Y E E S

$24,097
22,918

$23,359
21,925

$22,138
21,148

$22,359
21,306

$ 24,010
24,373

586(b)
12
241(c)
–
–
1,100(b-d)
1,100(b-d)

724(e)
26
(491)(f)
–
–
(35)(e-g)
(35)(e-g)

285(h)
83
57
–
(13)(i)
302(h-j)
302(h-j)

340(k)
47
(247)
–
(893)(l)
(880)(k-m)
(880)(k-m)

(1,226)(n)
144
(8)
(46)(o)
(17)(o)
(1,204)(n,o)
(1,204)(n,o)

$ 2,565
11,801
2,190
28,771
1,181
11,023
8,351

$ 1.77
0.49
–
–
2.26

$ 1.74
0.47
–
–
2.21

1.00
17.03

$ 5,252
12,216
2,157
34,217
222
13,632
8,254

0.94
(1.01)
–
–
(0.07)

0.93
(1.00)
–
–
(0.07)

1.00
16.93

$ 4,908
12,138
2,332
35,525
1,776
13,127
8,237

0.54
0.12
–
(0.03)
0.63

0.53
0.13
–
(0.03)
0.63

1.00
16.97

$ 4,850
12,319
2,402
33,792
–
12,329
7,374

0.54
(0.51)
–
(1.86)
(1.83)

0.54
(0.51)
–
(1.85)
(1.82)

1.00
15.21

$ 42.59
26.97
33.61

$ 45.01
37.12
42.00

$ 43.32
33.09
43.11

$ 46.19
31.35
34.97

4,691
13,129
2,923
37,177
832
11,751
10,291

(2.35)
(0.02)
(0.09)
(0.04)
(2.50)

1.00
21.25

43.25
30.70
40.35

1.5
58.8
13.2(b-d)
5.2(b-d)

1.7
62.1
(0.4)(e-g)
3.7(e-g)

1.5
63.0
3.9(h-j)
2.9(h-j)

$ 1,172
68,700

$ 1,213
79,400

$ 1,031
82,800

1.7
61.2
(8.8)(k-l)
2.7(k,l)
$
913
91,000

1.6
54.1
(10.6)(n,o)
(1.6)(n)
$
937
100,100

ITEM 6. SELECTED FINANCIAL DATA

F I N A N C I A L G L O S S A R Y
Current ratio –

current assets divided by current liabilities.

Total debt to capital ratio –

long-term debt plus notes payable and current ma-
turities 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 share-
holders’ equity (computed monthly).

Return on investment –

the after-tax amount of earnings from continuing
operations before interest and minority interest div-
ided by the average of total assets minus accounts
payable
(computed
monthly).

liabilities

accrued

and

F O O T N O T E S T O F I V E - Y E A R F I N A N C I A L S U M M A R Y
(a) All periods presented have been restated to reflect
the Carter Holt Harvey Limited and the Weldwood
of Canada Limited businesses as discontinued oper-
ations.

2 0 0 5 :
(b) Includes restructuring and other charges of $358 mil-
lion before taxes ($225 million after taxes), includ-
ing a $274 million charge before taxes ($174 million
after taxes) for organizational restructuring and other
charges principally associated with the Company’s
Transformation Plan, a $57 million charge before
taxes ($35 million after taxes) for early extinguish-
ment of debt, and a $27 million charge before taxes
($16 million after taxes) for legal reserves. Also in-
cluded are a $258 million pre-tax credit ($151 mil-
lion after taxes) for net insurance recoveries related
to the hardboard siding and roofing litigation, a $4
million credit before taxes ($3 million after taxes)
for the net reversal of restructuring reserves no lon-
ger required, a pre-tax charge of $111 million ($73
million after taxes) for net losses on sales and
impairments of businesses sold or held for sale, and
interest income of $54 million before taxes ($33 mil-
lion after taxes), including $43 million before taxes
($26 million after taxes) related to a settlement with
the U.S. Internal Revenue Service concerning the
1997 through 2000 U.S. federal income tax audit,
and $11 million before taxes ($7 million after taxes)
related to the collection of a note receivable from
the 2001 sale of a business.

(c) Includes a gain of $29 million before taxes ($361
million after taxes and minority interest) from the
2005 sale of Carter Holt Harvey Limited.

(d) Includes a $446 million reduction in the income tax
provision,
including a reduction of $627 million
from a settlement reached with the U.S. Internal
Revenue Service concerning the 1997 through 2000
U.S. federal income tax audit, a charge of $142 mil-
lion for deferred taxes related to earnings repa-
triations under the American Jobs Creation Act of
2004, and $39 million of other tax charges.

2 0 0 4 :
(e) Includes restructuring and other charges of $166 mil-
lion before taxes ($103 million after taxes), includ-
ing a $64 million charge before taxes ($40 million
after taxes) for organizational restructuring programs,
a $92 million charge before taxes ($57 million after
taxes) for early debt extinguishment costs, and a $10
million charge before taxes ($6 million after taxes)
for legal settlements. Also included are pre-tax cred-
its of $123 million ($76 million after taxes) for net
insurance recoveries related to the hardboard siding
and roofing litigation, a $36 million credit before
taxes ($22 million after taxes) for the net reversal of
restructuring reserves no longer required, and a
pre-tax charge of $139 million ($125 million after
taxes) for net losses on sales and impairments of
businesses sold or held for sale.

(f) Includes a gain of $268 million before taxes and
minority interest ($90 million after taxes and minor-
ity interest) from the 2004 sale of the Carter Holt
Harvey Tissue business, and a pre-tax charge of $323
million ($711 million after taxes) from the 2004 sale
of Weldwood of Canada Limited.

(g) Includes a $32 million net increase in the income
tax provision reflecting an adjustment of deferred tax
balances.

2 0 0 3 :
(h) Includes restructuring and other charges of $286 mil-
lion before taxes ($180 million after taxes), includ-
ing a $224 million charge before taxes ($140 million
after taxes) 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 $34 mil-
lion ($33 million after taxes) for net losses on sales
and impairments of businesses held for sale, and a
credit of $39 million before taxes ($24 million after

2 0 0 1 :
(n) Includes restructuring and other charges of $1.1 bil-
lion before taxes ($749 million after taxes), includ-
ing an $882 million charge before taxes ($603
million after taxes) for asset shutdowns of excess in-
ternal capacity and cost reduction actions, and a
$225 million pre-tax charge ($146 million after tax-
es) 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 mil-
lion pre-tax credit ($11 million after taxes) for the
reversal of excess 2000 and 1999 restructuring re-
serves.

(o) Includes an extraordinary pre-tax charge of $73 mil-
lion ($46 million after taxes) related to the impair-
ment of the Masonite business and the divestiture of
the Petroleum and Minerals assets, and a charge of
$28 million before taxes ($17 million after taxes) for
the cumulative effect of a change in accounting for
derivatives and hedging activities.

taxes) for the net reversal of restructuring reserves no
longer required.

(i) 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.”

(j) Includes a $110 million reduction of the income tax
provision recorded for significant tax events occur-
ring in 2003.

2 0 0 2 :
(k) Includes restructuring and other charges of $667 mil-
lion before taxes ($425 million after taxes), includ-
ing a $176 million charge before taxes ($121 million
after taxes) for asset shutdowns of excess internal
capacity and cost reduction actions, a $450 million
pre-tax charge ($278 million after taxes) for addi-
tional exterior siding legal reserves, and a charge of
$41 million before taxes ($26 million after taxes) for
early debt retirement costs. Also included are a
credit of $38 million before taxes ($100 million after
taxes) to adjust accrued costs of businesses sold or
held for sale, and a pre-tax credit of $68 million ($43
million after taxes) for the reversal of 2001 and 2000
reserves no longer required.

(l) Includes an $893 million charge for the cumulative
effect of an accounting change for the adoption of
SFAS No. 142, “Goodwill and Other Intangible
Assets.”

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

that this measure allows a better understanding of trends
in costs, operating efficiencies, prices and volumes. In-
dustry 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: Print-
ing Papers, Industrial Packaging, Consumer Packaging,
Distribution, Forest Products, 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

2005
$1,923

2004

2003

$2,040

$1,734

Corporate items

Corporate special items*

Interest expense, net

Minority interest

Income tax benefit (provision)

Discontinued operations

Accounting changes

(597)

(147)

(593)

(12)

285

241

–

(469)

(142)

(710)

(21)

(242)

(491)

(466)

(281)

(705)

(80)

–

(13)

Net earnings (loss)

$1,100

$ (35) $ 302

* Special items include restructuring and other charges, net losses on sales and impair-

ments of businesses held for sale, insurance recoveries and reversals of reserves no lon-

ger required.

Industry segment operating profits were $117 mil-
lion lower in 2005 due principally to the impact of
higher energy and raw material costs ($586 million),
lower sales volume ($251 million), and unfavorable for-
eign currency translation rates ($27 million) which
more than offset the benefits from higher average prices
($478 million), cost reduction initiatives,
improved
operating performance and a more favorable product
mix ($235 million), and higher earnings from land sales
($158 million). The impact of divestitures
($32
million), principally the Fine Papers and Industrial Pa-
pers businesses, and other items ($36 million) also had a
negative impact in 2005.

Segment Operating Profit
(in millions)

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

E X E C U T I V E S U M M A R Y

International Paper’s operating results in 2005 were
strongly impacted by significantly higher costs for en-
ergy, wood, caustic soda and other raw materials which
reduced operating profits compared with 2004 by $586
million. Lower sales volumes were also a negative factor
versus 2004 as we took a significant amount of
lack-of-order downtime in our U.S. uncoated paper and
containerboard mills, and downtime in our Eastern
European operations to rebuild paper machines in Po-
land and Russia to add needed uncoated paper and pa-
perboard capacity. We were able to partially offset some
through operational
of
impacts
im-
improvements in our manufacturing operations,
proved average pricing for our paper and packaging
grades, a more favorable product mix, and higher earn-
ings from forestland and real estate sales.

these negative

Looking forward to 2006, we expect operating prof-
its for the first quarter to be flat with the 2005 fourth
quarter. Sales volumes should be seasonally slow in the
quarter, but should show some improvement as the
quarter progresses. Price realizations should also improve
as previously announced price increases are im-
plemented. While energy, wood and raw material price
movements are mixed, their impact for the quarter is
expected to be flat.

However, we see favorable signs of positive mo-
mentum for the remainder of 2006. We anticipate that
demand in North America for both uncoated paper and
industrial packaging products will be stronger, and that
we will realize 2005 fourth-quarter and 2006 first-quarter
announced price increases. Additionally, operating rates
should improve in 2006 reflecting announced industry
capacity reductions in uncoated papers and container-
board. We are also starting to see some reductions in
natural gas and southern wood costs that, if the trend
continues, should benefit operations as the year pro-
gresses.

In connection with our overall strategic direction,
we are evaluating options for the possible sale or spin-off
of certain of our businesses as previously announced in
our Transformation Plan, with decisions on certain
businesses anticipated during 2006. We also will con-
tinue to improve our key operations in North America
by realigning our uncoated and packaging mill oper-
ations to reduce costs, improve our products and im-
prove our overall profitability.

Results of Operations

Industry segment operating profits are used by
International Paper’s management to measure the earn-
ings performance of its businesses. Management believes

The principal changes in operating profit by seg-
ment were as follows: Printing Papers’ profits were $29
million lower as the impacts of higher energy and raw
material costs, lower sales volume and unfavorable for-
eign currency translation rates more than offset the ef-
fects of higher average sales prices, improved sales mix
and lower operating and overhead costs. Industrial Pack-
aging’s profits were down by $150 million reflecting
higher energy and raw material costs, lower sales vol-
ume, an unfavorable mix of products sold and the im-
pact of the sale of the Industrial Papers business. These
effects were somewhat offset by benefits from higher
sales prices. Consumer Packaging’s profits were $35 mil-
lion lower as the impacts of higher energy and raw
material costs and lower sales volume more than offset
contributions from higher sales prices and lower operat-
ing and overhead costs. Forest Products’ profits were
$134 million higher. Increased earnings from land sales,
an improved product mix and lower overhead costs
more than offset the effect of higher energy and raw
material costs, lower harvest volumes and special items.
Distribution’s profits were $3 million lower in 2005 than
in 2004.

Corporate items of $597 million of expense in 2005
were higher than the $469 million in 2004 and $466
million in 2003 due to higher pension and supply chain
initiative costs and increased inventory-related costs,
partially offset by lower overhead costs.

Corporate special items, including restructuring and
other charges, losses on sales and impairments of busi-
nesses held for sale, insurance recoveries and reversals of
reserves no longer required, increased to $147 million
from $142 million in 2004, but were lower than the
$281 million in 2003. The increase in 2005 versus 2004
reflects an increase in restructuring charges, relating
principally to our Transformation Plan, offset by higher
insurance recoveries relating to hardboard siding and
roofing matters. Compared with 2003, the decrease re-
flects higher insurance recoveries and lower losses on
sales and impairments of businesses held for sale in 2005.
Interest expense, net, of $593 million in 2005 in-
cludes a pre-tax credit of $43 million related to an
agreement reached with the Internal Revenue Service
concerning the Company’s 1997 through 2000 federal
income tax audits, and a pre-tax credit of $11 million
related to the collection of a note receivable from the
2001 sale of the Flexible Packaging business. Excluding
these items, interest expense, net, of $647 million de-
creased from $710 million in 2004 and $705 million in
2003 reflecting lower average debt balances from debt
refinancing and repayments in 2004 and 2005.

The 2005 income tax benefit of $285 million in-
cludes a $446 million tax benefit related to 2005 tax
special items. The $242 million tax provision in 2004
included a $32 million tax provision related to tax

special items. The tax benefit of $56 million in 2003
included $110 million of benefits related to special items
occurring in 2003. See “Income Taxes” on pages 14 and
15 for a further discussion of these items.

During the 2005 third quarter, International Paper
completed the sale of the Carter Holt Harvey Limited
business. During 2004, International Paper completed
the sale of its Weldwood of Canada Limited business in
the fourth quarter. The operating results of these busi-
nesses and the gains or losses on the sales are reported in
discontinued operations for all periods presented.

Accounting changes included a charge of $13 mil-
lion in 2003 for the adoption of new accounting pro-
nouncements regarding asset retirement obligations and
variable interest entities.

Liquidity and Capital Resources

For the year ended December 31, 2005, Interna-
tional Paper generated $1.5 billion of cash flow from
continuing operations, down from $2.1 billion in 2004.
Capital spending from continuing operations for the
year totaled $1.2 billion, or 84% of depreciation and
amortization expense. We repaid approximately $1.7
billion 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 un-
used, committed credit facilities that we believe are ad-
equate 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 2006 will be to continue to maximize
our financial flexibility and preserve liquidity while fur-
ther reducing our long-term debt as our previously an-
nounced Transformation Plan progresses. Capital
spending for 2006 is targeted at $1.2 billion, or about
80% of depreciation and amortization.

Transformation Plan

In July 2005, International Paper announced a
Transformation Plan to focus on two key global platform
businesses: Uncoated Papers (including Distribution)
and Packaging. In connection with this plan, the Com-
pany is exploring strategic alternatives for other busi-
nesses including Coated and Supercalendered Papers,
Beverage Packaging, Kraft Papers, Arizona Chemical,
Wood Products, and segments or potentially all of its
6.5 million acres of U.S. forestlands. This evaluation
process is underway, with decisions anticipated for some
of these businesses in 2006. While the exact use of any
proceeds from potential future sales is dependent upon
various factors, the Company remains committed to us-
ing its free cash flow in 2006 to pay down debt, to return
value to shareholders, and for selective high-return in-
vestments.

Product prices also tend to follow general economic
trends, and are also affected by inventory levels, cur-
rency 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 Pa-
per’s results of operations for the year ended De-
cember 31, 2005, and the major factors affecting these
results compared to 2004 and 2003.

R E S U L T S O F O P E R A T I O N S

For the year ended December 31, 2005, Interna-
tional Paper reported net sales of $24.1 billion, com-
pared with $23.4 billion in 2004 and $22.1 billion in
2003. International net sales (including U.S. exports)
totaled $5.7 billion, or 24% of total sales in 2005. This
compares to international net sales of $5.7 billion in
2004 and $5.4 billion in 2003.

Full year 2005 net income totaled $1.1 billion
($2.21 per share), compared with a net loss of $35 mil-
lion ($0.07 per share) in 2004 and a net income of $302
million ($0.63 per share) in 2003. Amounts include re-
sults of discontinued operations and the cumulative ef-
fect of accounting changes.

Earnings from continuing operations in 2005 were
$859 million compared with $456 million in 2004 and
$258 million in 2003. However, included in earnings
from continuing operations in 2005 was an incremental
benefit of $497 million compared with 2004 from the
special items discussed on pages 15 and 16. Excluding this
benefit, earnings in 2005 were $94 million lower than in
2004. This decline was driven by higher energy and raw
material costs, lower sales volumes, and higher corporate
and other charges, principally pension and supply chain
initiative costs, that more than offset the positive effects
of higher sales prices, cost reduction initiatives, improved
mill operations, increased earnings from land sales and
lower interest expense.

See Industry Segment Results on pages 18 through 23

for a discussion of the impact of these factors by segment.

Earnings From Continuing Operations
(after tax, in millions)

Critical Accounting Policies and Significant
Accounting Estimates

Accounting policies that may have a significant ef-
fect on our reported results of operations and financial
position, and that can require judgments by manage-
ment in their application, include accounting for con-
tingent liabilities, impairments of long-lived assets and
goodwill, pensions and postretirement benefit obliga-
tions and income taxes.

In recent years, the assumption estimates used for
pensions have resulted in increases in reported pension
charges. Pension expenses for our U.S. plans increased
to $243 million in 2005 from $111 million in 2004 due
principally to an increase in the amortization of
unrecognized actuarial losses and a reduction in the as-
sumed discount rate. A further increase of approximately
$130 million is expected in 2006, reflecting a change in
the mortality assumption to use a more recent mortality
table, an increase in the amortization of unrecognized
actuarial losses and a further reduction in the assumed
discount rate. Our pension funding policy continues to
be to fully fund actuarially determined costs, generally
equal
required by the
Employee Retirement Income Security Act (ERISA).
Unless changes are made to our funding policy, it is un-
likely that any contributions to our U.S. qualified plan
will be required in 2006. Funding requirements in later
years will depend upon current pending legislation, in-
vestment performance and changes in discount rates.

to the minimum amounts

Legal

Payments relating to the hardboard exterior siding
class action settlement exceeded our projections for the
year, but payments related to the other two class actions
continue to be in line with projections made in 2002.
The Company settled with all of its insurance carriers,
except one, related to the hardboard siding claims, and
settled all but one of the small opt-out cases in the
linerboard antitrust litigation. Additional information
on these and other matters is included in Note 10 of the
Notes to Consolidated Financial Statements in Item 8.

C O R P O R A T E O V E R V I E W

While the operating results for International Pa-
per’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, Eu-
rope, South America and Asia. Factors that impact the
demand for our products include industrial non-durable
spending, commercial
goods production, consumer
printing and advertising activity, white-collar employ-
ment levels, new home construction and repair and
remodeling activity, and movements in currency ex-
change rates.

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

In millions

Net Earnings (Loss)

Add back (deduct):

Discontinued operations:

Loss (earnings) from

operations

(Gain) loss on sales or

impairments

Cumulative effect of

accounting changes

Earnings From Continuing

2005

2004

$1,100

$(35)

2003

$302

120

(130)

(57)

(361)

621

–

Operations

859

456

258

Add back (deduct): Income tax

provision (benefit)

(285)

242

(56)

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 on sales and

impairments of businesses

586

593

–

597

724

710

(5)

469

285

705

(3)

466

298

(258)

166

(123)

286

–

held for sale

111

135

Reversals of reserves no longer

required, net

(4)

(36)

(39)

Discontinued Operations and Cumulative Effect of
Accounting Changes

During the 2005 third quarter, the sale of the Com-
pany’s majority share of Carter Holt Harvey Limited
(CHH) was completed resulting in a $361 million
after-tax gain. This amount, together with an $80 mil-
lion net charge principally reflecting that portion of a
third-quarter agreement reached with the U.S. Internal
Revenue Service that relates to CHH, is included in
earnings from discontinued operations. In the fourth
quarter of 2004, International Paper sold its Weldwood
of Canada Limited (Weldwood) business for approx-
imately $1.1 billion. As a result of the sale, a $323 mil-
lion 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 minor-
ity interest discontinued operations gain was recorded
from the sale of the Carter Holt Harvey Tissue business.
Prior period results have been restated to present
the operating results of these businesses as earnings from
discontinued operations, including a net loss of $120
million in 2005, and earnings of $130 million and $57
million in 2004 and 2003, respectively. The $120 mil-
lion net loss in 2005 includes charges of $98 million for
the CHH portion of an audit agreement reached with
the U.S. Internal Revenue Service, and charges related
to cash repatriations from non-U.S. subsidiaries related
to CHH.

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) Inter-
pretation No. 46 (FIN 46), “Consolidation of Variable
Interest Entities,” and Statement of Financial Account-
ing Standards (SFAS) No. 143, “Accounting for Asset
Retirement Obligations,” respectively.

$1,923

$2,040

$1,734

Income Taxes

Industry Segment Operating Profit

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other

Total Industry Segment

$552

$581

$464

230

126

927

380

161

793

264

183

720

Operating Profit

$1,923

$2,040

$1,734

The Company recorded an income tax benefit for
2005 of $285 million, including a $446 million net tax
benefit related to special items, consisting of a tax bene-
fit of $627 million resulting from an agreement reached
with the U.S. Internal Revenue Service concerning the
1997 through 2000 U.S. federal income tax audit, a
$142 million charge for deferred taxes related to earn-
ings repatriations under the American Jobs Creation
Act of 2004 and $39 million of other tax charges. Ex-
cluding the impact of special items, the tax provision
was $203 million, or 27.5% of pre-tax earnings before
minority interest.

The income tax provision for 2004 was $242 mil-
lion, or 33% of pre-tax earnings from continuing oper-
ations before minority interest. This included a $32
million tax provision related to an adjustment of de-
ferred tax balances. Excluding the impact of special

items, the tax provision was $226 million, or 26% of
pre-tax earnings before minority interest.

While the Company reported pre-tax income in
2003, a net income tax benefit of $56 million was re-
corded reflecting decreases totaling $110 million in the
provision for income taxes for special items. These in-
cluded a $60 million reduction in the third quarter re-
flecting a favorable revision of estimated tax accruals
upon filing the 2002 federal income tax return and in-
creased research and development credits, and a $50
million reduction in the second quarter reflecting a fa-
vorable tax audit
from a
government sponsored overseas tax program. Excluding
the year-to-date tax effects of special items, the effective
tax rate for 2003 was 26%.

settlement and benefits

Corporate Items and Interest Expense

Minority interest expense, net of taxes, decreased to
$12 million in 2005 compared with $26 million in 2004
and $83 million in 2003. The decreases in 2005 and
2004 reflect a reduction in minority interest related to
preferred securities that were replaced by debt obliga-
tions in 2004 and 2003.

Interest expense, net, of $593 million includes a
pre-tax credit of $43 million for interest related to the
agreement reached with the U.S. Internal Revenue
Service concerning the Company’s 1997 through 2000
U.S. federal income tax audits, and a pre-tax credit of
$11 million related to the collection of a note receivable
from the 2001 sale of the Flexible Packaging business.
Excluding these items, interest expense, net, of $647
million decreased from $710 million in 2004 and $705
million in 2003 reflecting lower average debt balances
and lower interest rates from debt refinancing and
repayments in 2005 and 2004.

For the twelve months ended December 31, 2005,
corporate items totaled $597 million of expense com-
pared with $469 million in 2004 and $466 million in
2003. The increased expenses in 2005 compared with
both 2004 and 2003 are due to higher pension, supply
chain initiative and inventory-related costs, offset in
part by lower overhead administrative costs. Lower gains
from energy hedging transactions were also a factor in
2005 and 2004.

Our supply chain initiative, begun in late 2002, is a
corporate-wide project 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. Ex-
penses related to this program in 2006 should be
approximately $50 million above 2005 levels. The asso-
ciated benefits are reflected in business earnings as the
programs are implemented.

S P E C I A L I T E M S
Restructuring and Other Charges

for

improvement opportunities

International Paper continually evaluates its oper-
targeted to
ations
focus our portfolio on our core businesses,
(a)
(b) rationalize and realign capacity to operate fewer fa-
cilities 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 car-
rying 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.
It is possible that additional charges and costs will be
incurred in future periods in our core businesses should
such triggering events occur.

2 0 0 5 : During 2005, total restructuring and other charges
of $358 million before taxes ($225 million after taxes)
were recorded. These charges included a $274 million
charge before taxes ($174 million after taxes) for organ-
izational restructuring programs, principally costs asso-
ciated with the Company’s previously announced
Transformation Plan, a $57 million charge before taxes
($35 million after taxes) for early debt extinguishment
costs and a $27 million charge before taxes ($16 million
after taxes) for litigation settlements. Charges of $298
million relating to Corporate programs are included as
Corporate items, with $60 million of business-specific
charges included in the respective business’s operating
results. Earnings also included a $258 million pre-tax
credit ($151 million after taxes) for net insurance
recoveries related to the hardboard siding and roofing
litigation, and a $4 million credit before taxes ($3 mil-
lion after taxes) for the net reversal of restructuring re-
serves no longer required. Additionally,
included in
interest income was a credit of $54 million before taxes
($33 million after taxes), which included $43 million
before taxes ($26 million after taxes) related to a
settlement with the U.S. Internal Revenue Service, and
$11 million before taxes ($7 million after taxes) related
to the collection of a note from the 2001 Flexible Pack-
aging business sale.

2 0 0 4 : During 2004, restructuring and other charges be-
fore taxes of $166 million ($103 million after taxes)
were recorded. These charges included a $64 million

charge before taxes ($40 million after taxes) for organiza-
tional restructuring programs, a $92 million charge be-
fore taxes ($57 million after taxes) for early debt
retirement costs, 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 $36
million credit before taxes ($22 million after taxes) was
recorded for the net reversal of restructuring reserves no
longer required.

2 0 0 3 : During 2003, restructuring and other charges be-
fore taxes of $286 million ($180 million after taxes)
were recorded. These charges included a $224 million
charge before taxes ($140 million after taxes) 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 $39 million credit before
taxes ($24 million after taxes) was recorded for the net
reversal of restructuring reserves no longer required.

A further discussion of restructuring, business im-
provement 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 on Sales and Impairments of Businesses
Held for Sale

Net losses on sales and impairments of businesses
held for sale totaled $111 million in 2005, $135 million
in 2004 and $34 million in 2003. The principal compo-
nents of these gains/losses were:

2 0 0 5 : In the 2005 fourth quarter, a pre-tax charge of $46
million ($30 million after taxes) was recorded to write
down the assets of the Polyrey business to estimated fair
value and to adjust losses on businesses previously sold.

In the third quarter of 2005, charges totaling $5
million before taxes ($3 million after taxes) were re-
corded for adjustments of losses on businesses previously
sold.

During the second quarter of 2005, a net pre-tax
credit of $19 million ($12 million after taxes) was re-
corded including a $25 million credit before taxes ($15
million after taxes) from the collection of a note receiv-
able from the 2001 sale of the Flexible Packaging busi-
ness, and final charges related to the sale of Fine Papers
and Industrial Papers. In addition, interest income of
$11 million before taxes ($7 million after taxes) was col-
lected on the Flexible Packaging business note, which is
included in Interest expense, net.

During the first quarter of 2005, International Paper
announced an agreement to sell its Fine Papers and In-

dustrial Papers businesses. As a result, a $73 million
pre-tax loss ($48 million after taxes) was recorded in the
first quarter to write down the net assets of these busi-
nesses to their estimated net realizable value. Also in the
first quarter of 2005, charges totaling $6 million before
taxes ($4 million after taxes) were recorded for adjust-
ments to estimated losses on sales of certain smaller
operations.

2 0 0 4 : In December 2004, International Paper commit-
ted to plans for the sale in 2005 of its Fine Papers busi-
ness 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, Interna-
tional Paper sold two box plants located in China,
resulting in a pre-tax loss of $14 million ($4 million after
taxes).

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 addition, the 2004 second quarter included a loss
of $4 million before taxes ($2 million after taxes) to
write down the assets of Food Pack S.A. to their esti-
mated realizable value, which was included in the Con-
sumer Packaging segment.

2 0 0 3 : 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.

Pre-tax charges of $13 million ($7 million after tax-
es) were recorded in the first three quarters of 2003 to
adjust previously estimated gains/losses of businesses
previously sold.

Industry Segment Operating Profit

Industry segment operating profits of $1.9 billion in
2005 were slightly lower than $2.0 billion in 2004, but
above the $1.7 billion reported in 2003. Significantly
higher energy, wood, caustic soda and other raw material
lower sales volumes including
costs ($586 million),
lack-of-order downtime in our U.S. uncoated paper and
containerboard mills and downtime in our Eastern
European operations to rebuild paper machines in Po-
land and Russia to add needed uncoated paper and pa-

perboard capacity ($251 million), and the effect of un-
favorable foreign currency rates ($27 million) more than
offset the favorable effects of higher average prices ($478
million), cost reduction initiatives, improved operating
performance and a more favorable product mix ($235
million), and higher earnings from forestland and real
estate sales ($158 million).

Lack-of-order downtime in 2005 increased to ap-
proximately 830,000 tons, compared with only 70,000
tons in 2004 and 585,000 tons in 2003, as the Company
adjusted production in line with customer demand. The
2005 total included approximately 290,000 tons related
to uncoated paper machines at our mills in Pensacola,
Florida; Jay, Maine; and Bastrop, Louisiana; that were
permanently closed in the fourth quarter.

Looking forward to the first quarter of 2006, we
expect operating profits to be about flat with the 2005
fourth quarter. Sales volumes should be seasonally slow
in the quarter, but should show some improvement as
the quarter progresses. Price realizations should also im-
prove as previously announced price increases are im-
plemented. While energy, wood and raw material price
movements are mixed, their impact for the quarter is
expected to be flat.

D E S C R I P T I O N O F I N D U S T R Y S E G M E N T S

International Paper’s industry segments discussed
below are consistent with the internal structure used to
manage these businesses. All segments are differentiated
on a common product, common customer basis con-
sistent with the business segmentation generally used in
the Forest Products industry.

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.

U n c o a t e d P a p e r s : 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 re-
ports 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. Uncoated papers are sold under private label and
International Paper
include
Hammermill, Springhill, Great White, Ballet 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 5.4 million tons annually. International
Paper sold the Fine Papers business on April 30, 2005.
Prior to its sale, they produced papers used in high-

brand names

that

quality text, cover, business correspondence and artist
papers and sold under brand names Strathmore and
Beckett.

C o a t e d P a p e r s : This business produces coated papers used
in a variety of printing and publication end uses such as
catalogs, direct mailings, magazines,
and
commercial printing. Products include coated free sheet,
coated groundwood and supercalendered groundwood
papers. Production capacity in the United States
amounts to approximately 1.9 million tons annually.

inserts

M a r k e t P u l p : 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 paper 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.

B r a z i l i a n P a p e r : Brazilian operations function through
International Paper do Brasil, Ltda and subsidiaries, that
own or manage 1.3 million acres of forestlands in Brazil.
Our annual production capacity in Brazil is approx-
imately 680,000 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 and pine
timber on a global basis with eucalyptus and pine lumber
sold in Brazilian markets.

Industrial Packaging
I n d u s t r i a l P a c k a g i n g : With production capacity of about
4.8 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 67 U.S. container
plants. Additionally, we
recycled
containerboard mills and 33 container plants outside the
United States. Our container plants are supported by
regional design centers, which offer total packaging sol-
utions and supply chain initiatives. We have the ca-
pacity to produce around 515,000 tons of kraft paper
each year for use in multi-wall, retail bags and saturated
kraft. The Industrial Papers business, which was sold on
May 31, 2005, manufactured lightweight and pressure
sensitive papers and converted products in four domestic
facilities and one in the Netherlands.

operate

two

Consumer Packaging
C o n s u m e r P a c k a g i n g : 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, across our businesses
we work closely with our customers to understand their
needs and create profitable business opportunities
sourced from our broad base of packaging solutions: sub-
strates and barrier board technologies combined with
our printing expertise, graphics and structural design,
filling equipment and service, ASURYS technologies
(formerly called Smart Packaging) and marketing serv-
ices. All are tailored to create packaging that appeals to
consumers while building customer brand equity. Our
Everest, Fortress and Starcote brands are used in pack-
aging applications for everyday products such as juice,
milk, food, cosmetics, pharmaceuticals, computer soft-
ware and tobacco products. Approximately 32% 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 com-
plete packaging systems. From paper to filling machines,
including Tru-Taste
using proprietary technologies
brand barrier board technology for premium long-life
juices, our expertise is utilized to produce creative cus-
tomer
solutions and value. Shorewood Packaging
Corporation utilizes emerging technologies in its 18 fa-
cilities worldwide to produce world-class packaging with
high-impact graphics for a variety of markets, including
home entertainment, tobacco, cosmetics, general con-
sumer and pharmaceuticals. The Foodservice business
offers cups,
food containers and plates through
three domestic plants and six international facilities.

lids,

Distribution
Through xpedx, our North American merchant dis-
tribution business, we service the commercial printing
market with printing papers and graphic art supplies and
equipment, high traffic/away-from-home markets with
facility supplies and equipment, and various manu-
facturers and processors with packaging supplies and
equipment. xpedx is the leading wholesale distribution
marketer in these customer and product segments in
North America, operating 125 warehouse locations and
145 retail stores in the United States and Mexico, and
xpedx.com, a leading business to business e-commerce
site.

Forest Products
F o r e s t R e s o u r c e s : International Paper owns or manages
approximately 6.5 million acres of forestlands in the
United States, mostly in the South. All lands are in-
dependently third-party certified under the operating
standards of the Sustainable Forestry Initiative (SFITM ).
In 2005, these forestlands supplied about 20% 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 alter-
native to maximize the value of our forestland holdings.

W o o d P r o d u c t s : 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 ply-
wood annually.

Specialty Businesses and Other
C h e m i c a l s : Arizona Chemical is a leading producer of
specialty resins based on crude tall oil, a byproduct of
the wood pulping process. These products, used in adhe-
sives and inks, are made at 11 plants in the United
States and Europe.

E u r o p e a n D i s t r i b u t i o n : International Paper exited the
European Distribution business with the sale of Pape-
teries de France in the second quarter of 2005.

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

I N D U S T R Y S E G M E N T R E S U L T S
Printing Papers

Demand for Printing Papers products is closely cor-
related with changes in commercial printing and adver-
tising activity, direct mail volumes and, for uncoated
cut-size products, with changes in white-collar employ-
ment levels that affect the usage of copy and laser
printer paper. Market pulp is further affected by changes
in currency rates that can enhance or disadvantage pro-
ducers in different geographic regions. Principal cost
drivers
include manufacturing efficiency and raw
material and energy costs.

Printing Papers net sales for 2005 increased 2% from
2004 and 8% from 2003. Operating profits in 2005 were
5% lower than in 2004 but 19% higher than in 2003.
Compared with 2004, U.S. coated paper and market
pulp earnings improved, but this was offset by earnings
declines in U.S. uncoated papers, European Papers and
Brazilian Papers. Benefits from improved mill operations
and lower overhead costs ($129 million) and higher
average sales prices in the United States ($371 million),

were more than offset by higher raw material and energy
costs ($312 million), increased market related downtime
($187 million) and other items ($30 million). Com-
pared with 2003, higher 2005 earnings in the Brazilian
Papers, U.S. coated papers and U.S. market pulp busi-
nesses were offset by lower earnings in the U.S. un-
coated papers and the European Papers businesses. The
Printing Papers segment took 995,000 tons of downtime
in 2005, including 540,000 tons of lack-of-order down-
time to align production with customer demand. This
compared with 525,000 tons of downtime in 2004, of
which 65,000 tons related to lack-of-orders.

Printing Papers

In millions

Sales

Operating Profit

2005

2004

2003

$7,860

$7,670

$7,280

$552

$581

$464

Uncoated Papers sales totaled $4.8 billion in 2005
compared with $5.0 billion in 2004 and 2003. Sales
price realizations in the United States averaged 4.4%
higher in 2005 than in 2004, and 4.6% higher than
2003. Favorable pricing momentum which began in
2004 carried over into the beginning of 2005. Demand,
however, began to weaken across all grades as the year
progressed, resulting in lower price realizations in the
second and third quarters. However, prices stabilized as
the year ended. Total shipments for the year were 7.2%
lower than in 2004 and 4.2% lower than in 2003. To
continue matching our productive capacity with
customer demand, the business announced the perma-
nent closure of three uncoated freesheet machines and
took significant
lack-of-order downtime during the
period. Demand showed some improvement toward the
end of the year, bolstered by the introduction our new
line of vision innovation paper products
(VIP
TechnologiesTM), with improved brightness and white-
ness. Mill operations were favorable compared to last
year, and the rebuild of the No. 1 machine at the East-
over, South Carolina mill was completed as planned in
the fourth quarter. However, the favorable impacts of
improved mill operations and lower overhead costs were
more than offset by record high input costs for energy
and wood and higher transportation costs compared to
2004. The earnings decline in 2005 compared with 2003
was principally due to lower shipments, higher down-
time and increased costs for wood, energy and trans-
portation, partially offset by lower overhead costs and
favorable mill operations.

Average sales price realizations for our European
operations remained relatively stable during 2005, but
averaged 1% lower than in 2004, and 6% below 2003
levels. Sales volumes rose slightly, up 1% in 2005 com-
pared with 2004 and 5% compared to 2003. Earnings
were lower than in 2004, reflecting higher wood and

energy costs and a compression of margins due to un-
favorable foreign currency exchange movements. Earn-
ings were also adversely affected by downtime related to
the rebuild of three paper machines during the year.

Coated Papers sales in the United States were $1.6 bil-
lion in 2005, compared with $1.4 billion in 2004 and
$1.3 billion in 2003. The business reported an operating
profit in 2005 versus a small operating loss in 2004. The
earnings improvement was driven by higher average
sales prices and improved mill operations. Price realiza-
tions in 2005 averaged 13% higher than 2004. Higher
input costs for raw materials and energy partially offset
the benefits from improved prices and operations. Sales
volumes were about 1% lower in 2005 versus 2004.

Market Pulp sales from our U.S. and European facilities
totaled $757 million in 2005 compared with $661 mil-
lion and $571 million in 2004 and 2003, respectively.
Operating profits in 2005 were up 86% from 2004. An
operating loss had been reported in 2003. Higher aver-
age prices and sales volumes, lower overhead costs and
improved mill operations in 2005 more than offset in-
creases in raw material, energy and chemical costs. U.S.
softwood and hardwood pulp prices improved through
the 2005 first and second quarters, then declined during
the third quarter, but recovered somewhat toward year
end. Softwood pulp prices ended the year about 2%
lower than 2004, but were 15% higher than 2003, while
hardwood pulp prices ended the year about 15% higher
than 2004 and 10% higher than 2003. U.S. pulp sales
volumes were 12% higher than in 2004 and 19% higher
than in 2003, reflecting increased global demand. Euro-
pean pulp volumes increased 15% and 2% compared
with 2004 and 2003, respectively, while average sales
prices increased 4% and 11% compared with 2004 and
2003, respectively.

Brazilian Paper sales were $684 million in 2005 com-
pared with $592 million in 2004 and $540 million in
2003. Sales volumes
for uncoated freesheet paper,
coated paper and wood chips were down from 2004, but
average price realizations improved for exported un-
coated freesheet and coated groundwood paper grades.
Favorable currency translation, as yearly average Real
exchange rates versus the U.S. dollar were 17% higher
in 2005 than in 2004, positively impacted reported sales
in U.S. dollars. Average sales prices for domestic un-
coated paper declined 4% in local currency versus 2004,
while domestic coated paper prices were down 3%.
Operating profits in 2005 were down 9% from 2004, but
were up 2% from 2003. Earnings in 2005 were neg-
atively impacted by a weaker product and geographic
sales mix for both uncoated and coated papers, reflecting
increased competition and softer demand, particularly in
the printing, commercial and editorial market segments.

Entering 2006, earnings in the first quarter are ex-
pected to improve compared with the 2005 fourth quar-
ter due principally to higher average price realizations,
reflecting announced price increases. Product demand
for the first quarter should be seasonally slow, but is ex-
pected to strengthen as the year progresses, supported by
continued economic growth in North America, Asia
and Eastern Europe. Average prices should also improve
in 2006 as price increases announced in late 2005 and
early 2006 for uncoated freesheet paper and pulp con-
tinue to be realized. Operating rates are expected to
improve as a result of industry-wide capacity reductions
in 2005. Although energy and raw material costs remain
high, there has been some decline in both natural gas
and delivered wood costs, with further moderation ex-
pected later in 2006. We will continue to focus on fur-
ther
global manufacturing
in our
operations, implementation of supply chain enhance-
ments and reductions in overhead costs during 2006.

improvements

Industrial 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 proc-
essed foods, poultry, meat and agricultural products. In
addition to prices and volumes, major factors affecting
the profitability of Industrial Packaging are raw material
and energy costs, manufacturing efficiency and product
mix.

Industrial Packaging’s net sales for 2005 increased
2% compared with 2004, and were 18% higher than in
2003, reflecting the inclusion of International Paper
Distribution Limited (formerly International Paper
Pacific Millennium Limited) beginning in August 2005.
Operating profits in 2005 were 39% lower than in 2004
and 13% lower than in 2003. Sales volume increases
($24 million), improved price realizations ($66 million),
and strong mill operating performance ($27 million)
were not enough to offset the effects of increased raw
material costs ($103 million), higher market related
downtime costs
($50 million), higher converting
operating costs ($22 million), and unfavorable mix and
other costs ($67 million). Additionally, the May 2005
sale of our Industrial Papers business resulted in a $25
million lower earnings contribution from this business in
2005. The segment took 370,000 tons of downtime in
2005, including 230,000 tons of lack-of-order downtime
to balance internal supply with customer demand, com-
pared to a total of 170,000 tons in 2004, which included
5,000 tons of lack-of-order downtime.

Industrial Packaging

In millions

Sales

Operating Profit

2005

2004

2003

$4,935

$4,830

$4,170

$230

$380

$264

Containerboard’s net sales totaled $895 million in
2005, $951 million in 2004 and $815 million in 2003.
Soft market conditions and declining customer demand
at the end of the first quarter led to lower average sales
prices during the second and third quarters. Beginning
in the fourth quarter, prices recovered as a result of in-
creased customer demand and a rationalization of sup-
ply. Full year sales volumes trailed 2004 levels early in
the year, reflecting the weak market conditions in the
first half of 2005. However, volumes rebounded in the
second half of the year, and finished the year ahead of
2004 levels. Operating profits decreased 38% from 2004,
but were flat with 2003. The favorable impacts of in-
creased sales volumes, higher average sales prices and
improved mill operating performance were not enough
to offset the impact of higher wood, energy and other
raw material costs and increased lack-of-order down-
time. Implementation of the new supply chain operating
model in our containerboard mills during 2005 resulted
in increased operating efficiency and cost savings.

Specialty Papers in 2005 included the Kraft Paper
business for the full year and the Industrial Papers busi-
ness for five months prior to its sale in May 2005. Net
sales totaled $468 million in 2005, $723 million in 2004
and $690 million in 2003. Operating profits in 2005
were down 23% compared with 2004 and 54% com-
pared with 2003, reflecting the lower contribution from
Industrial Papers.

U.S. Converting Operations net sales for 2005
were $2.6 billion compared with $2.3 billion in 2004
and $1.9 billion in 2003. Sales volumes were up 10% in
2005 compared with 2004, mainly due to the acquisition
of Box USA in July 2004. Average sales prices in 2005
began the year above 2004 levels, but softened in the
second half of the year. Operating profits in 2005 de-
creased 46% and 4% from 2004 and 2003 levels, re-
spectively, primarily due to increased linerboard, freight
and energy costs.

European Container sales for 2005 were $883 mil-
lion compared with $865 million in 2004 and $801 mil-
lion in 2003. Operating profits declined 19% and 13%
compared with 2004 and 2003, respectively. The in-
crease in sales in 2005 reflected a slight increase in de-
mand over 2004, but this was not sufficient to offset the
negative earnings effect of increased operating costs,
unfavorable foreign exchange rates and a reduction in
average sales prices. The Moroccan box plant acquis-
ition, which was completed in October 2005, favorably
impacted fourth-quarter results.

Industrial Packaging’s sales in 2005 included $104
million from International Paper Distribution Limited,
our Asian box and containerboard business, subsequent
to the acquisition of an additional 50% interest in Au-
gust 2005.

Entering 2006, Industrial Packaging earnings are
expected to improve significantly in the first quarter
compared with the fourth quarter 2005. Average price
realizations should continue to benefit from price in-
creases announced in late 2005 and early 2006 for
linerboard and domestic boxes. Containerboard sales
volumes are expected to drop slightly in the 2006 first
quarter due to fewer shipping days, but growth is antici-
pated for U.S. converted products due to stronger de-
mand. Costs for wood, freight and energy are expected
to remain stable during the 2006 first quarter, approach-
ing fourth quarter 2005 levels. The continued im-
plementation of the new supply chain model at our mills
during 2006 will bring additional efficiency improve-
ments and cost savings. On a global basis, the European
Container operating results are expected to improve as a
result of targeted market growth and cost reduction ini-
tiatives, and we will begin seeing further contributions
from our recent Moroccan box plant acquisition and
from International Paper Distribution Limited.

Consumer Packaging

Demand and pricing for Consumer Packaging prod-
ucts correlate closely with consumer spending and gen-
eral economic activity.
In addition to prices and
volumes, major factors affecting the profitability of Con-
sumer Packaging are raw material and energy costs,
manufacturing efficiency and product mix.

Consumer Packaging’s 2005 net sales of $2.6 bil-
lion were flat compared with 2004 and 5% higher com-
pared with 2003. Operating profits in 2005 declined
22% from 2004 and 31% from 2003 as improved price
realizations ($46 million) and favorable operations in
the mills and converting operations ($60 million) could
not overcome the impact of cost increases in energy,
wood, polyethylene and other raw materials ($120
million),
lack-of-order downtime ($13 million) and
other costs ($8 million).

Consumer Packaging

In millions

Sales

Operating Profit

2005

2004

2003

$2,590

$2,605

$2,465

$126

$161

$183

Bleached Board net sales of $864 million in 2005
were up from $842 million in 2004 and $751 million in
2003. The effects in 2005 of improved average price
realizations and mill operating improvements were not
enough to offset increased energy, wood, polyethylene
and other raw material costs, a slight decrease in volume
and increased lack-of-order downtime. Bleached board
mills took 100,000 tons of downtime in 2005, including
65,000 tons of lack-of-order downtime, compared with
40,000 tons of downtime in 2004, none of which

was market related. During 2005, restructuring and
manufacturing improvement plans were implemented to
reduce costs and improve market alignment.

Foodservice net sales were $437 million in 2005
compared with $480 million in 2004 and $460 million
in 2003. Average sales prices in 2005 were up 3%; how-
ever, domestic cup and lid sales volumes were 5% lower
than in 2004 as a result of a rationalization of our cus-
tomer base early in 2005. Operating profits in 2005 in-
creased 147% compared with 2004, largely due to the
settlement of a lawsuit and a favorable adjustment on
the sale of the Jackson, Tennessee bag plant. Excluding
unusual items, operating profits were flat as improved
price realizations offset increased costs for bleached
board and resin.

Shorewood net sales of $691 million in 2005 were
essentially flat with net sales in 2004 of $687 million,
but were up compared with $665 million in 2003.
Operating profits in 2005 were 17% above 2004 levels
and about equal to 2003 levels. Improved margins
resulting from a rationalization of the customer mix and
improved manufacturing operations,
the effects of
including the successful start up of our South Korean
tobacco operations, more than offset cost increases for
board and paper and the impact of unfavorable foreign
exchange rates in Canada.

Beverage Packaging net sales were $597 million in
2005, $595 million in 2004 and $589 million in 2003.
Average sale price realizations increased 2% compared
with 2004, principally the result of the pass-through of
higher raw material costs, although the implementation
of price increases continues to be impacted by com-
petitive pressures. Operating profits were down 14%
compared with 2004 and 19% compared with 2003, due
principally to increases in board and resin costs.

In 2006, the bleached board market is expected to
remain strong, with sales volumes increasing in the first
quarter compared with the fourth quarter of 2005 for
both folding carton and cup products. Improved price
realizations are also expected for bleached board and in
our foodservice and beverage packaging businesses, al-
though continued high costs for energy, wood and resin
will continue to negatively impact earnings. Shorewood
should continue to benefit from strong Asian operations
and from targeted sales volume growth in 2006. Capital
improvements and operational excellence initiatives
undertaken in 2005 should benefit operating results in
2006 for all businesses.

Distribution

Our Distribution business, principally represented
by our xpedx business, markets a diverse array of products
and supply chain services to customers in many business
segments. Customer demand is generally sensitive to
changes in general economic conditions, although the

commercial printing segment is also dependent on corpo-
rate advertising and promotional spending. Distribution
earnings and cash flows are generally stable. Providing
customers with the best choice and value in both prod-
ucts and supply chain services is a key competitive fac-
service, cost-
tor. Additionally, efficient customer
effective
capital
management are key factors in this segment’s profit-
ability.

focused working

logistics,

and

Distribution

In millions

Sales

Operating Profit

2005

2004

2003

$6,380

$6,065

$5,860

$84

$87

$80

Distribution’s 2005 net sales increased 5% from
2004 and 9% from 2003. Operating profits in 2005 were
3% lower than 2004, but were 5% higher than 2003.
Sales rose, in part, as a result of higher average sales
prices for paper, tissue and packaging products. Sales
volumes for packaging and facility supplies increased due
to xpedx’s increasing success in positioning itself as a
national service provider to other distributors, manu-
facturers and retailers. While revenues increased in
2005, operating profits decreased, reflecting increased
expenses associated with initiatives targeting further
penetration of faster-growing market segments and costs
of facility realignments to improve the ongoing effi-
ciency of the xpedx distribution system.

The outlook for Distribution for 2006 is favorable.
Average sales prices and margins are expected to remain
at or above 2005 levels, and additional market pene-
tration is targeted in the printing, manufacturing, redis-
tribution and retail segments. Additional benefits are
also expected from prior-year programs to further reduce
operating costs.

Forest Products

Forest Products manages approximately 6.5 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 available to be har-
vested from 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 2005 were up 7% com-
pared with both 2004 and 2003. Operating profits in
2005 were 17% and 29% higher than in 2004 and 2003,
respectively. Earnings in 2005 compared with 2004 re-
flected higher earnings from forestland and real estate

sales ($159 million) and decreased forestland operating
expenses ($32 million); partially offset by reduced har-
vest and recreational income ($12 million), and lower
Wood Products earnings ($45 million) due principally
to higher raw material costs.

Forest Products

In millions

Sales

Operating Profit:

Forest Resources –

Sales of Forestlands

Harvest & Recreational Income

Forestland Expenses

Real Estate Operations

Wood Products

Operating Profit

2005

2004

2003

$2,575

$2,395

$2,390

$400

269

$315

281

$462

268

(146)

(178)

(157)

198

206

124

251

$927

$793

$720

Forest Resources sales in 2005 were $1.0 billion
compared with $900 million in 2004 and $1.1 billion in
2003. Operating profits in 2005 were 33% higher than
in 2004 and 12% higher than in 2003, primarily due to
higher forestland sales.

Operating profits from stumpage sales and recrea-
tional income were $269 million in 2005, compared
with $281 million in 2004 and $268 million in 2003.
Harvest volumes declined 13% in 2005 compared with
2004, and 20% from 2003, reflecting a lower inventory
of mature sawtimber in 2005. Sawtimber prices were up
9% compared to both 2003 and 2004. Operating profits
from forestland sales were $400 million in 2005 com-
pared with $315 million in 2004 and $462 million in
2003, reflecting fewer acres sold but higher sales prices
per acre. Operating expenses decreased to $146 million
in 2005 from $178 million in 2004 and $157 million in
2003, reflecting the effects of restructuring efforts and
cost reduction initiatives. Operating profits for the Real
Estate division, which principally sells higher-and-better
use properties, were $198 million, $124 million and $71
million in 2005, 2004 and 2003, respectively. Interna-
tional 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
through the sales of timberlands.

For 2006, our harvest is projected to decline 14%
due to a lower inventory of mature timber. However, in
future years, the harvest profile is expected to improve as
timber
tracts mature and the benefits of higher
yield-per-acre initiatives are realized. Average first-
quarter 2006 southern pine pulpwood, pine sawtimber
and hardwood pulpwood prices are expected to remain
close to fourth-quarter 2005 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 2005
of $1.6 billion were up 3% from $1.5 billion in 2004 and
18% from $1.3 billion in 2003. Average price realiza-
tions for lumber were up 6% and 21% in 2005 compared
with 2004 and 2003, respectively. Lumber sales volumes
in 2005 were up 5% versus 2004 and 10% versus 2003.
Average sales prices for plywood were down 4% from
2004, but were 15% higher than in 2003. Plywood sales
volumes in 2005 were slightly higher than 2004 and
2003. Operating profits in 2005 were 18% lower than
2004, but nearly three times higher than 2003. Lower
average plywood prices and higher raw material costs
more than offset the effects of higher average lumber
prices, volume increases and a positive sales mix. In
2005, log costs were up 9% versus 2004, negatively im-
pacting both plywood and lumber profits. Lumber and
plywood operating costs also reflected substantially
higher glue and natural gas costs versus both 2004 and
2003.

Looking forward to the first quarter of 2006, a con-
tinued strong housing market, combined with low prod-
uct inventory in the distribution chain, should translate
into continued strong lumber and plywood demand.
However, a possible softening of housing starts and
higher interest rates later in the year could put down-
ward pressure on pricing in the second half of 2006.

Specialty Businesses and Other

The Specialty Businesses and Other segment in-
cludes the operating results of Arizona Chemical, Euro-
pean 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 or
closure.

This segment’s 2005 net sales declined 18% and
26% from 2004 and 2003, respectively. Operating profits
in 2005 were down substantially from both 2004 and
2003. The decline in sales principally reflects declining
contributions from businesses sold or closed. Operating
profits were also affected by higher energy and raw
material costs in our Chemical business.

Specialty Businesses and Other

In millions

Sales

Operating Profit

2005

$915

2004

2003

$1,120

$1,235

$38

$23

Chemicals sales were $692 million in 2005, com-
pared with $672 million in 2004 and $625 million in
2003. Although demand was strong for most Arizona
Chemical product lines, operating profits in 2005 were
84% and 83% lower than in 2004 and 2003, re-
spectively, due to higher energy costs in the U.S., and
higher prices and reduced availability for crude tall oil

(CTO). In the United States, energy costs increased
41% compared to 2004 due to higher natural gas prices
and supply interruption costs. CTO prices increased
26% compared to 2004, as certain energy users turned to
CTO as a substitute fuel for high-cost alternative energy
sources such as natural gas and fuel oil. European CTO
receipts decreased 30% compared to 2004 due to lower
yields following the Finnish paper industry strike and a
Swedish storm that limited CTO throughput and corre-
sponding sales volumes.

Other businesses in this operating segment 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 ap-
proximately $223 million in 2005 (mainly European
Distribution and Decorative Products) compared with
$448 million in 2004 (mainly European Distribution
and Decorative Products), and $610 million in 2003.

L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S

Overview

A major factor in International Paper’s liquidity
and capital resource planning is its generation of operat-
ing 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 improvements in operating cash flow
should prices and worldwide economic conditions im-
prove in the future.

As part of our continuing focus on improving our
return on investment, we have focused our capital
spending on improving our key platform businesses in
North America and in geographic areas with strong
growth opportunities. Spending levels have been kept
below the level of depreciation and amortization charges
for each of the last three years, and we anticipate con-
tinuing this approach in 2006.

With the low interest rate environment in 2005,
financing activities have focused largely on the repay-
ment or refinancing of higher coupon debt, resulting in
a net reduction in debt of approximately $1.7 billion in
2005. We plan to continue this program, with addi-
tional
reductions anticipated as our previously an-
nounced Transformation Plan progresses in 2006. Our
liquidity position continues to be strong, with approx-
imately $3.2 billion of committed liquidity to cover fu-
ture short-term cash flow requirements not met by
operating cash flows.

Management believes it is important for Interna-
tional Paper to maintain an investment-grade credit rat-
ing to facilitate access to capital markets on favorable
terms. At December 31, 2005, the Company held long-
term credit ratings of BBB (negative outlook) and Baa3
(stable outlook) from Standard & Poor’s and Moody’s
Investor Services, respectively.

Cash Provided By Operations

Cash provided by continuing operations totaled
$1.5 billion for 2005, compared with $2.1 billion in
2004 and $1.5 billion in 2003. The major components
of cash provided by continuing operations are earnings
from continuing operations adjusted for non-cash in-
come and expense items and changes in working capital.
Earnings
from continuing operations adjusted for
non-cash items declined by $83 million in 2005 versus
2004. This compared with an increase of $612 million
for 2004 over 2003.

Working capital, representing International Paper’s
investments in accounts receivable and inventory less
accounts payable and accrued liabilities, was $2.6 billion
at December 31, 2005. Cash used for working capital
components increased by $591 million in 2005, com-
pared with a $86 million increase in 2004 and an $11
million increase in 2003. The increase in 2005 was
principally due to a decline in accrued liabilities at De-
cember 31, 2005.

Investment Activities

Capital spending from continuing operations was
$1.2 billion in 2005, or 84% of depreciation and amor-
tization, comparable to the $1.2 billion, or 87% of
depreciation and amortization in 2004, and $1.0 billion,
or 74% of depreciation and amortization in 2003.

The following table presents capital spending from
continuing operations by each of our business segments
for the years ended December 31, 2005, 2004 and 2003.

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other

2005

$658

187

131

121

2004

$590

2003

$482

179

205

126

165

128

121

939

Subtotal

Corporate and other

1,137

1,144

Total from continuing operations

$1,155

$1,176

$993

We expect capital expenditures in 2006 to be about
$1.2 billion, or about 80% of depreciation and amor-
tization. We will continue to focus our future capital
spending on improving our key platform businesses in

North America and on investments in geographic areas
with strong growth opportunities.

Acquisitions

In October 2005, International Paper acquired ap-
proximately 65% of Compagnie Marocaine des Cartons
et des Papiers (CMCP), a leading Moroccan corrugated
packaging company, for approximately $80 million in
cash plus assumed debt of approximately $40 million.

In August 2005, pursuant to an existing agreement,
International Paper purchased a 50% third-party interest
in IPPM (subsequently renamed International Paper
Distribution Limited) for $46 million to facilitate possi-
ble further growth in Asian markets. In 2001, Interna-
tional Paper had acquired a 25% interest
in this
business. The accompanying consolidated balance sheet
as of December 31, 2005 includes preliminary estimates
of the fair values of the assets and liabilities acquired,
including approximately $50 million of goodwill.

In July 2004, International Paper acquired Box
USA Holdings, Inc. (Box USA) for approximately $400
million,
including the assumption of approximately
$197 million of debt, of which approximately $193 mil-
lion was repaid by July 31, 2004.

Each of the above acquisitions was accounted for
using the purchase method. The operating results of
these acquisitions have been included in the con-
solidated statement of operations from the dates of ac-
quisition.

Financing Activities
2 0 0 5 : Financing activities during 2005 included debt
issuances of $1.0 billion and retirements of $2.7 billion,
for a net debt and preferred securities reduction of $1.7
billion.

In November and December 2005, International
Investments (Luxembourg) S.ar.l., a wholly-
Paper
owned subsidiary of International Paper, issued $700
million of long-term debt with an initial interest rate of
LIBOR plus 40 basis points that can vary depending
upon the credit rating of the Company, and a maturity
date in November 2010. Additionally, the subsidiary
borrowed $70 million under a bank credit agreement
with an initial interest rate of LIBOR plus 40 basis
points that can vary depending upon the credit rating of
the Company, and a maturity date in November 2006.

In December 2005, International Paper used pro-
ceeds from the above borrowings, and from the sale of
CHH in the third quarter of 2005, to repay approx-
imately $190 million of notes with coupon rates ranging
from 3.8% to 10% and original maturities from 2008 to
2029. The remaining proceeds from the borrowings and
the CHH sale will be used for further debt reductions in
the first quarter of 2006.

Other activities in the fourth quarter of 2005 in-
cluded the repatriation of $900 million of cash from cer-
tain of International Paper’s European and Canadian
subsidiaries under the American Jobs Creation Act of
2004. Most of the cash from the repatriation is intended
for further debt reduction in 2006.

In September 2005, International Paper used some
of the proceeds from the CHH sale to repay the remain-
ing $250 million portion of a subsidiary’s $650 million
long-term debt with an interest rate of LIBOR plus 62.5
basis points and a maturity date of June 2007, and $312
million of commercial paper that had been issued in the
same quarter. Other reductions in the third quarter of
2005 included $662 million of notes with coupon rates
ranging from 4% to 7.35% and original maturities from
2009 to 2029, and the repayment of $150 million of
7.10% notes with a maturity date of September 2005.

In the second quarter of 2005, International Paper
repatriated approximately $1.2 billion in cash from cer-
tain of its foreign subsidiaries, including amounts under
the American Jobs Creation Act of 2004. In June 2005,
International Paper repaid approximately $400 million
of a subsidiary’s long-term debt with an interest rate of
LIBOR plus 62.5 basis points and a maturity date of June
2007.

In February 2005, the Company redeemed the out-
standing $464 million aggregate principal amount of
International Paper Capital Trust 5.25% convertible
subordinated debentures at 100.5% of par plus accrued
interest, and made early payments of approximately
$295 million on notes with coupon rates ranging from
4% to 7.875% and original maturities from 2006 to
2015.

Other financing activity in 2005 included the issu-
ance of approximately 3,006,000 common shares under
various incentive plans, including stock option exercises
that generated $23 million of cash.

2 0 0 4 : Financing activities during 2004 included debt
issuances of $2.5 billion and retirements of $4.2 billion,
including repayments of $193 million of debt assumed in
the Box USA acquisition in July and approximately
$340 million of debt that was reclassified from Minority
interest in 2004 prior to repayment. Excluding these
repayments, the net reduction in debt during 2004 was
approximately $1.0 billion.

subsidiary

consolidated

In December 2004, Timberlands Capital Corp. II, a
former wholly-owned
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 repay-
ment.

Also in August 2004, an International Paper
wholly-owned subsidiary issued 500 million euro-
denominated long-term debt (equivalent to approx-
imately $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 ma-
turity 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, includ-
ing all of the outstanding $805 million principal amount
of International Paper Capital Trust III 7.875% pre-
ferred securities, using the proceeds from the two De-
cember 2003 issuances of $500 million each of notes
discussed below.

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

Other financing activity in 2004 included the issu-
ance 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.

2 0 0 3 : Financing activities during 2003 included debt
and preferred security issuances of $2.2 billion and
retirements totaling $1.2 billion for a net increase of
$1.0 billion. The increase reflects the timing of $1.0 bil-
lion of borrowings in December 2003 used to retire ap-
proximately $1.0 billion of debt
in early 2004 as
discussed below. 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 2009, and $500 million of
5.50% Senior Unsecured Notes due January 2014, were
issued. In January 2004, the proceeds from these issu-
ances were used to redeem $805 million of 7.875% pre-
ferred securities of International Paper Capital Trust III
that, prior to July 1, 2003, was a subsidiary of Interna-
tional Paper. The remaining proceeds were used for the
repayment or early retirement of other debt.

December 31, 2005, there were no outstanding borrow-
ings under these agreements.

The Company is currently in the process of refinanc-
ing the $750 million bank credit agreement maturing in
March 2006 and the $1.25 billion bank credit agree-
ment maturing in March 2009. The new bank credit
agreements are expected to consist of a $500 million
bank credit agreement with a maturity in March 2007
and a $1.5 billion bank credit agreement with a maturity
in March 2011.

Additionally, International Paper Kwidzyn S.A., a
wholly-owned foreign subsidiary of International Paper,
has a PLN 400 million (approximately $123 million)
bank credit agreement that expires in May 2006 with no
outstanding borrowings as of December 31, 2005, and
International Paper Investments (Luxembourg) S.ar.l., a
wholly-owned subsidiary of International Paper, has a
$100 million bank credit agreement that expires in
November 2006 with $70 million in associated borrow-
ings outstanding as of December 31, 2005.

The Company will continue to rely upon debt and
capital markets for the majority of any necessary long-
term funding not provided by operating cash flow or
divestiture proceeds. 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.
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,
include main-
financial covenants
2005. Principal
tenance of a minimum net worth of $9 billion, defined
as the sum of common stock, paid-in capital and re-
tained earnings, less treasury stock, plus any goodwill
impairment charges, and a maximum total debt to capi-
tal ratio, defined as total debt divided by total debt plus
net worth, of 60%.

Maintaining an investment grade credit rating is an
important element of International Paper’s financing
strategy. At December 31, 2005, the Company held
long-term credit ratings of BBB (negative outlook) and
Baa3 (stable 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-3,
respectively.

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 com-
mercial 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 Interna-
tional Paper. In the same period, International Paper
sold a minority interest in Southeast Timber, Inc., a
consolidated subsidiary of International Paper, to a pri-
vate 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 mil-
lion 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, 2005, International Paper
had entered into interest rate swaps with a total notional
amount of $1.7 billion. These swaps reduced 2005
interest expense by $10 million before taxes and minor-
ity interest, or 60 basis points, on $1.7 billion of related
debt. At December 31, 2005, the swaps reduced the
weighted average fixed rate on the debt of 5.5% to an
effective rate of 4.9% with maturities ranging from 1 to
11 years.

Dividend payments totaled $490 million in 2005,
$485 million in 2004 and $480 million in 2003. The
International Paper common stock dividend remained
at $1.00 per share during the three-year period.

At December 31, 2005 and 2004, cash and tempo-
rary investments totaled $1.6 billion and $2.6 billion,
respectively.

Capital Resources Outlook for 2006

International Paper expects to be able to meet pro-
jected capital expenditures, service existing debt and
meet working capital and dividend requirements during
2006 through cash from operations and divestiture pro-
ceeds, 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 varia-
bility during our industry’s economic cycles. This in-
cludes a $750 million fully committed bank credit
agreement that expires in March 2006, a $1.25 billion
fully committed bank credit agreement that expires in
March 2009, and up to $1.2 billion of available
commercial paper-based financings under a receivables
securitization program that expires November 2007. At

Contractual obligations for future payments under
existing debt and lease commitments and purchase obli-
gations at December 31, 2005, were as follows:

In millions
Total debt
Lease obligations
Purchase

2006
$1,181
172

2009

2007 2008
$570 $308 $2,330 $1,534
63

2010 Thereafter
$6,281
138

144

119

obligations (a) 3,264

204
280
$4,617 $1,107 $707 $2,646 $1,801

393

240

1,238
$7,657

Total

(a) The 2006 amount includes $2.4 billion for contracts made in
the ordinary course of business to purchase pulpwood, logs and
wood chips. 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.

T R A N S F O R M A T I O N P L A N

In July 2005, the Company announced a plan to
focus its business portfolio on two key global platform
businesses: Uncoated Papers (including Distribution)
and Packaging. The plan also focuses on improving
shareholder return through mill realignments in those
two businesses, additional cost
improvements and
exploring strategic options for other businesses, includ-
ing possible sale or spin-off. In connection with this
process, in the third quarter of 2005, the Company
completed the sale of its 50.5% interest in Carter Holt
Harvey Limited. Other businesses currently under re-
view include:

(cid:127) the Coated and Supercalendered Papers busi-
ness, including the coated groundwood mill
and associated assets in Brazil,

(cid:127) the Beverage Packaging business, including the

Pine Bluff, Arkansas mill,

(cid:127) the Kraft Papers business, including the Roa-

noke Rapids, North Carolina mill,

(cid:127) Arizona Chemical,
(cid:127) the Wood Products business, and
(cid:127) segments or potentially all of the Company’s

6.5 million acres of U.S. forestlands.

Consistent with this evaluation process, the Com-
pany has distributed bid package information for some of
these businesses. The exact timing of this evaluation
process will vary by business; however, it is anticipated
that decisions will be made for some of these businesses
during 2006. While the exact use of any proceeds from
potential future sales is dependent upon various factors
affecting future cash flows, such as the amount of any
proceeds received and changes in market conditions,
input costs and capital spending, the Company remains
committed to using its free cash flow in 2006 to pay
down debt, to return value to shareholders, and for se-
lective high-return investments.

C R I T I C A L A C C O U N T I N G P O L I C I E S

The preparation of financial statements in con-
formity with generally accepted accounting principles in
the United States requires International Paper to estab-
lish accounting policies and to make estimates that af-
fect both the amounts and timing of the recording of
assets, liabilities, revenues and expenses. Some of these
estimates require judgments about matters that are in-
herently uncertain.

for contingent

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
Nos. 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:
Contingent Liabilities. Accruals
li-
abilities, 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 dis-
cussed in Note 10 of the Notes to Consolidated Finan-
cial Statements in Item 8. Financial Statements and
Supplementary Data, reserves for projected future claims
settlements relating to exterior siding and roofing prod-
ucts previously manufactured by Masonite require
judgments regarding projections of future claims rates
and amounts.
International Paper utilizes an in-
dependent third party consultant to assist in developing
these estimates. Liabilities for environmental matters
require evaluations of relevant environmental regu-
lations and estimates of future remediation alternatives
and costs. International Paper determines these esti-
mates 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 cir-
cumstances indicate that the carrying value of the asset

may not be recoverable through future operations. Addi-
tionally, testing for possible impairment of recorded
goodwill and intangible asset balances is required annu-
ally. 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 con-
junction 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 global tax
provision based on the respective tax rules and regu-
lations 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 de-
ducted in its income tax returns. However, where
treatment of an item is uncertain, tax accruals are re-
corded based upon the expected most probable outcome
taking into consideration the specific tax regulations
and facts of each matter, the results of historical nego-
tiated settlements, and the results of consultations with
outside specialists. These accruals are recorded in the
accompanying consolidated balance sheet in Other li-
abilities. Changes to the reserves are only made when an
identifiable event occurs that changes the probable out-
come, 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 ad-
dresses the matter.

While International Paper believes that these judg-
ments and estimates are appropriate and reasonable
under the circumstances, actual resolution of these mat-
ters may differ from recorded estimated amounts.

S I G N I F I C A N T A C C O U N T I N G E S T I M A T E S
Pension and Postretirement Benefit Accounting. The
calculations of pension and postretirement benefit obli-
gations 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, 2005, 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

Fair Value of
Plan Assets

$8,958
320
703
276
21

$6,944
—
—
173
—

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

2006

2005

2004

2003

Discount rate

5.50% 5.75% 6.00% 6.50%

Expected long-term return on plan

assets

Rate of compensation increase

8.50% 8.50% 8.75% 8.75%
3.25% 3.25% 3.25% 3.75%

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

2006

2005

2004

Health care cost trend rate assumed for

next year

10.00% 10.00% 10.00%

Rate that the cost trend rate gradually

declines to

5.00% 5.00% 5.00%

Year that the rate reaches the rate it is

assumed to remain

2011

2010

2009

International Paper determines these actuarial as-
sumptions, after consultation with our actuaries, on
December 31 of each year to calculate liability in-
formation as of that date and pension and postretire-
ment expense for the following year. The discount rate
assumption is determined based on a yield curve that
incorporates approximately 500-550 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 as-
sets reflects projected returns for an investment mix de-
termined upon completion of a detailed asset/liability
study that meets the plans’ investment objectives. In-
creasing (decreasing) the expected long-term rate of re-
turn on U.S. plan assets by an additional 0.25% would
decrease (increase) 2006 pension expense by approx-
imately $16 million, while a (decrease) increase of
0.25% in the discount rate would (increase) decrease
pension expense by approximately $27 million. The ef-
fect on net postretirement benefit cost from a 1% in-
crease or decrease in the annual trend rate would be
approximately $2 million.

Actual rates of return earned on U.S. pension plan

assets for each of the last 10 years were:

Year

2005

2004

2003

2002

2001

Return

11.7%

14.1%

26.0%

(6.7)%

(2.4)%

Year

2000

1999

1998

1997

1996

Return

(1.4)%

21.4%

10.0%

17.2%

13.3%

The following chart, prepared by International
Paper, illustrates the quarterly performance ranking of
our pension fund investments compared with approx-
imately 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.”

Pension Fund
Rolling Three-Year Performance vs. Peers
Percentile Ranking (100%=Best)

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 be-
tween 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 11 years) to the extent
that they are not offset by gains and losses in subsequent
years. At December 31, 2005, unrecognized net actuarial
losses for International Paper’s U.S. pension plans to-
taled approximately $3.2 billion. While actual future
amortization charges will be affected by future gains/
losses, the amortization of cumulative unrecognized
losses as of December 31, 2005 is expected to increase
U.S. pension expense by approximately $68 million in
2006, while decreasing expense by $24 million and $38
million in 2007 and 2008, respectively.

Net periodic pension and postretirement plan ex-
penses, calculated for all of International Paper’s plans
were as follows:

In millions

2005 2004 2003 2002

2001

Pension expense (income)

U.S. plans (non-cash)

Non-U.S. plans

Postretirement expense

U.S. plans

Non-U.S. plans

$243 $111
15

$60 $(75) $(141)

2 —

Net expense (income)

$281 $181 $129

$(5) $(81)

Assuming that discount rates, expected long-term
returns on plan assets and rates of future compensation
increases remain the same as in 2005, projected future
net periodic pension and postretirement plan expenses
would be as follows:

In millions

Pension expense

U.S. plans (non-cash)

Non-U.S. plans

Postretirement expense

U.S. plans

Non-U.S. plans

Net expense

2007(a)

2006(a)

$356

$370

$394

$410

(a) Based on 12/31/05 assumptions.

The increases in 2005 and 2004 U.S. pension ex-
pense were due to increases in the amortization of un-
recognized actuarial losses, reductions in the discount
rate, a reduction in the expected long-term rate of re-
turn on plan assets, and a reduction in 2004 in the as-
sumed rate of future compensation increase.

For 2006, the Company estimates that it will record
net pension expense of approximately $370 million for
its U.S. defined benefit plans, with the increase from
expense of $243 million in 2005 principally reflecting a
change in the mortality assumption to use the Retire-
ment Protection Act 2000 Table (RP-2000) in 2006
versus the Group Annuity Mortality Table 1983 (GAM
83) used in 2005, amortization of unrecognized actuarial
losses over a shorter average remaining service period,
and a decrease in the assumed discount rate to 5.50% in
2006 from 5.75% in 2005. The estimated 2006 pension
expense for our non-U.S. plans is $17 million. Net post-
retirement benefit costs in 2006 will remain at current
levels.

The market value of plan assets for International
Paper’s U.S. pension plan at December 31, 2005 totaled
approximately $6.9 billion, consisting of approximately
61% equity securities, 28% fixed income securities, and
11% real estate and other assets. Plan assets did not in-
clude 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 regu-
lations in the coming years, it is unlikely that any con-
tributions to the plan will be required in 2006 unless
investment performance is negative or International
Paper changes its funding policy to make contributions
above the minimum requirements. The U.S. Congress is
that would
currently considering various proposals
change the minimum funding requirements for qualified
defined benefit plans in future years. While the amount
of any required contributions after 2006 will depend
upon the final rules adopted and other factors, including
changes in discount rates and actual plan asset returns,
the Company currently estimates that a contribution in
2007 of $40 million to $200 million may be required.
The U.S. nonqualified plans are only funded to the ex-
tent of benefits paid which are expected to be $34 mil-
lion in 2006.

for

Accounting for Stock Options. International Paper ac-
stock options using the intrinsic value
counts
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 measure-
ment 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 re-
ported 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 in-
dividual tax returns.

the

Under

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 ex-
pense of $57 million in 2005, $38 million in 2004, and
$44 million in 2003 would have been recorded.

During 2003, the Company decided to eliminate its
stock option program for all U.S. employees with the
intent of minimizing the use of stock options globally in
2006. In the United States, the stock option program
was replaced with a performance-based restricted share
program for approximately 1,250 employees to more
closely tie long-term incentive compensation to Com-
pany performance on two key performance drivers: re-
turn on investment (ROI) and total shareholder return
(TSR). As part of this shift in focus away from stock op-
tions to performance-based restricted stock, the Com-
pany accelerated the vesting of all 14 million unvested
stock options to July 12, 2005. The Company also con-
sidered the benefit to employees and the income state-
ment impact in making its decision to accelerate the
vesting of these options. Based on the market value of
the Company’s common stock on July 12, 2005, the
exercise prices of all such stock options were above the
market value and, accordingly, the Company recorded
no expense as a result of this action.

At December 31, 2005, 41.6 million options were
outstanding with exercise prices ranging from $29.31 to
$66.81 per share. At December 31, 2004, 45.4 million
options were outstanding with exercise prices ranging
from $29.31 to $66.81 per share.

On January 1, 2006, the Company adopted SFAS
No. 123(R), “Share-Based Payment,” using the modified
prospective method. No unvested stock options were
outstanding as of this date. The Company believes that
the adoption will not have a material impact on its con-
solidated financial statements.

I N C O M E T A X E S

Before minority interest, discontinued operations,
extraordinary items and the cumulative effect of
accounting changes, the Company’s effective income
tax rates were (49%), 33% and (20%) for 2005, 2004
and 2003, 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 be-
lieves that the effective tax rate computed after exclud-
ing 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 un-
usual items, the effective income tax rate for 2005 was
27.5% of pre-tax earnings compared with 29% in 2004
and 19% in 2003. The decrease in the rate in 2005 re-
flects a higher proportion of earnings in lower tax rate
jurisdictions. We estimate that the 2006 effective in-
come tax rate will be approximately 30% based on ex-
pected earnings and business conditions, which are
subject to change.

R E C E N T A C C O U N T I N G D E V E L O P M E N T S

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

Accounting Changes and Error Corrections:

In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,” which
changes the requirements for the accounting and report-
ing of a change in accounting principle. SFAS No. 154
is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15,
2005. This Statement does not change the transition
provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the
effective date of the Statement.

Accounting for Conditional Asset Retirement
Obligations:

In March 2005, the FASB issued Interpretation
No. 47, “Accounting for Conditional Asset Retirement
Obligations.” This Interpretation clarifies that the term
“conditional asset retirement obligation” as used in
FASB Statement No. 143 refers to the fact that a legal
obligation to perform an asset retirement activity is un-
conditional even though uncertainty exists about the
timing and (or) method of settlement. Uncertainty
about the timing and (or) method of settlement of a
conditional asset retirement obligation should be fac-
tored into the measurement of the liability when suffi-
cient information exists to make a reasonable estimate
of the fair value of the obligation.

International Paper adopted the provisions of this
Interpretation in the fourth quarter of 2005 with no
material effect on its consolidated financial statements.
The Company’s principal conditional asset retirement
obligations relate to the potential future closure or rede-
sign of certain of its production facilities. In connection
with any such activity, it is possible that the Company
may be required to take steps to remove certain materi-
als from the facilities, or to remediate in accordance
with federal and state laws that govern the handling of
certain hazardous or potentially hazardous materials.
Applicable regulations and standards provide that the
removal of certain materials would only be required if
the facility were to be demolished or underwent major
renovations. At this time, any such obligations have an
indeterminate settlement date, and the Company be-
lieves that adequate information does not exist to apply
an expected-present-value technique to estimate any
such potential obligations. Accordingly, the Company

does not record a liability for such remediation until a
decision is made that allows reasonable estimation of the
timing of such remediation.

Implicit Variable Interests:

In March 2005, the FASB issued FASB Staff Posi-
tion (FSP) FIN 46(R)-5, “Implicit Variable Interests
Under FASB Interpretation No. 46(R), Consolidation
of Variable Interest Entities.” This FSP states that im-
plicit variable interests are implied financial interests in
an entity that change with changes in the fair value of
the entity’s net assets exclusive of variable interests. An
implicit variable interest acts the same as an explicit
variable interest except it involves the absorbing and
(or) receiving of variability indirectly from the entity
(rather than directly). The identification of an implicit
variable interest is a matter of judgment that depends on
the relevant facts and circumstances. International Pa-
per applied the provisions of FSP FIN 46(R)-5 in the
second quarter of 2005, with no material impact on its
consolidated financial statements.

Accounting for Income Taxes:

In December 2004, the FASB issued FSP Financial
Accounting Standards 109-1 and 109-2 relating to the
American Jobs Creation Act of 2004 (the Act). The
Act provides for a special one-time deduction of 85% of
certain foreign earnings that are repatriated. In 2005,
International Paper repatriated approximately $2.1 bil-
lion in cash from certain of its foreign subsidiaries, in-
cluding amounts eligible for this special deduction. The
Company recorded income tax expenses associated with
these cash repatriations totaling approximately $142
million for the year ended December 31, 2005.

Share-Based Payment Transactions:

In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,” that will require
compensation costs
related to share-based payment
transactions to be recognized in the financial state-
ments. The amount of the compensation cost will be
measured based on the grant-date fair value of the equity
liability
or liability instruments issued. In addition,
awards will be remeasured each reporting period. Com-
pensation cost will be recognized over the period that an
employee provides service in exchange for the award.
This Statement will apply to all awards outstanding on
its effective date, or awards granted, modified, re-
purchased or cancelled after that date. In April 2005,
the Securities and Exchange Commission (SEC) de-
ferred the effective date of this Statement until the first
fiscal year beginning after June 15, 2005. International
Paper believes that the adoption of SFAS No. 123(R)
will not have a material impact on its consolidated finan-
cial statements. See Notes 1 and 13 of the Notes to Con-

in Item 8. Financial
solidated Financial Statements
Statements and Supplementary Data for a further dis-
cussion of stock options.

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,
for Nonmonetary
“Accounting
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 ap-
plied prospectively and is effective for nonmonetary as-
set exchanges occurring in fiscal periods beginning after
June 15, 2005. International Paper believes that the
adoption of SFAS No. 153 in 2006 will not have a
material impact on its consolidated financial statements.

Inventory Costs:

In November 2004,

the FASB issued SFAS
No. 151, “Inventory Costs, an Amendment of ARB
No. 43, Chapter 4.” This Statement requires that
abnormal amounts of idle facility expense, freight, han-
dling costs and wasted material be recognized as current-
period charges. This Statement also introduces the con-
cept of “normal capacity” and requires the allocation of
fixed production overhead to inventory based on the
normal capacity of the production facilities. Unallocated
overhead must be recognized as an expense in the period
in which it is 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 in 2006 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,
“Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug,
Improvement and
Modernization Act of 2003,” that provides guidance on
the accounting and required disclosures for the effects of
Improvement and
the Medicare Prescription Drug,
Modernization Act of 2003. International Paper adopted
FSP FAS 106-2 prospectively in the third quarter of
2004. See Note 16 of the Notes to Consolidated Finan-
cial Statements in Item 8. Financial Statements and
Supplementary Data for a further discussion.

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 Inter-
pretation changed existing consolidation rules for cer-
tain entities, those in which equity investors do not
have the characteristics of a controlling financial inter-
est, or do not have sufficient equity at risk for the entity
to finance the entity’s activities without additional sub-
ordinated financial support.

International Paper applied FIN 46(R) to its varia-
ble interest entities in 2003 and recorded a non-cash,
after-tax charge of $3 million as the cumulative effect of
this accounting change.

L E G A L P R O C E E D I N G S

Environmental Matters

continual

(2) make

improvements

International Paper is subject to extensive federal
and state environmental regulation as well as similar
regulations in all other jurisdictions in which we oper-
ate. Our continuing objectives are to: (1) control emis-
sions and discharges from our facilities into the air, water
and groundwater to avoid adverse impacts on the envi-
ronment,
in
environmental performance, and (3) maintain 100%
compliance with applicable laws and regulations. A total
of $70 million was spent in 2005 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
$121 million in 2006 for similar capital projects, includ-
ing the costs to comply with the Environmental Pro-
(EPA) Cluster Rule regulations.
tection Agency’s
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 2007 is approximately
$40 million, and during the year 2008 is approximately
$18 million. This reduced capital forecast for 2007 and
2008 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 re-
garding 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 2006 are $56 mil-
lion. 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 2007 through 2008 are
$23 million.

The EPA is continuing the development of new
programs and standards such as additional wastewater
discharge allocations, water intake structure require-
ments 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. International
Paper has been named as a potentially responsible party
in environmental remediation actions under various
federal and state laws, including the 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 mat-
ter, liability for CERCLA cleanups is allocated among
the many potential responsible parties. International
Paper has liability for cleanup of hazardous substances at
90 sites. Related costs are recorded in the financial
statements when they are probable and reasonably
estimable. International Paper believes that the prob-
able liability associated with these proceedings
is
approximately $50 million.

In addition to the above proceedings, other re-
mediation costs recorded as liabilities in the balance
sheet totaled approximately $50 million. Completion of
these actions is not expected to have a material adverse
effect on our consolidated financial statements. As of
February 2006, there were no other pending judicial
proceedings brought by government authorities against
International Paper for alleged violations of applicable
environmental laws or regulations.

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 un-
certainty, we believe that the outcome of any proceed-
ing, lawsuit or claim that is pending or threatened, or all
of them combined, will not have a material adverse ef-
fect on our consolidated financial statements.

Litigation

We routinely assess the likelihood of any adverse
judgments or outcomes of our litigation matters, as well
as ranges of probable losses. A determination of the
amount of the reserves required, if any, for these con-
tingencies is based largely on those assessments. Ulti-
mately, however, the setting of reserves is based on good
faith estimates and judgments which, given the un-
predictable nature of litigation, could prove to be in-
accurate. As a result, the reserve amounts in any given
matter may change at any time in the future due to new

unexpected developments. Analysis of our significant
litigation activity is discussed below, and further details
of these and other litigation matters are discussed in
Note 10 of the Notes to the Consolidated Financial
and
Statements
Supplementary Data.

in Item 8. Financial Statements

Antitrust Matters

In recent years, several antitrust class action law-
suits have been filed against companies in our industry.
Damages sought in these types of actions are often sub-
stantial and, even where no wrongdoing has occurred,
companies must often settle rather than risk an adverse
jury verdict. The Company has been named as a
defendant in several of those lawsuits and, in fact, has
reached favorable settlements after protracted and ex-
pensive litigation. Most recently in 2005, the Company
favorably resolved the linerboard antitrust cases which
had related to allegations of industry concerted activity
in the 1990s.

In light of the Company’s strong commitment to
antitrust compliance, and of the cost to defend and re-
solve these class actions, we have adopted a Code of
Business Ethics which applies to employees and execu-
tives alike, and we also have strong systems to ensure
compliance with antitrust laws, regulations and our own
policies. We place a very high priority on training our
employees on current antitrust laws around the world
and proper conduct under those laws. In this effort, we
employ both live and on-line training programs, and the
Company’s Antitrust Compliance Manual is required
reading for every U.S.-based salaried employee. In addi-
tion, the Company has a toll-free hotline which enables
employees to make anonymous reports about suspected
violation of law or Company policy. This reporting sys-
tem is also available to the general public with access
information publicized on our Internet site. We believe
that these efforts, together with strong leadership about
the importance of compliance, will minimize the
Company’s exposure in this area.

With respect to our one pending antitrust certified
class action, the Company believes that it has valid de-
fenses and is vigorously defending these cases.

E F F E C T O F I N F L A T I O N

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 oper-
ating results in each of 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.

We issue fixed and floating rate debt in a pro-
portion consistent with International Paper’s optimal
capital structure, while at the same time taking advan-
tage of market opportunities to reduce interest expense
as appropriate. Derivative instruments, such as interest
rate swaps, may be used to implement the optimal capi-
tal structure. At December 31, 2005 and 2004, the net
fair value liability of financial instruments with exposure
to interest rate risk was approximately $8.6 billion and
$10.4 billion, respectively. The potential loss in fair
value resulting from a 10% adverse shift in quoted
interest rates would have been approximately $326 mil-
lion and $419 million at December 31, 2005 and 2004,
respectively.

Commodity Price Risk

The objective of our commodity exposure manage-
ment 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. At December 31, 2005, the net fair value of such
outstanding energy hedge contracts was immaterial. At
December 31, 2004, there were no outstanding energy
hedge contracts.

Foreign Currency Risk

International Paper transacts business in many cur-
rencies 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 over-
seas operations with borrowings denominated in the
same currency as the operation’s functional currency, or
by entering into cross-currency and interest rate swaps,
or foreign exchange contracts. At December 31, 2005
and 2004, the net fair value liability of financial instru-
ments with exposure to foreign currency risk was
approximately $211 million and $335 million,
re-
spectively. The potential loss in fair value for such
financial instruments from a 10% adverse change in
quoted foreign currency exchange rates would have been
approximately $20 million and $65 million at De-
cember 31, 2005 and 2004, respectively.

F O R E I G N C U R R E N C Y E F F E C T S

impacts

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 state-
ments. Direct
include the translation of
international operations’ local currency financial state-
ments 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 cur-
rency
traded
products
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 Brazilian real, the Polish zloty and the Russian
ruble.

pricing

that

are

M A R K E T R I S K

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 obliga-
tions is included in Note 12 of the Notes to Con-
solidated 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 cur-
rency 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.

Interest Rate Risk

Our exposure to market risk for changes in interest
rates relates primarily to short- and long-term debt obli-
gations and investments in marketable securities. We
invest in investment grade securities of financial in-
stitutions and industrial companies and limit exposure to
any one issuer. Our investments in marketable securities
at December 31, 2005 are stated at cost, which approx-
imates market due to their short-term nature. Our inter-
est rate risk exposure related to these investments was
immaterial.

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 page 34, and under Item 8.
Financial Statements and Supplementary Data in Note
13 of the Notes to Consolidated Financial Statements
on pages 68 and 69.

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

INFORMATION BY INDUSTRY SEGMENT

F I N A N C I A L I N F O R M A T I O N B Y I N D U S T R Y S E G M E N T

A N D G E O G R A P H I C A R E A

For information about our industry segments, see
the “Description of Industry Segments” included on
pages 17 and 18 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 busi-
nesses and cumulative effects of accounting changes.
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 24 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations.

Prior-year industry segment information has been
restated to conform to the 2005 management structure
and to reflect the Carter Holt Harvey Limited and
Weldwood of Canada Limited businesses as dis-
continued operations.

N E T S A L E S

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and

Other (a)

Corporate and Intersegment

Sales

Net Sales

A S S E T S

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products (b)

Specialty Businesses and

Other (a)

2005

2004

2003

$ 7,860

$ 7,670

$ 7,280

4,935

2,590

6,380

2,575

4,830

2,605

6,065

2,395

4,170

2,465

5,860

2,390

915

1,120

1,235

(1,158)

(1,326)

(1,262)

$24,097

$23,359

$22,138

2005

2004

2003

$ 9,033

$ 9,171

$ 8,953

4,259

2,647

1,624

2,973

4,184

2,681

1,515

3,068

3,845

2,649

1,458

3,324

652

626

Corporate and other (c)

7,583

12,946

14,670

Assets

$28,771

$34,217

$35,525

O P E R A T I N G P R O F I T

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Operating Profit

Interest expense, net

Minority interest (d)

Corporate items, net

Restructuring and other charges

Insurance recoveries

Reversals of reserves no longer

2005

2004

2003

$ 552

$ 581

$ 464

230

126

927

380

161

793

264

183

720

1,923

2,040

1,734

(593)

(710)

(705)

—

(597)

(298)

258

(469)

(166)

123

(466)

(286)

—

required

Net gains (losses) on sales and

impairments of businesses held for

sale

(111)

(135)

(34)

Earnings From Continuing

Operations Before Income Taxes,

Minority Interest and Cumulative

Effect of Accounting Changes

$ 586

$ 724

$ 285

R E S T R U C T U R I N G A N D O T H E R C H A R G E S

INFORMATION BY GEOGRAPHIC AREA

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products (e)

Specialty Businesses and Other (a)

Corporate

2005

2004

2003

N E T S A L E S ( i )

$ 26

–

$ 26

298

166

123

Net Sales

In millions

2005

2004

2003

United States (j)

$19,886

$19,167

$18,138

Europe

Pacific Rim

Americas, other than U.S.

2,809

328

1,074

3,056

2,928

216

920

208

864

$24,097

$23,359

$22,138

Restructuring and Other Charges

$358

$166

$286

D E P R E C I A T I O N A N D A M O R T I Z A T I O N ( f )

E U R O P E A N S A L E S B Y I N D U S T R Y S E G M E N T

2005

2004

2003

In millions

Printing Papers

$ 693

$ 700

$ 682

Industrial Packaging

In millions

Printing Papers

Industrial Packaging
Consumer Packaging

Distribution

Forest Products (g)

Specialty Businesses and Other (a)

Corporate

240

166

101

126

241
164

111

230
166

119

111

Depreciation and Amortization

$1,376

$1,357

$1,347

E X T E R N A L S A L E S B Y M A J O R P R O D U C T

European Sales

$2,809

$3,056

$2,928

Consumer Packaging
Distribution

Specialty Businesses and Other (a)

L O N G - L I V E D A S S E T S ( k )

In millions

United States

Europe

2005

2004

2003

$1,364

$1,370

$1,291

851

572

869

22
2

793

804

18
9

806

2005

2004

2003

$11,218

$11,764

$12,102

1,474

1,489

1,334

875

142

282

718

114

288

629

307

Long-Lived Assets

$13,991

$14,373

$14,470

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Other (h)

Net Sales

2005

2004

2003

Americas, other than U.S.

$ 6,971

$ 6,486

$ 6,069

Asia

Corporate

4,900

2,796

6,389

2,340

701

4,617

2,715

6,306

2,559

676

4,040

2,580

6,191

2,522

736

$24,097

$23,359

$22,138

(a) Includes Arizona Chemical and certain other smaller busi-

(e) Includes $10 million for Forest Resources and $6 million for

nesses identified in the Company’s divestiture program.

Wood Products in 2005, and $31 million for Wood Products in

(b) Includes $2.2 billion, $2.4 billion and $2.6 billion for Forest

2003.

Resources, and $739 million, $693 million and $710 million

(f) Includes cost of timber harvested.

for Wood Products, in 2005, 2004 and 2003, respectively.

(g) Includes $51 million, $60 million and $74 million for Forest

Resources, and $50 million, $50 million and $45 million for

(d) Operating profits for industry segments include each segment’s

Wood Products, in 2005, 2004 and 2003, respectively.

percentage share of the profits of subsidiaries included in that

(h) Includes sales of products not included in our major product

segment that are less than wholly-owned. The pre-tax minority

lines.

interest for these subsidiaries is added here to present con-

(i) Net sales are attributed to countries based on location of seller.

solidated earnings from continuing operations before income

(j) Export sales to unaffiliated customers were $1.5 billion in 2005,

taxes, minority interest, extraordinary items, and cumulative

$1.5 billion in 2004 and $1.4 billion in 2003.

effect of accounting changes.

(k) Long-Lived Assets includes Forestlands and Plants, Properties

and Equipment, net.

R E P O R T O F M A N A G E M E N T O N :

F I N A N C I A L S T A T E M E N T S

The management of International Paper Company
is responsible for the preparation of the consolidated
financial statements in this annual report and for estab-
lishing and maintaining adequate internal controls over
financial reporting. The consolidated financial state-
ments 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 busi-
ness environment, some financial statement amounts
are based on estimates and judgments. Even though
estimates and judgments are used, 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 Com-
mittee to oversee this process.

The accompanying consolidated financial state-
ments have been audited by the independent registered
public accounting firm, Deloitte & Touche LLP. During
their audits, Deloitte & Touche LLP was given unre-
stricted 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.

I N T E R N A L C O N T R O L S O V E R F I N A N C I A L

R E P O R T I N G

The management of International Paper Company
is also responsible for establishing and maintaining ad-
equate internal controls over financial reporting includ-
ing the safeguarding of assets against unauthorized
acquisition, use or disposition. These controls are de-
signed to provide reasonable assurance to management
and the board of directors regarding preparation of reli-
able published financial statements and such asset safe-
guarding. All internal control systems have inherent
limitations, including the possibility of circumvention
and overriding of controls, and therefore can provide
only reasonable assurance as to such financial statement
preparation and asset safeguarding. The system is sup-
ported by written policies and procedures, contains self-
monitoring mechanisms, and is audited by the internal
audit
function. Appropriate actions are taken by
management to correct deficiencies as they are identi-
fied.

The Company has assessed the effectiveness of its
internal control over financial reporting as of De-
cember 31, 2005. 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, 2005, the Company’s internal control
over financial reporting is effective.

International Paper completed the acquisition of a
majority share of Compagnie Marocaine des Cartons et
des Papiers (CMCP), a leading Moroccan corrugated
packaging company, on October 14, 2005. Due to the
timing of the acquisition, we have excluded CMCP
from our evaluation of the effectiveness of internal con-
trols over financial reporting. For the period ended De-
cember 31, 2005, sales and assets of CMCP represented
less than 1% of total revenues and less than 1% of total
assets.

The Company’s independent registered public ac-
counting firm, Deloitte & Touche LLP, has issued their
report on management’s assessment and a report on the
effectiveness of the Company’s internal control over
financial reporting. The report appears on pages 40 and
41.

I N T E R N A L C O N T R O L E N V I R O N M E N T A N D B O A R D

O F D I R E C T O R S O V E R S I G H T

Our

internal control environment

includes an
enterprise-wide attitude of integrity and control con-
sciousness 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 Interna-
tional Paper business, which have been distributed to all
employees; a toll-free telephone helpline whereby any
employee may anonymously report suspected violations
of law or International Paper’s policy; and an office of
ethics and business practice. The internal control system
further includes careful selection and training of super-
visory and management personnel, appropriate dele-
responsibility,
gation of authority and division of
dissemination of accounting and business policies
throughout International Paper, and an extensive pro-
gram of internal audits with management follow-up.

financial

the Company’s

The Board of Directors, assisted by the Audit and
Finance Committee (Committee), monitors the in-
tegrity of
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
in-
dependent directors, meets regularly with representa-
tives of management, and with the independent auditors

four

and the Internal Auditor, with and without manage-
ment 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 promul-
gated as a result of the Sarbanes-Oxley Act of 2002. A
copy of the charter will be included in the Company’s
Proxy Statement relating to the annual meeting of
shareholders in 2006. The Committee has reviewed and
discussed the consolidated financial statements for the
year ended December 31, 2005, including critical ac-
counting policies and significant management judg-
ments, 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

MARIANNE M. PARRS
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER

R E P O R T O F D E L O I T T E & T O U C H E L L P ,

I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G

F I R M , O N C O N S O L I D A T E D F I N A N C I A L

F I R M , O N I N T E R N A L C O N T R O L S O V E R F I N A N C I A L

S T A T E M E N T S

R E P O R T I N G

To the Shareholders of International Paper Com-

pany:

We have audited the accompanying consolidated
balance sheets of International Paper Company and
subsidiaries (the “Company”) as of December 31, 2005
and 2004, 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,
2005. 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 assur-
ance about whether the financial statements are free of
material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and dis-
closures in the financial statements. An audit also in-
cludes 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 state-
ments present fairly, in all material respects, the finan-
cial position of
International Paper Company and
subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each
of the three years in the period ended December 31,
2005, in conformity with accounting principles gen-
erally accepted in the United States of America.

We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Compa-
ny’s internal control over financial reporting as of De-
cember 31, 2005, based on the criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Tread-
way Commission and our report dated March 2, 2006
expressed an unqualified opinion on management’s as-
sessment 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 2, 2006

We have audited management’s assessment,
in-
cluded in the accompanying Report of Management on
that
Internal Controls over Financial Reporting,
International Paper Company and subsidiaries (the
“Company”) maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As de-
scribed in the Report of Management on Internal Con-
trols Over Financial Reporting, management excluded
from their assessment the internal control over financial
reporting at Compagnie Marocaine des Cartons et des
Papiers (CMCP), which was acquired on October 14,
2005, and whose financial statements reflect less than
1% of total assets and total revenues, respectively, of the
related consolidated financial statement amounts as of
and for the year ended December 31, 2005. Accordingly,
our audit did not include the internal control over
at CMCP. The Company’s
financial
management is responsible for maintaining effective in-
ternal control over
its
financial
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.

reporting and for

reporting

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 assur-
ance about whether effective internal control over
financial reporting was maintained in all material re-
spects. 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 au-
dit provides a reasonable basis for our opinions.

A company’s internal control over financial report-
ing is a process designed by, or under the supervision of,
the company’s principal executive and principal finan-
cial officers, or persons performing similar functions, and
effected by the company’s board of directors, manage-
ment, and other personnel to provide reasonable assur-
ance regarding the reliability of financial reporting and
the preparation of financial statements for external pur-
poses in accordance with accounting principles generally

In our opinion, management’s assessment that the
Company maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria es-
tablished 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 De-
cember 31, 2005, based on the criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Tread-
way Commission.

We have also audited, in accordance with the stan-
dards 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, 2005 of the Company
and our reports dated March 2, 2006 expressed an un-
qualified opinion on those financial statements and fi-
nancial statement schedule.

New York, N.Y.
March 2, 2006

financial

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 prepara-
tion of
in accordance with
accounting principles generally accepted in the United
States, and that receipts and expenditures of the com-
pany are being made only in accordance with author-
izations of management and directors of the company;
and (3) provide reasonable assurance regarding pre-
vention 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.

statements

Because of the inherent limitations of internal con-
trol 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, projec-
tions of any evaluation of the effectiveness of the in-
ternal 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.

International Paper Company

CONSOLIDATED STATEMENT OF OPERATIONS

In millions, except per share amounts, for the years ended December 31

N E T S A L E S

C O S T S A N D E X P E N S E S
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 on sales and impairments of businesses

held for sale

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

E A R N I N G S F R O M C O N T I N U I N G O P E R A T I O N S

B E F O R E I N C O M E T A X E S A N D M I N O R I T Y I N T E R E S T
Income tax provision (benefit)
Minority interest expense, net of taxes

E A R N I N G S F R O M C O N T I N U I N G O P E R A T I O N S

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

Asset retirement obligations
Variable interest entities

N E T E A R N I N G S ( L O S S )

B A S I C E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E

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

Asset retirement obligations
Variable interest entities

Net earnings (loss)

D I L U T E D E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E

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

Asset retirement obligations
Variable interest entities

Net earnings (loss)

2005
$24,097

18,139
1,876
1,376
1,087
233
358
(258)

111
(4)
593

586
(285)
12
859
241

–
–
$ 1,100

$ 1.77
0.49

–
–
$ 2.26

$ 1.74
0.47

–
–
$ 2.21

2004
$23,359

17,225
1,935
1,357
1,026
236
166
(123)

139
(36)
710

724
242
26
456
(491)

–
–
(35)

0.94
(1.01)

–
–
$ (0.07)

0.93
(1.00)

–
–
$ (0.07)

2003
$22,138

16,443
1,888
1,347
954
235
286
–

34
(39)
705

285
(56)
83
258
57

(10)
(3)
302

0.54
0.12

(0.02)
(0.01)
0.63

0.53
0.13

(0.02)
(0.01)
0.63

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

CONSOLIDATED BALANCE SHEET

In millions at December 31

A S S E T S
Current Assets

Cash and temporary investments
Accounts and notes receivable, less allowances of $110 in 2005 and $124 in 2004
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

L I A B I L I T I E S A N D C O M M O N S H A R E H O L D E R S ’ E Q U I T Y
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, 2005 – 490.5 shares, 2004 – 487.5 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less: Common stock held in treasury, at cost, 2005 – 0.1 shares

Total Common Shareholders’ Equity
Total Liabilities and Common Shareholders’ Equity

International Paper Company

2005

2004

$ 1,641
2,926
2,434
14
279
115
7,409

11,801
2,190
625
5,043
1,703
$28,771

$ 1,181
2,085
425
36
1,117
4,844

11,023
726
3,616
211

491
6,627
3,172
(1,935)

8,355
4

8,351
$28,771

$ 2,180
2,743
2,371
4,729
410
153
12,586

12,216
2,157
655
4,994
1,609
$34,217

222
2,026
425
3,165
1,496
7,334

13,632
1,118
3,691
188

487
6,562
2,562
(1,357)

8,254
–

8,254
$34,217

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

International Paper Company

CONSOLIDATED STATEMENT OF CASH FLOWS

In millions for the years ended December 31

O P E R A T I N G A C T I V I T I E S
Net earnings (loss)
Cumulative effect of accounting changes, net of taxes
Discontinued operations, net of taxes and minority interest

Earnings from continuing operations

Depreciation, amortization and cost of timber harvested
Tax benefit—non-cash settlement of tax audits
Deferred income tax benefit, net
Restructuring and other charges
Insurance recoveries
Payments related to restructuring and legal reserves
Reversals of reserves no longer required, net
Periodic pension expense, net
Proceeds on Maine timberlands transaction
Net losses on sales and impairments of businesses held for sale
Other, net
Changes in current assets and liabilities
Accounts and notes receivable
Inventories
Accounts payable and accrued liabilities
Other

C a s h p r o v i d e d b y o p e r a t i o n s – c o n t i n u i n g

C a s h p r o v i d e d b y o p e r a t i o n s – d i s c o n t i n u e d

o p e r a t i o n s

C a s h P r o v i d e d B y O p e r a t i o n s
I N V E S T M E N T A C T I V I T I E S
Invested in capital projects
Continuing operations
Businesses sold and held for sale

Acquisitions, net of cash acquired
Proceeds from divestitures
Other

C a s h p r o v i d e d b y ( u s e d f o r ) i n v e s t m e n t a c t i v i t i e s

– c o n t i n u i n g o p e r a t i o n s

C a s h ( u s e d f o r ) p r o v i d e d b y i n v e s t m e n t a c t i v i t i e s

– d i s c o n t i n u e d o p e r a t i o n s

C a s h P r o v i d e d B y ( U s e d F o r ) I n v e s t m e n t

A c t i v i t i e s

F I N A N C I N G A C T I V I T I E S

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

C a s h ( u s e d f o r ) p r o v i d e d b y f i n a n c i n g a c t i v i t i e s –

c o n t i n u i n g o p e r a t i o n s

C a s h u s e d f o r f i n a n c i n g a c t i v i t i e s – d i s c o n t i n u e d

o p e r a t i o n s

C a s h ( U s e d F o r ) P r o v i d e d B y F i n a n c i n g

A c t i v i t i e s

E f f e c t o f E x c h a n g e R a t e C h a n g e s o n C a s h –

C o n t i n u i n g O p e r a t i o n s

E f f e c t o f E x c h a n g e R a t e C h a n g e s o n C a s h –

D i s c o n t i n u e d O p e r a t i o n s

C h a n g e i n C a s h a n d T e m p o r a r y I n v e s t m e n t s
C a s h a n d T e m p o r a r y I n v e s t m e n t s

Beginning of the year

L e s s – C a s h , E n d o f Y e a r – D i s c o n t i n u e d

End of the year

O p e r a t i o n s

2005

$ 1,100
–
(241)
859
1,376
(627)
(38)
358
(258)
(185)
(4)
243
–
111
234

17
(16)
(629)
37

1,478

32
1,510

(1,155)
(17)
(116)
1,440
73

225

(218)

23
968
(2,670)
–
4
(490)
–
(40)

(2,205)

(172)

(2,377)

(90)

(5)
(955)

2,596
1,641

2004

(35)
–
491
456
1,357
–
(78)
166
(123)
(220)
(36)
111
242
139
138

(62)
(69)
49
(4)

2,066

322
2,388

(1,176)
(37)
(186)
867
300

(232)

287

164
2,536
(4,219)
–
(145)
(485)
–
(68)

(2,217)

(218)

(2,435)

111

114
233

2,363
2,596

2003

302
13
(57)
258
1,347
–
(336)
286
–
(252)
(39)
60
–
34
182

87
51
(117)
(32)

1,529

293
1,822

(993)
(38)
–
71
(184)

(1,144)

(123)

(1,267)

80
2,116
(641)
(550)
104
(480)
150
7

786

(195)

591

69
1,289

1,074
2,363

C a s h , E n d o f Y e a r – C o n t i n u i n g O p e r a t i o n s
Certain prior-year amounts have been reclassified to separately disclose the operating, investing and financing portions of cash flows attrib-
utable to discontinued operations.
The accompanying notes are an integral part of these financial statements.

–
$ 1,641

(416)
$ 2,180

(105)
$ 2,258

International Paper Company

CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY

In millions, except share and per share amounts in thousands

INTERNATIONAL PAPER

Common Stock

Issued Paid-in
Capital

Shares Amount

Retained
Earnings

484,760 $ 485 $ 6,493 $ 3,260
–
–
(480)

402
–
–

7
–
–

–
–
–

Accumulated
Other
Comprehensive
Income
(Loss) (1)

$ (2,645)
–
–
–

Treasury Stock
Shares Amount
5,680 $ 219
(105)
(2,725)
26
713
–
–

Total
Common
Shareholders'
Equity

$ 7,374
112
(26)
(480)

B A L A N C E , J A N U A R Y 1 , 2 0 0 3
Issuance of stock for various plans, net
Repurchase of stock
Cash dividends – Common stock ($1.00 per share)
Comprehensive income (loss):

Net earnings
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: Reclassificaton adjustment for gains

included in net income (less tax of $36)

Total comprehensive income

B A L A N C E , D E C E M B E R 3 1 , 2 0 0 3
Issuance of stock for various plans, net
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: Reclassificaton adjustment for gains

included in net income (less tax of $13)

Total comprehensive income

–

–
–

–

–
–

–

–
–

–

485,162
2,333
–

485
2
–

6,500
62
–

–

–
–

–

–
–

–

–
–

–

B A L A N C E , D E C E M B E R 3 1 , 2 0 0 4
Issuance of stock for various plans, net
Cash dividends – Common stock ($1.00 per share)
Comprehensive income (loss):

487,495
3,006
–

487
4
–

6,562
65
–

Net earnings
Minimum pension liability adjustment:

U.S. plans (less tax of $189)
Non-U.S. plans (less tax of $5)
Change in cumulative foreign currency

translation adjustment (less tax of $22)
Net gains on cash flow hedging derivatives:

Net gain arising during the period (less tax

of $14)

Less: Reclassificaton adjustment for gains

included in net income (less tax of $30)

Total comprehensive income

–

–
–

–

–
–

–

–
–

–

302

–
–

–

3,082
–
(485)

(35)

–
–

–

2,562
–
(490)

1,100

–
–

–

150
(4)

808

(65)

–

–
–

–

–
–

–

(1,690)
–
–

3,668
(3,652)
–

140
(140)
–

–

33
1

255

(26)

(1,357)
–
–

–

(304)
(1)

(251)

(68)

–

–
–

–

16
96
–

–

–
–

–

302

150
(4)

808

(65)
1,257
8,237
204
(485)

(35)

33
1

255

(26)
298
8,254
65
(490)

1,100

(304)
(1)

(251)

(68)
522
$8,351

–

–
–

–

–
4
–

–

–
–

–

B A L A N C E , D E C E M B E R 3 1 , 2 0 0 5

490,501 $491 $6,627 $3,172

$(1,935)

112 $

(1) The cumulative foreign currency translation adjustment (in millions) was $(280), $(29) and $(284) at December 31, 2005, 2004 and 2003,

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

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

N O T E S T O C O N S O L I D A T E D F I N A N C I A L

A N N U A L M A I N T E N A N C E C O S T S

S T A T E M E N T S

NOTE 1 SUMMARY OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES

N A T U R E O F O U R B U S I N E S S

International Paper is a global forest products, paper
and packaging company that is complemented by an
extensive North American merchant distribution sys-
tem, with primary markets and manufacturing oper-
ations in the United States, Europe, South America and
Asia. Substantially all of our businesses have experi-
enced, and are likely to continue to experience, cycles
relating to available industry capacity and general eco-
nomic conditions.

F I N A N C I A L S T A T E M E N T S

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

C O N S O L I D A T I O N

The consolidated financial statements include the
accounts of International Paper and its wholly-owned,
controlled majority-owned and financially controlled
subsidiaries. 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 totaled $17 million, $14 million and $4 million
in 2005, 2004 and 2003, respectively.

R E V E N U E R E C O G N I T I O N

Revenue is recognized when the customer takes ti-
tle 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 recog-
nized when title and risk of loss pass to the buyer.

S H I P P I N G A N D H A N D L I N G C O S T S

Shipping and handling costs, such as freight to our
customers’ destinations, are included in distribution
expenses in the consolidated statement of operations.
When shipping and handling costs are included in the
sales price charged for our products, they are recognized
in net sales.

Annual maintenance costs for major planned main-
tenance shutdowns (in excess of $1 million) are ex-
pensed ratably over the year in which the maintenance
shutdowns occur since the Company believes that oper-
ations benefit throughout the year from the main-
tenance work performed. These
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
deferred at year-end. Other maintenance costs are ex-
pensed as incurred.

costs,

T E M P O R A R Y I N V E S T M E N T S

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

I N V E N T O R I E S

Inventories are valued at the lower of cost or mar-
ket and include all costs directly associated with manu-
facturing 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.

P L A N T S , P R O P E R T I E S A N D E Q U I P M E N T

are

expensed

Plants, properties and equipment are stated at cost,
less accumulated depreciation. Expenditures for better-
ments are capitalized, whereas normal repairs and main-
tenance
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 is used for other
plants and equipment. Annual straight-line depreciation
for
rates are,
machinery and equipment – 5% to 33%.

for buildings – 2 1⁄2% to 8 1⁄2%, and,

incurred.

F O R E S T L A N D S

At December 31, 2005, International Paper and its
subsidiaries owned or managed about 6.5 million acres of
forestlands in the United States, 1.3 million acres in
Brazil, and had, through licenses and forest management
agreements, harvesting rights on government-owned
forestlands in Russia. Forestlands include owned prop-
erty 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 rela-
tionship of
to estimated current
merchantable volume.

incurred costs

G O O D W I L L

for

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
reporting purposes. For goodwill
impairment testing, this goodwill is allocated to business
segments. Annual testing for possible goodwill impair-
ment is performed as of the end of the third quarter of
each year. No impairment charges were recorded in
2005 or 2004.

segment

I M P A I R M E N T O F L O N G - L I V E D A S S E T S

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 the projected undiscounted future cash
flows generated by their use. Impaired assets are recorded
at their estimated fair value.

I N C O M E T A X E S

International Paper uses the asset and liability
method of accounting for income taxes whereby de-
ferred income taxes are recorded for the future tax con-
sequences 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 provi-
sion based on the respective tax rules and regulations for
the jurisdictions in which it operates. Where the Com-
pany believes that the deduction of an item is support-
able 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 settle-
ments, and the results of consultations with outside spe-
cialists. These
the
accompanying consolidated balance sheet in Other li-
abilities. Changes to the reserves are only made when an
identifiable event occurs that changes the probable out-
come, such as a settlement with the relevant tax author-
ity, the expiration of statutes of limitation for the subject
tax year, a change in tax laws, or a recent court case that
addresses the matter.

recorded

accruals

are

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

S T O C K - B A S E D C O M P E N S A T I O N

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 Statement of Financial
Accounting Standards (SFAS) No. 123, its net earn-
ings, earnings per common share and earnings per
common share – assuming dilution would have been
reduced to the pro forma amounts indicated in the fol-
lowing table:

In millions, except per share amounts

Net Earnings (Loss)

As reported

Pro forma

Earnings (Loss) Per Common Share

As reported

Pro forma

Earnings (Loss) Per Common Share

assuming dilution

As reported

Pro forma

2005

2004

2003

$1,100

$ (35) $ 302

1,043

(73)

258

$ 2.26

$(0.07) $0.63

2.15

(0.15)

0.54

$ 2.21

$(0.07) $0.63

2.10

(0.15)

0.54

The effect on 2005, 2004 and 2003 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 earn-
ings for future years due to the vesting period of stock
options and decreases in the number of options out-
standing due to the elimination of the Company’s stock
option program for all U.S. employees in 2005.

E N V I R O N M E N T A L R E M E D I A T I O N C O S T S

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 re-
mediation obligations are discounted to their present
value when the amount and timing of expected cash
payments are reliably determinable.

A S S E T R E T I R E M E N T O B L I G A T I O N S

143,

“Accounting

In accordance with the provisions of SFAS
No.
for Asset Retirement
Obligations”, 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 and the liability can be rea-
sonably estimated. The liability is accreted over time
and the asset is depreciated over the life of the related
equipment or facility. International Paper’s asset retire-
ment 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 clo-
sures, or possible new federal or state regulations affect-
ing these closures.

T R A N S L A T I O N O F F I N A N C I A L S T A T E M E N T S

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

R E C L A S S I F I C A T I O N S

Certain reclassifications have been made to prior-
year amounts to conform to the current year pre-
the
prior-year
sentation. Certain
Consolidated Statement of Cash Flows have been re-
classified to separately disclose the operating, investing
and financing portions of cash flows attributable to dis-
continued operations.

amounts

NOTE 2 EARNINGS PER COMMON SHARE

Earnings per common share from continuing oper-
ations 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 before the cumulative
effect of accounting changes, assuming dilution, were
computed assuming that all potentially dilutive secu-
including “in-the-money” stock options, were
rities,
converted into common shares at the beginning of each
year. In addition, the computation of diluted earnings
per share reflects the inclusion of contingently con-
vertible securities in periods when dilutive.

A reconciliation of the amounts included in the
computation of earnings per common share from con-
tinuing operations before the cumulative effect of ac-
counting 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

2005

2004

2003

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

$ 859

$ 456

$ 258

–

dilution

$ 886

$ 456

$ 258

Average common shares outstanding

486.0

485.8

479.6

Effect of dilutive securities

Restricted shares

Stock options

Contingently convertible debt

Average common shares

0.8

2.9

20.0

–

2.6

–

1.5

–

outstanding— assuming dilution

509.7

488.4

481.1

Earnings per common share from

continuing operations before the

cumulative effect of accounting

changes

$ 1.77

$ 0.94

$ 0.54

Earnings per common share from

continuing operations before the

cumulative effect of accounting

changes—assuming dilution

$ 1.74

$ 0.93

$ 0.53

Note: If an amount does not appear in the above table, the security was antidilutive for

the period presented.

NOTE 3 INDUSTRY SEGMENT
INFORMATION

Financial information by industry segment and geo-
graphic area for 2005, 2004 and 2003 is presented on
pages 36 and 37.

NOTE 4 RECENT ACCOUNTING
DEVELOPMENTS

A C C O U N T I N G C H A N G E S A N D E R R O R

C O R R E C T I O N S :

provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the
effective date of the Statement.

the relevant facts and circumstances. International Pa-
per applied the provisions of FSP FIN 46(R)-5 in the
second quarter of 2005, with no material affect on its
consolidated financial statements.

A C C O U N T I N G F O R C O N D I T I O N A L A S S E T

R E T I R E M E N T O B L I G A T I O N S :

A C C O U N T I N G F O R I N C O M E T A X E S :

International Paper adopted the provisions of this
Interpretation in the fourth quarter of 2005 with no
material affect on its consolidated financial statements.
The Company’s principal conditional asset retirement
obligations relate to the potential future closure or rede-
sign of certain of its production facilities. In connection
with any such activity, it is possible that the Company
may be required to take steps to remove certain materi-
als from the facilities, or to remediate in accordance
with federal and state laws that govern the handling of
certain hazardous or potentially hazardous materials.
Applicable regulations and standards provide that the
removal of certain materials would only be required if
the facility were to be demolished or underwent major
renovations. At this time, any such obligations have an
indeterminate settlement date, and the Company be-
lieves that adequate information does not exist to apply
an expected-present-value technique to estimate any
such potential obligations. Accordingly, the Company
does not record a liability for such remediation until a
decision is made that allows reasonable estimation of the
timing of such remediation.

I M P L I C I T V A R I A B L E I N T E R E S T S :

In December 2004, the FASB issued FSP Financial
Accounting Standards 109-1 and 109-2 relating to the
American Jobs Creation Act of 2004 (the Act). The
Act provides for a special one-time deduction of 85% of
certain foreign earnings that are repatriated. In 2005,
International Paper repatriated $2.1 billion in cash from
including amounts
certain of its foreign subsidiaries,
eligible for this special deduction. International Paper
recorded income tax expenses associated with these cash
repatriations totaling approximately $142 million for the
year ended December 31, 2005.

S H A R E - B A S E D P A Y M E N T T R A N S A C T I O N S :

In December 2004, the FASB issued SFAS No. 123
(revised 2004), “Share-Based Payment,” that will require
related to share-based payment
compensation costs
transactions to be recognized in the financial state-
ments. The amount of the compensation cost will be
measured based on the grant-date fair value of the equity
liability
or liability instruments issued. In addition,
awards will be remeasured each reporting period. Com-
pensation 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, re-
purchased, or cancelled after that date. In April 2005,
the Securities and Exchange Commission (SEC) de-
ferred the effective date of this Statement until the first
fiscal year beginning after June 15, 2005. International
Paper believes that the adoption of SFAS No. 123(R) in
2006 will not have a material impact on its consolidated
financial statements. See Notes 1 and 17 for a further
discussion of stock options.

E X C H A N G E S O F N O N M O N E T A R Y A S S E T S :

In December 2004,

the FASB issued SFAS
No. 153, “Exchanges of Nonmonetary Assets, an
Amendment of APB Opinion No. 29,” that 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 en-
tity 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 occur-
ring in fiscal periods beginning after June 15, 2005.

International Paper believes that the adoption of SFAS
No. 153 in 2006 will not have a material impact on its
consolidated financial statements.

I N V E N T O R Y C O S T S :

In November 2004,

the FASB issued SFAS
No. 151, “Inventory Costs, an Amendment of ARB
No. 43, Chapter 4.” This Statement requires that
abnormal amounts of idle facility expense, freight, han-
dling 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 overhead to inventory based on the
normal capacity of the production facilities. Unallocated
overhead must be recognized as an expense in the period
in which it is 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 in 2006 will not have a
material impact on its consolidated financial statements.

A C C O U N T I N G F O R M E D I C A R E B E N E F I T S :

In May 2004, the FASB issued FSP FAS 106-2,
“Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug,
Improvement and
Modernization Act of 2003,” 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. See Note 16 for a further discussion.

C O N S O L I D A T I O N O F V A R I A B L E I N T E R E S T

E N T I T I E S :

NOTE 5 ACQUISITIONS

On July 1, 2004, International Paper completed the
acquisition of Box USA Holdings, Inc. (Box USA). The
operating results of Box USA are included in the
accompanying consolidated financial statements from
that date. International Paper acquired all of the out-
standing 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, approximately $193
million of which was repaid by July 31, 2004.

The note payable is required to be paid unless
claims for indemnification are offset against the note.
Subsequent claims for indemnification totaling $5.5
million reduced the note payable to $9.5 million plus
interest payable. The first installment of $3 million plus
interest was paid in the third quarter of 2005. The re-
maining installments to be paid are $2 million in 2006
and $4.5 million in 2009, subject to any additional
claims for indemnification.

The following table summarizes the assets and li-
abilities assumed at the date of the Box USA acquis-
ition:

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

260

499

197

300

$199

The following unaudited pro forma information for
the years ended December 31, 2004 and 2003, presents
the combined results of the continuing operations of
International Paper and Box USA as if the acquisition
had occurred as of January 1, 2003. This pro forma in-
formation does not purport to represent International
Paper’s actual results of operations if the transaction de-
scribed above would have occurred on January 1, 2003,
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 operations

Net (loss) earnings

Earnings from continuing operations per

2004

2003

$23,613

$22,631

461

(30)

263

307

common share

0.94

0.55

Net (loss) earnings per common share –

assuming dilution

(0.06)

0.64

O T H E R A C Q U I S I T I O N S :

In October 2005, International Paper acquired ap-
proximately 65% of Compagnie Marocaine des Cartons
et des Papiers (CMCP), a leading Moroccan corrugated

to cash repatriations from non-U.S. subsidiaries, and $39
million of other tax charges. Interest expense, net, also
includes a $43 million pre-tax credit ($26 million after
taxes) relating to the tax audit agreement.

The following table presents a detail of the $274
restructuring

million corporate-wide organizational
charge by business:

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Forest Products

Distribution

Specialty Businesses and

Other
Corporate

Second
Quarter

Third
Quarter

Fourth
Quarter Total

$17(a) $17(c) $150(e)

$184

–

14(b)

–

–
–

–

13(d)
7

14 (f)

–
20(g)

13
27

$31

$44

$199

$274

(a) Includes charges for severance and other charges for the indef-

inite shutdown of three U.S. paper machines.

(b) Includes charges associated with the relocation of the Forest

Products headquarters from Savannah, Georgia to Memphis,

Tennessee.

the indefinite shutdown of the three U.S. paper machines.

(d) Represents charges related to the shutdown of a plant in Nor-

way.

(e) Includes charges of $50 million related to the shutdown of pa-

per machines at Jay, Maine, Bastrop, Louisiana, and Pensacola,

Florida, and a charge of $95 million to write down the assets of

the Bastrop, Louisiana mill to their estimated net realizable

value of $105 million.

(f) Includes $10 million of charges related to the closure of the

Joplin, Missouri facility, and $2 million of charges related to

the relocation of the Forest Products headquarters from Sav-

annah, Georgia to Memphis, Tennessee.

(g) Includes $2 million of charges related to the relocation of

International Paper’s headquarters from Stamford, Connecticut

to Memphis, Tennessee, and $12 million of transformation

costs.

packaging company, for approximately $80 million in
cash plus assumed debt of approximately $40 million.

In 2001, International Paper and Carter Holt Har-
vey Limited (CHH) each acquired a 25% interest in
International Paper Pacific Millennium Limited
(IPPM). IPPM is a Hong Kong-based distribution and
packaging company with operations in China and other
Asian countries. On August 1, 2005, pursuant to an ex-
isting agreement, International Paper purchased a 50%
third-party interest in IPPM (now renamed Interna-
tional Paper Distribution Limited) for $46.1 million to
facilitate possible further growth in Asia.

The financial position and results of operations of
these two acquisitions have been included in Interna-
tional Paper’s consolidated financial statements from the
dates of acquisition in 2005. The accompanying con-
solidated balance sheet as of December 31, 2005 in-
cludes preliminary estimates of the fair values of the
assets and liabilities acquired, including approximately
$50 million of goodwill.

NOTE 6 RESTRUCTURING, BUSINESS
IMPROVEMENT AND OTHER CHARGES

This footnote discusses restructuring, business im-
provement and other charges recorded for each of the
three years included in the period ended December 31,
2005. 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 2005 and 2004 organizational restructuring pro-
grams, and tables showing quarterly charges by business
along with explanations for 2003.

2 0 0 5 : During 2005, restructuring and other charges be-
fore taxes of $358 million ($225 million after taxes)
were recorded. Included in this charge were a pre-tax
charge of $274 million ($174 million after taxes) for
organizational restructuring programs, principally costs
associated with the Company’s previously announced
Transformation Plan, a pre-tax charge of $57 million
($35 million after taxes) for losses on early extinguish-
ment of debt, and a $27 million pre-tax charge ($16
million after taxes) for legal reserves. Also recorded were
pre-tax credits of $258 million ($151 million after taxes)
for net insurance recoveries related to the hardboard sid-
ing and roofing litigation (see Note 10) and a $4 million
pre-tax credit ($3 million after taxes) for the net
adjustment of previously provided reserves. In addition,
a $446 million net reduction of the income tax provi-
sion was recorded, including a credit of $627 million
from an agreement reached with the U.S. Internal Rev-
enue Service concerning the 1997 through 2000 U.S.
federal income tax audits, a $142 million charge related

$170

$104

$274

Administrative Support

Groups

The following table presents the components of the

organizational restructuring charge discussed above:

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Forest Products

Distribution

Specialty Businesses and Other

Corporate

Asset
Write-
downs

$153

Severance
and
Other

$31

Total

$184

–

The following table presents a roll forward of the
severance and other costs included in the 2005 re-
structuring plans:

In millions

Opening Balance (second quarter 2005)

Additions (third quarter 2005)

Additions (fourth quarter 2005)

2005 Activity

Cash charges

Reclassifications:

Pension and postretirement curtailments and

special termination benefits

Balance, December 31, 2005

Severance
and
Other

$29

(54)

(10)

$40

The severance charges recorded in 2005 related to
855 employees. As of December 31, 2005, 661 employ-
ees had been terminated.

2 0 0 4 : During 2004, restructuring and other charges be-
fore taxes of $166 million ($103 million after taxes)
were recorded. These charges included a $64 million
charge before taxes ($40 million after taxes) for a
corporate-wide organizational restructuring program, a
$92 million charge before taxes ($57 million after taxes)
for losses on early extinguishment of debt and a $10 mil-
lion 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 recov-
eries related to the hardboard siding and roofing liti-
gation and $36 million before taxes ($22 million after
taxes) for the net reversal of restructuring reserves no
longer needed were recorded. Also, a $32 million charge
was recorded for an adjustment of deferred tax balances.

The following table presents a detail of the $64 mil-
lion corporate-wide organizational restructuring program
charge in 2004, by business:

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Forest Products

Distribution

Specialty Businesses

and Other

First
Quarter

Second
Quarter

Third
Quarter

–

$14

$32

–

$18

Total

$64

The following table presents a roll forward of the
severance and other costs included in the 2004 re-
structuring 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)

(22)

$–

The severance charges recorded in 2004 related to
744 employees. As of December 31, 2004, 616 employ-
ees had been terminated and 128 employees retained.
Actual pension and postretirement costs exceeded esti-
mates despite the lower number of employees termi-
nated.

2 0 0 3 : During 2003, restructuring and other charges of
$286 million before taxes ($180 million after taxes)
were recorded. These charges included a $224 million
charge before taxes ($140 million after taxes) 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 $39 million credit before
taxes ($24 million after taxes) was recorded for the net
reversal of restructuring reserves no longer required.

The $224 million charge in 2003 for the asset shut-
downs of excess internal capacity and cost reduction ac-
tions consisted of a $80 million charge in the fourth
quarter, a $71 million charge in the third quarter, a $51
million charge in the second quarter, and a $22 million
charge in the first quarter. The fourth-quarter charge
included $45 million of asset write-downs and $35 mil-
lion 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 $20 million of severance and other
charges.

The following table and discussion present details

related to the 2003 fourth-quarter charge:

In millions

Printing Papers

Consumer Packaging

Forest Products

Distribution

(a)

(b)

(c)

(d)

Administrative Support Groups (e)

Asset
Write-
downs

$19

–

$45

Severance
and
Other

$35

Total

$21

$80

(a) The Printing Papers business recorded a charge of $5 million to

write off certain assets at the Courtland, Alabama and Frank-

lin, 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.

(b) The Consumer Packaging business recorded an additional

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 commer-

cial 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.

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

(d) The Distribution business (xpedx) recorded a charge of $3 mil-
lion to cover lease termination costs related to the Nationwide

San Francisco, California facility that was vacated in the fourth

quarter of 2003.

(e) During the fourth quarter of 2003, International Paper im-

plemented 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 (a)

Specialty Businesses and Other

(b)

Asset
Write-
downs

$–

Severance
and

Other Total

$38

$62

$38

$71

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

plemented the initial phase of an Overhead Reduction Pro-

gram 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 mil-

lion 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:

In millions

Printing Papers

Consumer Packaging

Forest Products

Distribution

(a)

(b)

(c)

(d)

Specialty Businesses and Other (e)

Asset
Write-
downs

Severance
and
Other

–

$16

$35

Total

$51

associated with this shutdown included $10 million of asset

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

write-downs to salvage value and $1 million of other exit costs.

for severance costs relating to 19 employees associated with an

organizational restructuring initiative. The business also re-

to shut down the Natchez, Mississippi dissolving pulp mill by

corded an additional charge of $3 million to write off obsolete

mid-2003. Charges associated with this shutdown included a

equipment.

$1 million charge to write down assets to their salvage value

(b) The Consumer Packaging business implemented a ration-

and $12 million of severance costs covering the termination of

alization plan at the Clifton and Englewood, New Jersey plants

141 employees in April and other employees to be terminated

as a result of increased competition and slowing growth rates in

upon closure. Additional shutdown charges for severance and

key market segments. Management also approved a plan to exit

closure costs were recorded in the second and third quarters of

leased space at the Montvale, New Jersey office in connection

2003. Additionally, Industrial Papers approved a plan to re-

with the realignment of the Beverage Packaging and Foodser-

structure converting operations at the Kaukauna, Wisconsin

vice businesses. Additionally, the Consumer Packaging busi-

facility, modify its release products organization and implement

ness initiated an organizational restructuring program at several

division-wide productivity improvement actions. Charges asso-

of its Bleached Board facilities. Charges associated with the

ciated with these plans included $1 million to write down as-

programs included $2 million to cover the termination of 79

sets to their salvage value and $5 million of severance costs

employees, lease termination costs of $3 million, and other

covering the termination of 130 employees.

cash costs of $1 million.

Springhill, Louisiana lumber facility and the Slaughter In-

dustries Distribution Center in Portland, Oregon, and to

temporarily cease operations at the Tuskalusa lumber mill in

Moundville, Alabama. Charges associated with the shutdowns

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

included $12 million of asset write-downs to salvage value at

In millions

Springhill and Slaughter, $5 million of severance costs cover-

ing 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 re-

duce ongoing operational expenses.

(e) Specialty Businesses recorded a severance charge of $16 million

associated with the termination of 447 employees in con-

nection with the July 15th shutdown of the Natchez, Mississippi

mill.

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

The following table and discussion present details

Reversals of reserves no longer required

related to the 2003 first-quarter charge:

Balance, December 31, 2004

Severance
and
Other

$20

(64)

(4)

(3)

(57)

(9)

(13)

(2)

$–

In millions

Industrial Packaging

(a)

Specialty Businesses and Other (b)

Asset
Write-
downs

Severance
and
Other

The severance charges recorded in the first, second,
third and fourth quarters of 2003 related to 2,966 em-
ployees. As of December 31, 2004, 2,955 employees had
been terminated and 11 employees retained.

Total

$–

$20

$22

(a) The Industrial Packaging business implemented a plan to re-

organize the Creil and Mortagne locations in France into a

NOTE 7 BUSINESSES HELD FOR SALE AND
DIVESTITURES

single complex. Charges associated with the reorganization in-

D I S C O N T I N U E D O P E R A T I O N S :

cluded $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 sev-

erance costs of 51 employees associated with the Valkeakoski,

Finland plant closure. Chemical Cellulose implemented a plan

In the third quarter of 2005, International Paper
completed the sale of its 50.5% interest in CHH to
Rank Group Investments Ltd. for approximately U.S.
$1.14 billion to be used principally to reduce debt. The
pre-tax gain on the sale of $29 million ($361 million

after taxes and minority interest), including a $186 mil-
lion pre-tax credit from cumulative translation adjust-
ments, was
included in Discontinued operations,
together with CHH’s operating results prior to the sale.
Additionally, in May 2004, CHH sold its Tissue busi-
ness. In accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets,”
International Paper has restated all prior periods to
present the operating results of CHH as a discontinued
operation. Revenues associated with the discontinued
operation were $1.7 billion, $2.3 billion and $2.3 billion
for 2005, 2004 and 2003, respectively.

Earnings and earnings per share related to CHH

were as follows:

In millions, except per share amounts

2005

2004

2003

Earnings (loss) from discontinued

operation

Assets and liabilities of CHH, included in Interna-
tional Paper’s consolidated balance sheet at De-
cember 31, 2004, as Assets and Liabilities of businesses
held for sale, were as follows:

In millions

Cash and temporary investments

Accounts receivable, net

Inventories

Plants, properties and equipment, net

Forestlands

Other assets

Assets of business held for sale

2004

$416

251

347

1,216

1,779

491

$4,500

Notes payable and current maturities of long-term debt

$284

Accounts payable

Accrued payroll and benefits

Other accrued liabilities
Long-term debt

253

17
500

602

1,360

$3,083

Earnings (loss) from operation

Income tax (expense) benefit

$(32)

(96)

$35

$46

Other liabilities

Minority interest

Minority interest (expense) benefit,

net of taxes

(41)

(40)

Liabilities of business held for sale

Earnings (loss) from discontinued

operation, net of taxes

Gain on sale of CHH

Gain on sale of CHH Tissue

business

Income tax benefit (expense)

Minority interest expense, net of

taxes

Gain on sale, net of taxes and

(120)

–

332

268

(69)

–

(109)

minority interest

361

Earnings from discontinued

operation, net of taxes and

–

minority interest

$241

$117

$48

Earnings (loss) per common share

from discontinued operation –

assuming dilution

Earnings (loss) from operation, net

of taxes

$(0.24)

$0.06

$0.11

Gain on sale, net of taxes and

minority interest

0.71

0.19

–

Earnings per common share from

discontinued operation, net of

taxes and minority interest –

assuming dilution

$0.47

$0.25

$0.11

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 cer-
tain adjustments at closing. Accordingly, a $323 million
pre-tax loss on impairment ($711 million after taxes),
including $182 million of pre-tax credits from cumu-
lative translation adjustments, was recorded in Dis-
continued operations
to write down the assets of
Weldwood to their estimated net realizable value upon
sale, including the related tax effect. The Company
completed the sale of Weldwood in the fourth quarter
for C$1.23 billion. International Paper’s net cash pro-
ceeds 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 dis-
continued operation.

Revenues associated with this discontinued oper-
ation were $1.0 billion and $791 million for 2004 and
2003, respectively.

Earnings and earnings per share related to Weld-

wood were as follows:

In millions, except per share amounts

2004

2003

Earnings (loss) from discontinued operation

Earnings from operation

Income tax expense

Earnings from operation, net of taxes

Asset impairment

Income tax expense (a)

Asset impairment, net of taxes

$153

(50)

103

(323)

(388)

(711)

$15

(6)

–

Earnings (loss) from discontinued operation, net

of taxes

$(608)

Earnings (loss) per common share from

discontinued operation

Earnings from operation, net of taxes

Asset impairment, net of taxes

Earnings (loss) per common share from

$0.22

$0.02

(1.47)

–

discontinued operation, net of taxes

$(1.25)

$0.02

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

ried over in connection with the acquisition of Champion in

June 2000.

O T H E R D I V E S T I T U R E S :
2 0 0 5 : In the fourth quarter of 2005, a pre-tax charge of
$46 million ($30 million after taxes) was recorded for
adjustments of losses of businesses held for sale, princi-
pally $45 million to write down the carrying value of the
Company’s Polyrey business in France to its estimated
net realizable value.

In the second quarter of 2005, a net pre-tax credit
of $19 million ($12 million after taxes) was recorded,
including a $25 million credit before taxes ($15 million
after taxes) from the collection of a note receivable from
the 2001 sale of the Flexible Packaging business and fi-
nal charges related to the sale of Fine Papers and In-
interest income of $11
dustrial Papers. In addition,
million before taxes ($7 million after taxes) was col-
lected on the Flexible Packaging business note, which is
included in Interest expense, net.

During the first quarter of 2005, International Paper
had announced an agreement to sell its Fine Papers
business to Mohawk Paper Mills, Inc. of Cohoes, New
York. A $24 million pre-tax loss ($13 million after tax-
es) was recorded in the first quarter to write down the
net assets of the Fine Papers business to their estimated
net realizable value. The sale of Fine Papers was com-
pleted in the second quarter of 2005.

Also during the first quarter of 2005, International
Paper announced that it had signed an agreement to sell
its Industrial Papers business to an affiliate of Kohlberg
and Company, LLC. A $49 million pre-tax loss ($35
million after taxes) was recorded in the first quarter to

write down the net assets of the Industrial Papers busi-
ness and related corporate assets to their estimated net
realizable value. The sale of Industrial Papers was com-
pleted in the second quarter of 2005.

Also in 2005, pre-tax charges totaling $11 million
($7 million after taxes) were recorded to adjust pre-
viously estimated gains/losses of businesses previously
sold.

The net 2005 pre-tax losses totaling $111 million
discussed above are included in Net losses on sales and
impairments of businesses held for sale in the accom-
panying consolidated statement of operations.

2 0 0 4 : In December 2004, International Paper commit-
ted to plans for the sale in 2005 of its Fine Papers busi-
ness and its Maresquel mill and Papeteries de France
distribution business in Europe. 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 re-
corded 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).

In the third quarter of 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. This sale was completed in the second quarter of
2005 for approximately $14 million in proceeds.

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 $4 million loss
before taxes ($2 million after taxes) was recorded to
write down the assets of Food Pack S.A. in Chile to
their estimated realizable value.

The net 2004 pre-tax losses totaling $139 million
discussed above are included in Net losses on sales and
impairments of businesses held for sale in the accom-
panying consolidated statement of operations.

2 0 0 3 : In the fourth quarter of 2003, International Paper
recorded a $34 million charge ($34 million after taxes)
to write down the assets of its Polyrey business in France
to their estimated fair value. This pre-tax loss is included
in Net losses on sales and impairments of businesses held
for sale in the accompanying consolidated statement of
operations.

T R A N S F O R M A T I O N P L A N :

V A R I A B L E I N T E R E S T E N T I T I E S :

On July 19, 2005, International Paper announced a
plan to focus its business portfolio on two key global
platform businesses: Uncoated Papers (including Dis-
tribution) and Packaging. Subsequently, as discussed
above, the Company completed the sale of CHH. Con-
sistent with the previously announced plan, the Com-
pany continues to evaluate strategic options for specific
businesses, including the possible sale or spin-off of the
businesses identified in the plan, and has distributed bid
package information for many of these businesses. As
this Transformation Plan is executed, it is expected that
additional one-time implementation charges will be
incurred in future periods.

NOTE 8 PREFERRED SECURITIES OF
SUBSIDIARIES AND VARIABLE INTEREST
ENTITIES

P R E F E R R E D S E C U R I T I E S O F S U B S I D I A R I E S :

In March 2003, Southeast Timber, Inc. (Southeast
Timber), a consolidated subsidiary of International Pa-
per, issued $150 million of preferred securities to a pri-
vate investor with future dividend payments based on
LIBOR. Southeast Timber, which through a subsidiary
initially held approximately 1.5 million acres of forest-
lands in the southern United States, is International
Paper’s primary vehicle for ongoing 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. Distributions paid to the third-party in-
vestor were $10 million, $7 million and $5 million in
2005, 2004 and 2003, respectively. The expense related
to these preferred securities is shown in minority interest
expense in the accompanying consolidated statement of
operations.

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 Tim-
ber is a separate legal entity, the assets of Southeast
Timber and its subsidiaries, consisting principally of for-
estlands having a book value of approximately $215 mil-
lion at December 31, 2005, will not be available to
satisfy future liabilities and obligations of International
Paper, although the value of International Paper’s inter-
ests in Southeast Timber and its subsidiaries will be
available for these purposes.

International Paper holds variable interests in two
financing entities that were used to monetize long-term
notes received from the sale of forestlands in 2002 and
2001. International Paper transferred notes and cash
having a value of approximately $1.0 billion to these
entities in exchange for preferred interests, and ac-
counted for the transfers as a sale of the notes with no
associated gain or loss. In the same period, the entities
acquired approximately $1.0 billion of International
Paper debt obligations for cash. International Paper has
not consolidated the entities because it is not the pri-
mary beneficiary of the entities. At December 31, 2005,
International Paper’s $540 million preferred interest in
one of the entities has been offset against related debt
obligations since International Paper has, and intends to
effect, a legal right of offset to net-settle these two
amounts.

NOTE 9 INCOME TAXES

The components of International Paper’s earnings
from continuing operations before income taxes and
minority interest by taxing jurisdiction were:

In millions

Earnings (loss)

U.S.

Non-U.S.

2005

2004

2003

$276

$271

$(249)

310

453

534

Earnings from continuing operations

before income taxes and minority

interest

$586

$724

$285

The provision (benefit) for income taxes by taxing

jurisdiction was:

In millions

2005

2004

2003

Current tax provision (benefit)

U.S. federal

U.S. state and local

Non-U.S.

Deferred tax provision (benefit)

U.S. federal

U.S. state and local

Non-U.S.

$(301)

$161

$173

(52)

106

135

$(247)

$320

$280

$(5)

(10)

(23)

$(34)

$(262)

(49)

(72)

(2)

$(38)

$(78)

$(336)

Income tax provision (benefit)

$(285)

$242

$(56)

The Company’s net deferred income tax provision
(benefit) includes a $3 million benefit, a $2 million
benefit and a $1 million provision for 2005, 2004 and
2003, respectively, for the effect of changes in non-U.S.
and state tax rates.

International Paper made income tax payments, net
of refunds, of $457 million, $254 million and $255 mil-
lion in 2005, 2004 and 2003, respectively.

A reconciliation of income tax expense using the
statutory U.S. income tax rate compared with actual
income tax expense (benefit) follows:

In millions

2005

2004

2003

Earnings from continuing operations
before income taxes and minority
interest

$586

$724

$285

Statutory U.S. income tax rate

35% 35%

35%

Tax expense using statutory

U.S. income tax rate

State and local income taxes

Tax rate and permanent differences on

non-U.S. earnings

Net U.S. tax on non-U.S. dividends

Tax benefit on export sales

Non-deductible business expenses

Permanent differences on sales of non-

strategic assets

Minority interest

Retirement plan dividends

Tax credits

Tax audit settlements

Other, net

205

(41)

253

100

(41)

(25)

169

(9)

–

(6)

(19)

(560)

(12)

(41)

(105)

(7)

–

(9)

(7)

(37)

–

(12)

(7)

(56)

–

Income tax expense (benefit)

$(285)

$242

$(56)

Effective income tax rate

-49% 33% -20%

The tax effects of significant temporary differences
representing deferred tax assets and liabilities at De-
cember 31, 2005 and 2004, were as follows:

In millions

Deferred tax assets:

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

Deferred tax liabilities:

2005

2004

$339

589

300

1,807

211

349

$348

320

519

1,518

186

457

3,635

(139)

3,446

(129)

$3,496

$3,317

Plants, properties, and equipment

$(2,599)

$(2,731)

Forestlands

Other

(753)

(298)

(749)

(282)

Total deferred tax liabilities

$(3,650)

$(3,762)

Net deferred tax liabilities

$(154)

$(445)

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 decrease in 2005 in Deferred income
taxes principally reflects the generation of U.S. net
operating loss carryforwards, the utilization of income
tax credits and an increase in deferred tax assets relating
to pension costs.

The valuation allowance for deferred tax assets as of
January 1, 2005, was $129 million. The net change in
the total valuation allowance for the year ended De-
cember 31, 2005, was an increase of $10 million.

The 2005 income tax provision included a net $446
million reduction, including a $627 million reduction
resulting from an agreement reached with the U.S.
federal taxing authorities concerning the 1997 through
2000 U.S. federal income tax audits, a $142 million
charge for deferred taxes related to earnings repatriated
under the American Jobs Creation Act of 2004 and $39
million of other tax charges.

During 2004, International Paper recorded a $32
million increase in the provision for income taxes
reflecting an adjustment of deferred tax balances.

During 2003, decreases totaling $110 million in the
provision for income taxes were recorded for significant
tax items, including a $60 million reduction for a favor-
able revision of estimated tax accruals upon filing the
2002 federal income tax return and increased research
and development credits, and a $50 million reduction
reflecting a favorable tax audit settlement and benefits
from an overseas tax program.

for

International Paper has federal and non-U.S. net
operating loss carryforwards that expire as follows: 2006
through 2015 – $147 million, 2016 through 2025 – $3.4
billion, and indefinite carryforwards of $700 million.
International Paper has tax benefits from net operating
loss carryforwards
state taxing jurisdictions of
approximately $397 million that expire as follows: 2006
through 2015 – $102 million and 2016 through 2025 –
$295 million.
federal,
non-U.S. and state tax credit carryforwards that expire
as follows: 2006 through 2015 – $66 million, 2016
through 2025 – $116 million, and indefinite carryfor-
wards – $182 million. Further, International Paper has
state capital loss carryforwards that expire as follows:
2006 through 2015 – $40 million and 2016 through
2025 – $1 million.

International Paper also has

Deferred income taxes are not provided for tempo-
rary differences of approximately $2.4 billion, $2.7 bil-
lion and $2.5 billion as of December 31, 2005, 2004 and
2003, respectively, representing earnings of non-U.S.
intended to be permanently reinvested.
subsidiaries
Computation of the potential deferred tax liability asso-
ciated with these undistributed earnings and other basis
differences is not practicable.

International Paper is currently being audited by
various federal, state and non-U.S. taxing authorities for
tax periods from 1994 through 2004. While the Com-
pany believes that it is adequately accrued for possible
audit adjustments, the final resolution of these examina-
tions cannot be determined at this time and could result
in final settlements that differ from current estimates.

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 for-
eign earnings that are repatriated. International Paper
applied this provision to qualifying earnings
repa-
triations in 2005 totaling $2.1 billion and recorded a
deferred tax charge of $142 million related to these
repatriations.

NOTE 10 COMMITMENTS AND
CONTINGENT LIABILITIES

Certain property, machinery and equipment are
leased under cancelable and non-cancelable agreements.
At December 31, 2005, total future minimum rental
commitments under non-cancelable leases were $712
million, due as follows: 2006 – $172 million; 2007 –
$144 million; 2008 – $119 million; 2009 – $76 million;
2010 – $63 million; and thereafter – $138 million. Rent
expense was $216 million, $225 million and $236 mil-
lion for 2005, 2004 and 2003, respectively.

Unconditional purchase obligations have been en-
tered into in the ordinary course of business for the pur-
chase of certain pulpwood,
raw
materials, energy and services. At December 31, 2005,
total future minimum purchase obligations were $5.6
billion due as follows: 2006 – $3.3 billion; 2007 – $393
million; 2008 – $280 million; 2009 – $240 million; 2010
– $204 million; and thereafter – $1.2 billion.

logs, wood chips,

International Paper entered into an agreement in
2000 to guarantee, for a fee, an unsecured contractual
credit agreement between a financial institution and 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 from the financial institution to the cus-
tomer and the Company’s guarantee are unsecured.
Under the terms of the guarantee, International Paper
could be required to make future payments up to a max-
imum of $110 million if the customer were to default
under the credit agreement. There is no liability re-
corded 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 un-
certain 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 be-
lieves that possible future unrecorded liabilities for these
matters, if any, would not have a material adverse effect
on its consolidated financial statements.

E X T E R I O R S I D I N G A N D R O O F I N G S E T T L E M E N T S

Three nationwide class action lawsuits against the
Company and Masonite Corp., a formerly wholly-owned
subsidiary of the Company, relating to exterior siding
and roofing products manufactured by Masonite were
settled in 1998 and 1999. Masonite was sold to Premdor
Inc. in 2001. The liability for these settlements, as well
as the corresponding insurance recoveries (each as fur-
ther described below), were retained by the Company.

15,

1998

on January

The first suit, entitled Judy Naef v. Masonite and
International Paper, was filed in December 1994 and
settled
(the Hardboard
Settlement). The plaintiffs alleged that hardboard siding
manufactured by Masonite failed prematurely, allowing
moisture intrusion that in turn caused 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 be-
tween January 1, 1980, and January 15, 1998. For siding
that was installed between January 1, 1980, and De-
cember 31, 1989, the deadline for filing claims expired
January 18, 2005, and for siding installed between Jan-
uary 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 and settled on
January 6, 1999 (the Omniwood Settlement). The
plaintiffs made allegations with regard to Omniwood
siding manufactured by Masonite that were similar to
those alleged with respect to hardboard siding. 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. Claims relating to
Omniwood siding must be made by January 6, 2009.

The third suit, entitled Smith, et al v. Masonite
Corporation, et al., was filed in 1995 and settled on
January 6, 1999 (the Woodruf Settlement). The plain-
tiffs alleged that Woodruf roofing manufactured by Ma-
sonite was defective and caused damage to the structure
underneath the roofing. The class consisted of all U.S.
property owners who had incorporated and installed
Woodruf roofing from January 1, 1980, to January 6,
1999. For roofing that was installed between January 1,

1980, and December 31, 1989, the deadline for filing
claims expired January 6, 2006, and for roofing installed
between January 1, 1990, and January 6, 1999, claims
must be made by January 6, 2009.

All of the settlements provide for monetary compen-
sation 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. All of the
settlements also provide for payment of attorneys’ fees
equaling 15% (in the case of the Hardboard Settlement)
and 13% (in the case of the Omniwood and Woodruf
Settlements) of the settlement amounts paid to class
members.

C L A I M S F I L I N G A N D E V A L U A T I O N

For all of the settlements, once a claim is de-
termined to be valid, the amount of the claim is de-
termined by reference to a negotiated compensation
formula designed to compensate the homeowner for
product 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. Pursuant to the settlement
agreements, these costs are determined by reference to
“Mean’s Price Data,” as published by R.S. Means Com-
pany, and updated annually for
inflation. Persons
receiving compensation pursuant to this formula also
agree to release the Company and Masonite from all
other property damage claims relating to the product in
question.

In connection with the products involved in the
settlements described above, where there is damage, the
process of degradation, once begun, continues until re-
pairs are made. The Company estimates that approx-
imately four million structures have installed products
that are the subject of the Hardboard Settlement,
300,000 structures have installed products that are the
subject of the Omniwood Settlement and 86,000 struc-
tures have installed products that are the subject of the

Woodruf Settlement. Masonite stopped selling the prod-
ucts involved in the Hardboard Settlement in May
2001, the products involved in the Woodruf Settlement
in May 1996 and the products involved in the Omni-
wood Settlement in September 1996.

Persons who are class members under the settle-
ments who do not pursue remedies may have recourse to
warranties, if any, in existence at the expiration of the
the settlement
respective terms established under
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.

C L A I M S P A Y M E N T D A T A

Through December 31, 2005, net settlement pay-
ments totaled approximately $1.0 billion ($831 million
for the Hardboard Settlement, $128 million for the
Omniwood Settlement and $52 million for the Woodruf
Settlement), including $51 million of non-refundable
attorneys’ advances.

The average settlement cost per claim for the years
ended December 31, 2005, 2004 and 2003 for the
Hardboard, Omniwood and Woodruf Settlements are
set forth in the table below:

AVERAGE SETTLEMENT COST PER CLAIM

Hardboard

Omniwood

Woodruf

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

In thousands

December 31,

2005

$2.5

$2.2

$4.6

$6.1

$4.3

$0.5

December 31,

2004

2.3

3.1

4.3

4.2

4.0

December 31,

2003

2.2

3.0

3.8

5.4

3.9

1.2

The above information is calculated by dividing the
aggregate amount of claims paid during the specified
period by the number of claims paid during such period.

The following table shows an analysis of claims activity related to the Hardboard, Omniwood and Woodruf Settle-

ments for the years ended December 31, 2005, 2004 and 2003:

CLAIMS ACTIVITY

In thousands

Hardboard

Omniwood

Woodruf

Total

December 31, 2002

No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2003

No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2004
No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2005

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

28.6

45.0

(30.9)

(16.3)

26.4

56.0

(28.6)

(14.9)

38.9
27.3

(30.7)

(15.3)

20.2

4.0

9.2

(7.1)

(3.3)

2.8

8.0

(3.7)

(2.1)

5.0
5.6

(5.3)

(2.1)

3.2

1.9

4.9

(4.1)

(0.9)

1.8

5.2

(4.0)

(0.6)

2.4
4.6

(4.1)

(0.5)

2.4

0.4

0.3

(0.2)

–

0.5

–

(0.1)

–

0.4
0.4

(0.3)

–

0.5

1.1

1.0

(0.9)

(0.4)

0.8

0.6

(0.4)

(0.1)

0.9
0.6

(0.5)

(0.2)

0.8

Multi-
Family

0.3

–

0.3

–

0.3
–

–

0.3

Single
Family

Multi-
Family

31.6

50.9

(35.9)

(17.6)

29.0

61.8

(33.0)

(15.6)

42.2
32.5

(35.3)

(16.0)

23.4

Total

36.3

60.4

(43.2)

(20.9)

32.6

69.8

(36.8)

(17.7)

47.9
38.5

(40.9)

(18.1)

4.7

9.5

(7.3)

(3.3)

3.6

8.0

(3.8)

(2.1)

5.7
6.0

(5.6)

(2.1)

4.0

27.4

At December 31, 2005, there were $18 million of
payments due for claims that have been determined to
be valid ($12 million for Hardboard, $5 million for
Omniwood and $1 million for Woodruf) and an esti-
mated $14 million of payments associated with claims
currently under evaluation ($9 million for claims related
to the Hardboard Settlement, $3 million for claims re-
lated to the Omniwood Settlement and $2 million for
claims related to the Woodruf Settlement). In addition,
there was approximately $9 million of costs associated
with administrative and legal fees incurred but not paid
prior to year-end.

R E S E R V E F O R S I D I N G A N D R O O F I N G S E T T L E M E N T S
At December 31, 2005, net reserves for the settle-
ments discussed above totaled $113 million, of which
$34 million is attributable to the Hardboard Settlement,
$74 million to the Omniwood Settlement and $5 mil-
lion to the Woodruf Settlement.

The following table presents an analysis of the net
reserve activity related to the Hardboard, Omniwood
and Woodruf Settlements for the years ended De-
cember 31, 2005, 2004 and 2003:

In millions

Hard-
board

Omni-

wood Woodruf

Balance, December 31, 2002

$357

$138

$12

Total

$507

Payments

Insurance collections

Balance, December 31, 2003

Payments

Insurance collections

Balance, December 31, 2004
Payments

Reclassification

Balance, December 31,

(129)

(21)

(3)

(153)

261

(111)

158
(119)

(5)

–

117

(20)

–

97
(23)

–

387

(5)

(136)

–

4
(4)

259
(146)

–

2005

$34

$74

$113

While, for tracking purposes, the Company main-
tains three reserve accounts for each of the Hardboard,
Omniwood and Woodruf Settlements, we evaluate the
adequacy of the aggregate reserve due to their similar
and related nature. In making a determination as to
adequacy of the aggregate reserve, we employ a third-
party consultant to conduct statistical studies of future
costs utilizing recent claims experience data. In 2002,
projections were prepared of the anticipated claims
activity and payments through the end of the claims
period for each of the settlements. These projections are
updated annually using recent claims activity and other
factors typically considered in projecting future claims

and costs. If the projections were to indicate that ag-
gregate payments though the end of the claims period
would be materially over or under the aggregate fore-
casted payments, the aggregate reserve would be appro-
priately adjusted. Since 2002, our actual claims
experience has been in line with projected forecasts and
therefore there have been no adjustments of the ag-
gregate reserve balance for these settlements.

A number of factors could cause actual results to
vary from our projections, including a higher than pro-
jected cost per claim (due to higher construction, wood,
energy and replacement costs, all of which affect the in-
flation factor for the Means Price Data discussed above),
and increased claims from geographic locations where
previously there had been few or no claims.

In January 2005,

the Company received over
21,000 Hardboard claims (compared to 8,000 claims
received in December 2004, and 3,000 claims received
in January 2004). This significant increase in claim vol-
ume coincided with the January 18, 2005 deadline for
filing claims in the Hardboard Settlement for siding in-
stalled in the 1980s. Claims are processed by the In-
dependent Claims Administrator and only those claims
which meet the requirements of the Hardboard Settle-
ment are paid. Following the January deadline, the In-
dependent Claims Administrator could not immediately
determine how many of the 21,000 claims would meet
the requirements for payment as set forth in the Hard-
board Settlement. In addition to this significant volume
increase, the Company experienced a higher average
cost per claim due, in part, to a 2005 increase in the
Means Price Data compared to prior years. At the end of
the third quarter, the Company’s third-party consultant
advised the Company that payments relating to 1980s
Hardboard siding would be largely concluded by the end
of the third quarter 2005. Payments through the end of
the third quarter totaled $99 million, which were
approximately $30 million more than projected for the
year. However, during the fourth quarter, the number of
valid 1980s Hardboard claims and approved payments
exceeded the third-party consultant’s projection by $12
million. As a result of these unforeseen factors, the
Company made aggregate payments of $118 million in
2005 for Hardboard Settlement claims.

Despite the higher than anticipated number of
valid 1980s Hardboard claims and the slightly higher
cost per claim, the Company believes that, as of the end
of 2005, the aggregate reserve balance for the Hard-
board, Omniwood and Woodruf Settlements is ad-
equate. However,
filed for products
if new claims
involved in these settlements, or the average cost per
claim, were to be higher than projected in 2006, the
Company might increase its aggregate reserve to cover
claims for these settlements. The amount of an increase,
if any, could range from zero to $20 million and would

depend on a number of factors, including the likelihood
that, and the extent to which, our 2005 experience is
indicative of future activity. The Company will con-
tinue to evaluate the relevant data through the end of
the claims period in order to determine if an increase in
its aggregate reserve will be warranted.

H A R D B O A R D I N S U R A N C E M A T T E R S

The Company commenced a number of lawsuits
and arbitration proceedings against various insurance
carriers relating to their refusal to indemnify and/or de-
fend the Company and Masonite for, among other
things, the Hardboard Settlement.

These matters (with the exception of one arbi-
tration proceeding further discussed below) have been
favorably resolved resulting in the execution of settle-
ment agreements that require the insurance carriers to
pay the Company an aggregate of approximately $625
million. Of this amount, approximately $603 million in
insurance settlements were reached with carriers
through December 31, 2005.
In millions

2005

2003

2004

Insurance settlements

Income recognized

Cash settlements received, net

$334

$174

$33

258

114

123

–

Including collections received prior to 2003, cumu-
lative net cash settlements received totaled $304 million
through December 31, 2005. Approximately $230 mil-
lion of additional cash will be collected in 2006 through
2008 under current settlement agreements. The Com-
pany also entered into a settlement in the first quarter of
2006 for approximately $22 million. The only remaining
proceeding to recover insurance is an arbitration that
the Company commenced against ACE Insurance
Company, Ltd. That proceeding is scheduled for June
2006 in London.

In 2004, the Company settled a dispute with a third
party relating to an alternative risk-transfer agreement.
Under that agreement, the Company received $100
million for certain costs relating to the Hardboard
Settlement and other hardboard siding cases. As part of
the settlement, the Company agreed to pay the third
party a portion of certain insurance recoveries received
by the Company after January 1, 2004, up to a max-
imum of $95 million. As of December 31, 2005, approx-
imately $48 million had been paid to the third party
under this settlement.

A N T I T R U S T M A T T E R S

On May 14, 1999, and May 18, 1999, two lawsuits
were filed in federal court in the Eastern District of
Pennsylvania against the Company, the former Union
Camp Corporation (acquired by the Company in 1999),
and other manufacturers of linerboard (the Defendants).
These suits alleged 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 sought 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,
the Company, along with Weyerhaeuser Co. and
Georgia-Pacific Corp., agreed with the class plaintiffs to
settle the litigation for an aggregate amount of $68 mil-
lion. The settlement, of which the Company’s and Un-
ion Camp’s share totaled $24.4 million, was approved by
the court in an order dismissing the cases on De-
cember 10, 2003.

While court approval of the class action settlements
was pending in 2003, 12 new complaints each with
multiple plaintiffs who opted out of the class action,
described above, were filed in various federal district
courts around the country. These suits alleged 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 volun-
tarily dismissed its complaint on October 10, 2003. In
2005, the Company settled all of the claims of the re-
maining opt-out plaintiffs, except for one claimant who
had purchased a small amount of corrugated containers
from the Company,
for payments which aggregated
$27.5 million. As a consequence of those settlements,
all but one of the lawsuits have been dismissed. The
amount involved in the one remaining lawsuit is de
minimus.

In 2004, the Company settled a number of pur-
ported federal and state class actions alleging price-
fixing relating to high pressure laminates by its former
Nevamar business (which was part of the Company’s
Decorative Products division) for a total of $38.5 mil-
lion. The federal settlement has been approved by the
court, and the Company has been dismissed from the
case. The state settlements have all received approval as
well, and the judgments dismissing the Company from
the cases are final in all but one state (Tennessee) in
which four settlement class members have appealed the
trial court’s rejection of their objection to the settle-
ment. The amount involved in the Tennessee matter is
de minimus.

On September 16, 2002, the Company was served
in Federal District Court in Columbia, South Carolina
with a class action lawsuit by a group of private land-
owners alleging that the Company and certain of its fi-
ber suppliers, known as Quality Suppliers, engaged in an
unlawful conspiracy to artificially depress the prices at
which the Company 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. Discovery
and issues concerning class notice are ongoing. The

Company believes it has valid defenses and is vigorously
defending this case.

A number of private plaintiffs filed purported class
actions on behalf of purchasers of coated publication
papers in various U.S. federal and state courts. These
class actions, based on investigations of possible cartel
activity relating to coated publication papers that were
commenced in 2004 by European, U.S. and Canadian
antitrust authorities, allege that manufacturers of coated
publication papers, including the Company, participated
in a price-fixing conspiracy from 1993 to the present.
The cases filed in federal court asserted a violation of the
federal antitrust laws, while the cases filed in the state
court alleged 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. The state cases in all
states except California were removed to federal court
and transferred to the District of Connecticut, and on
November 15, 2005, a consolidated indirect purchaser
class action complaint was filed in the District of Con-
necticut on behalf of indirect purchasers in all states
except California. While discovery is in the earliest
stages, the Company believes it is not a proper party
defendant to this litigation and intends to vigorously
defend its position.

P A T E N T M A T T E R

action

judgment

by Nevamar

In connection with its former Nevamar business,
the Company retained liability for a patent dispute
pending in the U.S. District Court for the District of
Maryland. The case was commenced in 1988 as a
declaratory
for
non-infringement and invalidity of a static dissipative
laminate patent held by Charleswater Products, Inc.
(Charleswater). Charleswater counterclaimed, asserting
that certain Nevamar products infringed its patent and
seeking damages of approximately $24 million for lost
profits and royalty payments (which could be trebled if
Nevamar were found to have willfully infringed the
patent), plus substantial pre-judgment interest as Char-
leswater’s claims have existed since 1986. Because the
Nevamar business is no longer owned by the Company,
the outcome of the case would have no impact on the
Company’s business except to the extent of monetary
damages. The proceedings have been protracted by an
extended preliminary injunction hearing; a summary
judgment ruling in favor of Nevamar which was then
reversed after an appeal; a claim construction proceed-
ing; extensive fact and expert discovery; and a further
summary judgment motion that is pending. Trial for this

Interest costs related to the development of certain
long-term assets are capitalized and amortized over the
related assets’ estimated useful lives. Capitalized net in-
terest costs were $14 million in 2005, $10 million in
2004 and $8 million in 2003. Interest payments made
during 2005, 2004 and 2003 were $822 million, $774
million and $806 million, respectively. The 2005 inter-
est payments include a $52 million payment to the U.S.
Internal Revenue Service related to the settlement of
the 1997 – 2000 U.S. federal income tax audits. Total
interest expense was $683 million in 2005, net of a $46
million credit related to the settlement of the tax audits
discussed above, $782 million in 2004 and $804 million
in 2003. Interest income was $90 million, $73 million
and $100 million in 2005, 2004 and 2003, respectively.

The following tables present changes in the good-
will balances as allocated to each business segment for
the years ended December 31, 2005 and 2004.

Balance
January 1,

2005 Other(a)

Additions /
Reductions

Balance
December 31,
2005

$2,876

$–

$2,879

In millions

Printing
Papers

Industrial

Packaging

591

67 (b)

Consumer

Packaging

Distribution

Forest

Products

Corporate

1,014

299

190

(28)

1 (c)

–

(13)(d)

676

987

299

191

Total

$4,994

$(6)

$55

$5,043

(a) Includes reclassifications and the effects of foreign currency

translations

(b) Includes the effects of the completion of the accounting for the

acquisition of Box USA ($23 million), the acquisition of

Compagnie Marocaine des Cartons et des Papiers ($12 million)

and the acquisition of a 50% interest in International Paper

Distribution Limited ($38 million), offset by the effects of the

sale of the Industrial Papers business ($6 million)

est in Shorewood EPC Europe Ltd. ($5 million), and a 20%

minority interest in IP Korea ($1 million), offset by the re-

classification of IP Pty Australia Ltd. to equity method invest-

ments ($5 million)

(d) Includes the effects of the sale of the Fine Papers business

matter is scheduled to commence on March 13, 2006.
The Company believes that it has valid defenses and is
vigorously defending this case.

S U M M A R Y

The Company 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 mat-
ters, some of which allege substantial monetary damages.
While any proceeding or litigation has the element of
uncertainty, the Company believes that the outcome of
any of the lawsuits or claims that are pending or threat-
ened (other than those that cannot be assessed due to
their preliminary nature), or all of them combined, in-
cluding the preceding antitrust matters, will not have a
material adverse effect on its consolidated financial
statements.

NOTE 11 SUPPLEMENTARY FINANCIAL
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

2005

$404

1,611

317

2004

$321

1,650

298

$2,434

$2,371

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
inventory balances by approx-
have increased total
imately $239 million and $170 million at December 31,
2005 and 2004, respectively.

Plants, properties and equipment by major classi-

fication 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

2005

2004

$19,865

$20,895

5,685

978

1,886

28,414

16,613

5,633

974

1,824

29,326

17,110

Plants, properties and equipment, net

$11,801

$12,216

Balance
January 1,

In millions

2004 Other(b)

Additions/
Reductions

Balance
December 31,
2004

Printing Papers

$2,878

$(3)(c)

$2,876

Industrial

Packaging

Consumer

Packaging

Distribution

345

1,016

334

Forest Products

190 (a)

Corporate

Total

$4,793

–

(6)

238 (d)

591

(3)(e)

(36)(f)

–

1,014

299

190

$196

$4,994

(a) Restated for the reclassification of Weldwood to Discontinued

operations

(b) Represents the effects of foreign currency translations and re-

classifications from other long-term assets

Assets of businesses held for sale

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 pro-
ceeds from the transaction of approximately $242 mil-
lion are included as a source of cash in the
accompanying consolidated statement of cash flows.
The deferred gain on the transaction totaling $112 mil-
lion and $114 million at December 31, 2005 and 2004,
respectively, included in Other liabilities in the accom-
panying consolidated balance sheet, is being amortized
to earnings in future periods over the term of the fiber
supply agreement.

(d) Includes the effects of the acquisition of Box USA ($238 mil-

NOTE 12 DEBT AND LINES OF CREDIT

lion) offset by the sale of Food Pack S.A. ($3 million)

(e) Includes the effects of the sale of Food Pack S.A.

(f) 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)

The following table presents an analysis of activity
related to asset retirement obligations since January 1,
2004:

In millions

Asset retirement obligation at January 1

New liabilities

Liabilities settled

Net adjustments to existing liabilities

Accretion expense

2005

2004

$41

(6)

(2)

$48

(8)

(6)

Asset retirement obligation at December 31

$47

$41

This liability is included in Other liabilities in the

accompanying consolidated balance sheet.

The following table presents changes in minority
interest balances for the years ended December 31, 2005
and 2004:

In millions

Balance, beginning of year

Reclassification of limited partnership interests to

debt

Interest of CHH in an IP consolidated subsidiary

Dividends paid

Minority interest expense

Other, net

Balance, end of year

2005

2004

$188

$528

–

(338)

–

(11)

(25)

(3)

$211

$188

In November and December of 2005, International
Paper Investments (Luxembourg) S.ar.l, a wholly-owned
subsidiary of International Paper, issued $700 million of
long-term debt with an initial interest rate of LIBOR
plus 40 basis points that can vary depending upon the
credit rating of the Company and a maturity date in
November 2010. Additionally, the subsidiary borrowed
$70 million under a bank credit agreement with an ini-
tial interest rate of LIBOR plus 40 basis points that can
vary depending on the credit rating of the Company,
and with a maturity date in November 2006.

In December 2005, International Paper used a por-
tion of the proceeds from the above borrowings, and
from the sale of CHH in the third quarter of 2005, to
repay approximately $190 million of notes with coupon
rates ranging from 3.8% to 10% and original maturities
from 2008 to 2029. The remaining proceeds from the
borrowings and CHH sale will be used for other debt
reductions in the first quarter of 2006.

In September 2005, International Paper used a por-
tion of the proceeds from the CHH sale to repay the
remaining $250 million portion of a subsidiary’s $650
million long-term debt with an interest rate of LIBOR
plus 62.5 basis points and a maturity date of June 2007,
and $312 million of commercial paper that had been
issued in the same quarter. Other reductions in the third
quarter included $662 million of notes with coupon
rates ranging from 4% to 7.35% and original maturities
from 2009 to 2029, and the repayment of $150 million
of 7.10% notes with a maturity date of September 2005.
In June 2005, International Paper repaid approx-
imately $400 million of a subsidiary’s long-term debt
with an interest rate of LIBOR plus 62.5 basis points and
a maturity date of June 2007.

In February 2005, International Paper redeemed the
outstanding $464 million aggregate principal amount of
International Paper Capital Trust 5.25% convertible
subordinated debentures originally due in July 2025 at
100.5% of par plus accrued interest. Other reductions in
the first quarter of 2005 included early payment of ap-
proximately $295 million of principal on notes with
coupon rates ranging from 4% to 7.875% and original
maturities from 2006 to 2015.

Pre-tax early debt retirement expense of $57 mil-
lion related to the above 2005 redemptions is included
in Restructuring and other charges in the accompanying
consolidated statement of operations.

In December 2004, Timberlands Capital Corp. II,
Inc., a former 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 mil-
lion 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 August 2004, an International Paper wholly-
owned subsidiary issued 500 million euro-denominated
long-term debt (equivalent to approximately $619 mil-
lion at issuance) with an initial interest rate of EUR-
IBOR 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 mil-
lion 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 approx-
imately $1.0 billion of 8.125% coupon rate debt with an
original maturity date in July 2005.

In January 2004, approximately $1.0 billion of debt
with an 8.05% blended coupon rate was retired using
$1.0 billion of proceeds from 4.875% coupon rate debt
issued in December 2003.

A pre-tax early debt retirement expense of $92 mil-
lion related to the above 2004 redemptions is included
in Restructuring and other charges in the accompanying
consolidated statement of operations.

A summary of long-term debt follows:

In millions at December 31

8 7/8% to 10% notes – due 2011 – 2012

9.25% debentures – due 2011
7% to 7 7/8% notes – due 2006 – 2007

6 7/8% notes – due 2023 – 2029

6.75% notes – due 2011

6.65% notes – due 2037

6.4% notes to 6.5% notes – due 2006 – 2007

6.4% to 7.75% debentures – due 2025 –

2027

5.85% notes – due 2012

5 1/4% convertible subordinated debentures

5.25% to 5.5% notes – due 2014 – 2016

5 3/8% euro notes – due 2006

5 1/8% debentures – due 2012

2005

$136

125

437

351

819

344

571

969

–

1,296

296

106

2004

$175

125
649

394

1,000

149

797

1,202

464

1,596

334

102

3.8% to 4.25% notes – due 2008 – 2010

1,152

1,399

Zero-coupon convertible debentures – due

2021

Medium-term notes – due 2006 – 2009 (a)

Floating rate notes – due 2006 – 2010 (b)

Environmental and industrial development

1,185

1,764

1,141

1,794

bonds – due 2006 – 2033 (c,d)

2,005

2,150

Commercial paper and bank notes (e)

Other (f)

Total (g)

Less: Current maturities

Long-term debt

417

178

12,204

13,854

1,181

222

$11,023

$13,632

(a) The weighted average interest rate on these notes was 8.1% in

2005 and 2004.

(b) The weighted average interest rate on these notes was 4.2% in

2005 and 2.9% in 2004.

2005 and 5.6% in 2004.

(d) Includes $22 million of bonds at December 31, 2004, which

could be tendered at various dates and/or under certain circum-

stances. These bonds were redeemed in 2005.

(e) The weighted average interest rate was 4.9% in 2005 and 4.6%

in 2004. Includes $283 million of non-U.S. denominated bor-

rowings with a weighted average interest rate of 4.8% in 2005.

(f) Includes $6 million at December 31, 2005, and $54 million at

December 31, 2004, related to interest rate swaps treated as fair

value hedges (see Note 13).

(g) The fair market value was approximately $12.3 billion at De-

cember 31, 2005, and $14.4 billion at December 31, 2004.

held long-term credit ratings of BBB (negative outlook)
and Baa3 (stable 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-3, respectively.

Total maturities of long-term debt over the next
five years are 2006—$1.2 billion; 2007—$570 million;
2008—$308 million; 2009—$2.3 billion; and 2010—
$1.5 billion.

At December 31, 2005 and 2004, International
Paper classified $1.25 billion and $87 million, re-
tenderable bonds, contingently con-
spectively, of
vertible securities, 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, 2005, International Paper’s un-
used 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. The agreements include a $750
million fully committed bank credit agreement that ex-
pires in March 2006 and a $1.25 billion fully committed
bank credit agreement that expires in March 2009.
These agreements have a facility fee of 0.15% that is
payable quarterly. These agreements also include up to
$1.2 billion of available commercial paper-based financ-
ings under a receivables securitization program that ex-
pires in November 2007 with a facility fee of 0.20%. At
December 31, 2005, there were no outstanding borrow-
ings under these agreements.

The Company is currently in the process of refinanc-
ing the $750 million bank credit agreement maturing in
March 2006 and the $1.25 billion bank credit agree-
ment maturing in March 2009.

Additionally, International Paper Kwidzyn S.A., a
wholly-owned foreign subsidiary of International Paper,
has a PLN 400 million (approximately $123 million)
bank credit agreement maturing in May 2006, with no
outstanding borrowings as of December 31, 2005, and
International Paper Investments (Luxembourg) S.ar.l., a
wholly-owned subsidiary of International Paper, has a
$100 million bank credit agreement maturing in No-
vember 2006, with $70 million in borrowings out-
standing as of December 31, 2005.

At December 31, 2005, outstanding debt included
approximately $417 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, 2005, the Company

Contingently Convertible Securities

Included in debt at December 31, 2005 and 2004
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 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 consec-
utive trading days ending six business days prior to
June 20, 2004, or later annual date. The conversion
price of the notes was $59.11 as of December 31, 2005.
At June 20, 2005, the bonds were subject to an in-
creased accretion rate; however, the adjusted rate re-
mained at 3.75% per the terms of the agreement.

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 de-
bentures 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 de-
bentures 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-, re-
spectively; (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 Com-
pany distributes to all holders of its 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.

Security holders have the right to require re-
purchase 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 Compa-
ny’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 re-
demption 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 re-
demption 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

the

International Paper periodically uses derivatives
and other financial instruments to hedge exposures to
interest rate, commodity and currency risks. For hedges
criteria under SFAS No. 133,
that meet
“Accounting for Derivative Instruments and Hedging
Activities,” International Paper, at inception, formally
designates and documents the instrument as a hedge of a
the risk
specific underlying exposure, as well as
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 us-
ing available market information or other appropriate
valuation methodologies,
in Other current or non-
current assets or liabilities. The earnings impact result-
ing 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 in-
ception and quarterly thereafter to ensure they are effec-
tive in offsetting changes in either the fair value or cash
flows of the related underlying exposures. The in-
effective portion of a financial instrument’s change in
fair value, if any, would be recognized currently in earn-
ings together with the changes in fair value of any de-
rivatives not designated as hedges.

I N T E R E S T R A T E R I S K

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, 2005, of approximately $500
million and maturities ranging from one to 18 years do
not qualify as hedges under SFAS No. 133. For the years
ended December 31, 2005, 2004 and 2003, the change
in fair value of these swaps was immaterial. The fair
value of the swap contracts as of December 31, 2005, is a
$7 million liability.

The remainder of International Paper’s interest rate
swap agreements qualify as fully effective fair value
hedges under SFAS No. 133. At December 31, 2005
and 2004, outstanding notional amounts for its interest
rate swap fair value hedges amounted to approximately
$1.7 billion and $2.2 billion, respectively. The fair val-
ues of these swaps were net assets of approximately $7
million and $70 million at December 31, 2005 and
2004, respectively.

In 2005, interest rate swap hedges with a notional
value of $313 million were terminated in connection
with various early retirements of debt. The resulting gain
of approximately $6 million is included in Restructuring
and other charges in the accompanying consolidated
statement of operations (see Note 6).

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 ap-
proximately $14 million is included in Restructuring
and other charges in the accompanying consolidated
statement of operations (see Note 6).

C O M M O D I T Y R I S K

To minimize volatility in earnings due to large fluc-
tuations in the price of commodities, International Pa-
per may use 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 out-
standing contracts in OCI. On the date a contract ma-
tures, the gain or loss is reclassified into cost of products
sold concurrent with the recognition of the commodity
purchased. In 2005, there was no reclassification from
OCI to earnings related to commodity hedging, and in
2004, the reclassification to earnings was immaterial. For
the year ended December 31, 2003, the reclassification
to earnings was an after-tax gain of $24 million, repre-
senting the after-tax cash settlements on maturing en-
ergy hedge contracts. Unrealized after-tax losses of $2
million for 2005 and 2004 and after-tax gains of $12
million for 2003 were recorded to OCI. After-tax losses
of approximately $2 million as of December 31, 2005,
are expected to be reclassified to earnings in 2006. The

net fair value of energy hedge contracts as of De-
cember 31, 2005, is a $1 million asset recorded in Other
assets in the accompanying consolidated balance sheet.

F O R E I G N C U R R E N C Y R I S K

in non-U.S. operations

International Paper’s policy has been to hedge cer-
tain investments
through
borrowings denominated in the same currency as the
operation’s functional currency, or by entering into
cross-currency and interest rate swaps or foreign ex-
change contracts. These financial instruments are effec-
tive as hedges 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. oper-
ation’s net assets hedged, are recorded as translation ad-
justments 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, 2005, 2004 and 2003, net gains and losses
included in the cumulative translation adjustment relat-
ing to derivative and debt instruments hedging foreign
net investments amounted to a $19 million gain, a $74
million loss and an $89 million loss after taxes and mi-
nority interest, respectively. The 2004 loss includes $50
million relating to net investment hedges that were in-
cluded in the loss on sale of Weldwood in Discontinued
operations in 2004.

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 pro-
tect International Paper from currency fluctuations be-
tween the contract date and ultimate settlement. These
contracts, most of which have been designated as cash
flow hedges, had maturities of four years or less as of
December 31, 2005. For the years ended December 31,
2005, 2004 and 2003, net unrealized gains after taxes
and minority interest totaling $48 million, $72 million
and $53 million, respectively, were recorded to OCI.
Net after-tax gains of $14 million, $4 million and $10
million were reclassified to earnings. Gains relating to
CHH, after taxes and minority interest, totaling $14
million, $22 million and $31 million are included in
Discontinued operations
the years ended De-
for
cember 31, 2005, 2004 and 2003, respectively. Cumu-
lative OCI after-tax and minority interest gains of $40
million are included in the gain on sale of CHH in Dis-
continued operations in 2005. As of December 31, 2005,
gains of $19 million after taxes are expected to be re-
classified to earnings in 2006. 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 earn-
ings 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 counter-
parties.

NOTE 14 CAPITAL STOCK

The authorized capital stock at both December 31,
2005 and 2004, consisted of 990,850,000 shares of
common stock, $1 par value; 400,000 shares of cumu-
lative $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 . D E F I N E D B E N E F I T P L A N S

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 receive an additional com-
pany contribution to their savings plan (see “Other
Plans” on page 73).

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
Income Security Act
the Employee Retirement
(ERISA). International Paper made no contributions to
the qualified defined benefit plan in 2005 or 2004, and
does not expect to make any contributions in 2006 un-
less International Paper changes its funding policy to
make contributions above the minimum requirements.
The U.S. Congress is currently considering various pro-
posals
that would change the minimum funding
requirements for qualified defined benefit plans in future

years. While the amount of any required contributions
after 2006 will depend upon the final rules adopted and
other factors, including changes in discount rates and
actual plan asset returns, the Company currently esti-
mates that a contribution in 2007 of $40 million to $200
million may be required.

The nonqualified plan is only funded to the extent
of benefits paid, which are expected to be $34 million in
2006.

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 obliga-
tions 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 for 2005, 2004 and 2003 were as
follows:

Net Periodic Pension Expense

Service cost is the actuarial present value of benefits
attributed by the plans’ benefit formula to services ren-
dered by employees during the year. Interest cost repre-
sents 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 in-
vestment of plan assets using an estimated long-term
rate of return.

Net periodic pension expense for qualified and
nonqualified U.S. defined benefit plans comprised the
following:

In millions

Service cost

Interest cost

2005

$129

474

2004

$115

467

2003

$107

469

Expected return on plan assets

(556)

(592)

(598)

Actuarial loss

Amortization of prior service cost

167

Net periodic pension expense (a)

$243

$111

$60

(a) Excludes $6.5 million, $3.4 million and $8.3 million in 2005,

2004 and 2003, respectively, in curtailment losses, and $3.6

million, $1.4 million and $6.3 million in 2005, 2004 and 2003,

respectively, of special termination benefits,

in connection

with cost reduction programs and facility rationalizations that

were recorded in Restructuring and other charges in the con-

solidated statement of operations. Also excludes $14.3 million

and $0.3 million in 2005 and 2003, respectively, in curtailment

losses, and $7.6 million of special termination benefits in 2005

related to certain divestitures recorded in Net losses on sales

and impairments of businesses held for sale in the consolidated

statement of operations.

The increases in 2005 and 2004 U.S. pension ex-
pense were due to increases in the amortization of un-
recognized actuarial losses, reductions in the discount
rate and a reduction in 2005 in the expected long-term
rate of return on plan assets, net of a reduction in 2004
in the assumed rate of future compensation increase.

International Paper evaluates its actuarial assump-
tions annually as of December 31 (the measurement

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2003

2005
2004
5.75% 6.00% 6.50%
8.50% 8.75% 8.75%
3.25% 3.25% 3.75%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2005 and 2004,
were as follows:

Discount rate

Rate of compensation increase

2004

2005
5.50% 5.75%
3.25% 3.25%

The expected long-term rate of return on plan as-
sets 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 histor-
ical 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 ap-
proximately 500-550 Aa-graded bonds. The plan’s pro-
jected cash flows are then matched to the yield curve to
develop the discount rate. To calculate pension expense
for 2006, the Company will use an expected long-term
rate of return on plan assets of 8.50%, a discount rate of
5.50% and an assumed rate of compensation increase of
3.25%. The Company estimates that it will record net
pension expense of approximately $370 million for its
U.S. defined benefit plans in 2006, with the increase
from expense of $243 million in 2005 principally
reflecting a change in the mortality assumption to use
the Retirement Protection Act 2000 table (RP-2000) in
2006 versus the Group Annuity Mortality Table 1983
(GAM83) used in 2005, an increase in the amortization
of unrecognized actuarial losses over a shorter average
remaining service period, and a decrease in the assumed
discount rate to 5.50% in 2006 from 5.75% in 2005.

The following illustrates the effect on pension ex-
pense for 2006 of a 25 basis point decrease in the above
assumptions:

In millions

Expense/(Income):

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2006

$27

(6)

Investment Policy / Strategy

Plan assets are invested to maximize returns within
prudent levels of risk. 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 manager performance.

International Paper’s pension plan asset allocations
by type of fund at December 31, 2005 and 2004, 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,

2005

2004

61% 62%
28% 27%
8%

100% 100%

No plan assets were invested in International Paper

common stock at December 31, 2005 or 2004.

At December 31, 2005, projected future pension

benefit payments are as follows:

In millions

2006

2007

2008

2009

2010

2011 – 2015

$525

515

517

523

536

2,932

Minimum Pension Liability Adjustment

At December 31, 2002, International Paper’s quali-
fied defined benefit pension plan had a prepaid benefit
cost of approximately $1.7 billion. At this 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 compre-
hensive 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
quarter of 2004 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, a credit to after-tax OCI was
recognized in the amount of $41 million at De-
cember 31, 2004. At December 31, 2005, the change in
the mortality assumption increased the ABO by more
than plan assets requiring an after-tax charge to OCI of
$290 million. International Paper also incurred adjust-
ments to the nonqualified plan additional minimum li-
abilities and recorded after-tax charges to OCI of $14
million and $8 million, at December 31, 2005 and 2004,
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, 2005 and 2004:

In millions

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

2005

2004

$9,278

$8,294

8,855

6,944

7,927

6,745

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 11 years as of De-
cember 31, 2005) to the extent that they are not offset
by gains and losses in subsequent years. Unrecognized
actuarial losses shown in the following table were $3.2
billion and $2.6 billion in 2005 and 2004, respectively.
While actual future amortization charges will be affected
by future gains/losses, the amortization of cumulative
unrecognized losses as of December 31, 2005, is expected
to increase pension expense by $68 million in 2006,
while decreasing expense by $24 million in 2007 and
$38 million in 2008.

The following table shows the changes in the bene-
fit obligation and plan assets for 2005 and 2004, and the

N O N - U . S . D E F I N E D B E N E F I T P L A N S

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:

In millions

Service cost

Interest cost

2005

2004

2003

$11

(10)

$10

(8)

–

(6)

(1)

–

Estimated expenses

Net periodic pension expense (a)

$15

$12

(515)

(537)

(a) Excludes $1.7 million of curtailment gains in 2005 related to

In millions

2005

2004

Expected return on plan assets

Change in projected benefit obligation:

Actuarial loss

Benefit obligation, January 1

$8,294

$7,899

Curtailment gain

plans’ funded status and amounts recognized in the con-
solidated balance sheet as of December 31, 2005 and
2004. The benefit obligation as of December 31, 2005,
increased by $984 million, principally as a result of the
change in the mortality assumption with a smaller im-
pact from a decrease in the discount rate used in
computing the estimated benefit obligation. Plan assets
increased by $199 million, principally reflecting higher
actual market returns.

Service cost

Interest cost

Actuarial loss

Benefits paid

Acquisitions
Divestitures

Restructuring

Special termination benefits

Plan amendments

129

474

833

115

467

288

–

(4)

1
–

Benefit obligation, December 31

$9,278

$8,294

Change in plan assets:

Fair value of plan assets, January 1

$6,745

$6,436

Actual return on plan assets

Company contributions

Benefits paid

694

797

(515)

(537)

Fair value of plan assets, December 31

$6,944

$6,745

Funded status

Unrecognized actuarial loss

Unamortized prior service cost

Prepaid benefit costs

Amounts recognized in the consolidated

balance sheet consist of:

Accrued benefit liability

Intangible asset

Minimum pension liability adjustment

included in accumulated other

comprehensive income

Net amount recognized

$(2,334)

$(1,549)

3,181

310

2,632

330

$1,157

$1,413

$(1,911)

$(1,182)

310

330

2,758

2,265

$1,157

$1,413

the divestiture of Maresquel recorded in Net losses on sales and
impairments of businesses held for sale in the consolidated

statement of operations.

Weighted average assumptions used to determine
net pension expense for 2005, 2004 and 2003 were as
follows:

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2003

2005
2004
5.11% 5.43% 5.58%
6.68% 6.66% 6.75%
3.32% 3.50% 3.64%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2005 and 2004,
were as follows:

Discount rate

Rate of compensation increase

2005

2004

4.86% 5.55%
3.39% 3.58%

The difference between the assumptions used to
determine benefit obligations and the assumptions used
to determine net pension expense is due to Carter Holt
Harvey and Weldwood divestitures being disclosed in
the benefit obligation rollforward and not in the net
pension expense assumptions.

The following table shows the changes in the bene-
fit obligation and plan assets for 2005 and 2004 and the
plans’ funded status and amounts recognized in the con-
solidated balance sheet as of December 31, 2005 and
2004.

In millions

Change in projected benefit obligation:

Benefit obligation, January 1

Obligations for additional plans

Service cost

Interest cost

Participants’ contributions

Plan amendments

Divestitures

Curtailment gains

Actuarial loss

Benefits paid
Effect of foreign currency exchange rate

movements

Benefit obligation, December 31

Change in plan assets:

2005

2004

$365

$587

–

(3)

(121)

(247)

(2)

(12)

–

(41)

(21)

$276

$365

Fair value of plan assets, January 1

$255

$423

Assets for additional plans

Actual return on plan assets

Administrative expenses

Company contributions

Benefits paid

Participants’ contributions

Divestitures

Effect of foreign currency exchange rate

movements

–

(3)

(12)

(40)

(108)

(230)

(11)

values of plan assets totaled $232 million, $207 million,
and $127 million, respectively, at December 31, 2005.
Plan assets consist principally of common stock and
fixed income securities. Adjustments to the non-U.S.
plans’ additional minimum liabilities at December 31,
2005, resulted in a debit to OCI of $12 million after
taxes, less a credit of $11 million after taxes and minor-
ity interest related to the sale of CHH, for a net charge
to OCI of $1 million. A credit of $1 million after taxes
was recorded to OCI at December 31, 2004.

O T H E R P L A N S

International Paper sponsors defined contribution
plans (primarily 401(k) plans) to provide substantially
all U.S.
salaried and certain hourly employees of
International Paper an opportunity to accumulate per-
sonal
to
employees hired after June 30, 2004, for their retire-
ment. Contributions may be made on a before-tax basis
to substantially all of these plans.

funds and to provide additional benefits

As determined by the provisions of each plan, Inter-
national 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 $88
million, $87 million and $95 million for the plan years
ending in 2005, 2004 and 2003, respectively. The net
assets of these plans were approximately $4.3 billion as
of the 2005 plan year-end,
including approximately
$666 million (15.5%) in International Paper common
stock.

Fair value of plan assets, December 31

$173

$255

NOTE 16 POSTRETIREMENT BENEFITS

Funded status

Unrecognized actuarial loss

Unrecognized transition asset

Unamortized prior service cost

Prepaid benefit costs

Amounts recognized in the consolidated balance

sheet consist of:

Prepaid benefit cost

Accrued benefit liability

Intangible asset

Minimum pension liability adjustment

included in accumulated other

comprehensive income

Net amount recognized

$(103)

$(110)

(1)

$(48)

$(41)

$22

(93)

(111)

–

$(48)

$(41)

The reductions in the benefit obligation and in
plan assets in 2005 are mainly due to the sale of CHH.
For non-U.S. plans with accumulated benefit obliga-
tions in excess of plan assets, the projected benefit
obligations, accumulated benefit obligations and fair

U . S . P O S T R E T I R E M E N T B E N E F I T S

International Paper provides certain retiree health
care and life insurance benefits covering a majority of
U.S. salaried and certain hourly employees. These em-
ployees are generally eligible for benefits upon retire-
ment 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 totaled 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 re-
corded prospectively beginning July 1, 2004. This re-
sulted in a reduction of net postretirement benefit cost
of approximately $8 million and a reduction of the
accumulated postretirement benefit obligation (APBO)
of approximately $110 million in 2004, 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.
The final regulations for the implementation of the Act
were released on January 21, 2005. This resulted in a
remeasurement of the plan that reduced net postretire-
ment benefit costs by $14 million and reduced the
APBO by $59 million in 2005.

The components of postretirement benefit expense

in 2005, 2004 and 2003 were as follows:

In millions

Service cost

Interest cost

Actuarial loss

2005

2004

2003

Amortization of prior service cost

(40)

(29)

Net postretirement benefit cost (a)

$20

$53

$55

(a) Excludes $1.8 million, $1.0 million and $5.3 million of

curtailment gains in 2005, 2004 and 2003, respectively, and

$0.8 million in 2005 and 2004 and $1.3 million in 2003 of spe-

cial termination benefits related to cost reduction programs

and facility rationalizations that were recorded in Restructuring

and other charges in the consolidated statement of operations.

Also excludes $4.1 million in curtailment gains in 2005 and $1

million of special termination benefits in 2005 related to cer-

tain divestitures recorded in Net losses on sales and impair-

ments of businesses held for sale in the consolidated financial

statements.

International Paper evaluates its actuarial assump-
tions 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 Postretire-
ment Benefits Other Than Pensions.”

The discount rates used to determine net cost for
the years ended December 31, 2005, 2004 and 2003,
were as follows:

Discount rate

2005
2004
5.50% 6.00% 6.38%

2003

The weighted average assumptions used to de-
termine the benefit obligation at December 31, 2005
and 2004, were as follows:

Discount rate

Health care cost trend rate assumed for next

year

Rate that the cost trend rate gradually declines

Year that the rate reaches the rate it is assumed

to remain

2004

2005
5.50% 5.75%

10.00% 10.00%

5.00% 5.00%

2010

2009

A 1% increase in the assumed annual health care
cost trend rate would have increased the accumulated
postretirement benefit obligation at December 31, 2005,
by approximately $35 million. A 1% decrease in the
annual trend rate would have decreased the accumu-
lated postretirement benefit obligation at December 31,
2005, by approximately $32 million. The effect on net
postretirement benefit cost from a 1% increase or de-
crease would be approximately $2 million.

The plan is only funded in an amount equal to bene-
fits paid. The following table presents the changes in
benefit obligation and plan assets for 2005 and 2004:

In millions

Change in benefit obligation:

Benefit obligation, January 1

Service cost

Interest cost

Participants' contributions

Actuarial gain

Benefits paid

Plan amendments

Divestitures

Restructuring

Special termination benefits

2005

2004

$838

$1,000

(100)

(136)

(118)

(138)

(5)

–

Benefit obligation, December 31

$703

$838

Change in plan assets:

Fair value of plan assets, January 1

Company contributions

Participants' contributions

Benefits paid

$–

100

(136)

(138)

Fair value of plan assets, December 31

$–

Funded status

Unamortized prior service cost

Unrecognized actuarial loss

Accrued benefit cost

$(703)

$(838)

(167)

238

(229)

357

$(632)

$(710)

At December 31, 2005, estimated total future post-
retirement benefit payments, net of participant con-
tributions and estimated future Medicare Part D subsidy
receipts are as follows:

In millions

2006

2007

2008

2009

2010

2011 – 2015

Benefit
Payments

Subsidy
Receipts

$87

$(13)

352

(14)

(15)

(16)

(17)

(90)

N O N - U . S . P O S T R E T I R E M E N T B E N E F I T S

In addition to the U.S. plan, certain Canadian and
Brazilian employees are eligible for retiree health care
and life insurance. Net postretirement benefit cost for
our non-U.S. plans was $3 million for 2005 and $2 mil-
lion for 2004. The benefit obligation for these plans was
$21 million in 2005 and $20 million in 2004.

NOTE 17 INCENTIVE PLANS

International Paper currently has a Long-Term In-
centive Compensation Plan (LTICP) that includes a
Stock Option Program, a Restricted Performance Share
Program and a Continuity Award Program, ad-
ministered 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 5,135 and 5,435 rights outstanding at De-
cember 31, 2005 and 2004, 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 dis-
closure provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation,” in accounting for our
plans. SFAS No. 123(R) will be adopted effective Jan-
uary 1, 2006. As no unvested stock options were out-
standing at this date, the Company believes that the
adoption will not have a material impact on its con-
solidated financial statements.

S T O C K O P T I O N P R O G R A M

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 is-
sued with an exercise price equal to the market price of
International Paper stock on the grant date.

Under the program, officers and certain other em-
ployees may be granted options to purchase Interna-
tional 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 op-
tion, 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.

The Company discontinued its stock option pro-
gram in 2004 for members of executive management,
and in 2005 for all other eligible U.S. and non-U.S.
employees. In the United States, the stock option pro-
gram was replaced with a performance-based restricted
share program for approximately 1,250 employees to
more closely tie long-term incentive compensation to
Company performance on two key performance drivers:
return on investment (ROI) and total shareholder re-
turn (TSR). As part of this shift in focus away from
stock options to performance-based restricted stock, the
Company accelerated the vesting of all 14 million un-
vested stock options to July 12, 2005. The Company
also considered the benefit to employees and the income
statement impact in making its decision to accelerate
the vesting of these options. Based on the market value
of the Company’s common stock on July 12, 2005, the
exercise prices of all such stock options were above the
market value and, accordingly, the Company recorded
no expense as a result of this action.

For pro forma disclosure purposes (see Note 1), the
fair market value of each option grant has been esti-
mated on the date of the grant using the Black-Scholes
option pricing model with the following weighted aver-
age assumptions used for grants in 2005, 2004 and 2003,
respectively:

The following summarizes the status of the Stock
Option Program and the changes during the three years
ending December 31, 2005:

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

2005

2004

2003

3.82% 3.23% 2.46%
22.65% 24.41% 24.06%
2.53% 2.53% 2.71%
3.50
3.50

3.50

2.99% 2.14% 1.59%
21.78% 22.83% 23.70%
2.42% 2.30% 2.57%
0.32
1.60

1.75

Outstanding at December 31, 2002

Granted

Exercised

Forfeited

Expired

Outstanding at December 31, 2003

Granted

Exercised

Forfeited

Expired

(a) The average fair market values of initial option grants during

2005, 2004 and 2003 were $6.78, $6.90 and $5.86, respectively.

(b) The average fair market values of replacement option grants

during 2005, 2004 and 2003 were $2.05, $4.76 and $4.39,

respectively.

Outstanding at December 31, 2004

Granted

Exercised

Forfeited

Expired

Weighted
Average
Exercise
Price

$40.11

37.08

31.87

41.19

51.71

39.51

39.70

34.60

40.86

51.40

39.70
39.64

33.74

41.44

43.52

Options (a,b)

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)

45,434,907
861,827

(602,746)

(1,607,979)

(2,504,411)

Outstanding at December 31, 2005

41,581,598

$39.49

(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.

(b) The table includes options outstanding under an acquired

company plan under which options may no longer be granted.

The following table summarizes information about stock options outstanding at December 31, 2005:

Range of Exercise Prices

$29.31 – $33.80

$33.81 – $39.77

$39.78 – $45.74

$45.75 – $51.71

$51.72 – $57.68

$57.69 – $63.65

$63.66 – $66.81

Options Outstanding
Weighted
Options
Average
Outstanding
Remaining
as of
Life
12/31/05

Weighted
Average
Exercise
Price

Options Exercisable
Weighted
Options
Average
Outstanding
Exercise
as of
Price
12/31/05

6,264,472

19,514,939

11,113,806

1,746,895

213,192

2,550,094

178,200

41,581,598

5.6

6.7

5.9

2.9

0.8

3.8

4.0

6.0

$31.77

$37.25

$41.34

$47.42

$54.23

$59.14

$64.70

6,264,472

19,514,939

11,113,806

1,746,895

213,192

2,550,094

178,200

$31.77

$37.25

$41.34

$47.42

$54.23

$59.14

$64.70

$39.49

41,581,598

$39.49

The following summarizes the activity of the Con-
tinuity Award Program for the three years ending De-
cember 31, 2005:

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

Granted (a)

Issued

Forfeited (b)

Outstanding at December 31, 2005

238,072

149,500

(60,912)

(22,500)

304,160

31,500

(22,700)

(26,461)

286,499
8,000

(13,000)

(31,124)

250,375

(a) The weighted average fair value of restricted shares granted was

$43.10, $43.20 and $37.20 in 2005, 2004 and 2003, re-

spectively.

(b) Also includes restricted shares canceled when tandem stock

options were awarded. No tandem options were awarded in

2005, 2004 or 2003.

At December 31, 2005 and 2004, a total of
21.1 million and 20.3 million shares, respectively, were
available for grant under the LTICP. In 2004, share-
holders had approved an additional 14 million shares to
be used for grant. In 2003, shareholders had approved an
additional 10 million shares to be made available for
grant, with 100,000 of these shares reserved specifically
restricted stock. A total of
for
12.5 million shares, 14.9 million shares and 2.3 million
shares were available for the granting of restricted stock
as of December 31, 2005, 2004 and 2003, respectively.

the granting of

The compensation cost charged to earnings for all
the incentive plans under the LTICP was $53 million
for 2005 and $29 million for both 2004 and 2003.

P E R F O R M A N C E – B A S E D R E S T R I C T E D S H A R E S

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
2003 and 2004. In 2005, the plan was amended to pro-
vide for segmentation in which one-fourth of the award
vests during each twelve-month period, with the final
one-fourth segment vesting over the full three-year
period. 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, 2005:

Outstanding at December 31, 2002

Granted (a)

Issued

Forfeited

Outstanding at December 31, 2003

Granted (a)

Issued

Forfeited

Outstanding at December 31, 2004

Granted (a)

Issued (b)

Forfeited

Outstanding at December 31, 2005

1,277,340

658,155

(586,237)

(164,803)

1,184,455

1,581,442

(391,691)

(128,957)

2,245,249
2,831,566

(519,533)

(361,965)

4,195,317

(a) The weighted average fair value of performance shares

granted was $41.56, $42.95 and $35.34 in 2005, 2004 and

2003, respectively.

(b) Includes 114,177 shares held for payout at the end of the per-

formance period.

C O N T I N U I T Y A W A R D P R O G R A M

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. Award-
ing 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.

International Paper Company

I N T E R I M F I N A N C I A L R E S U L T S ( U N A U D I T E D ) ( a )

In millions, except per share amounts and stock prices

2 0 0 5
Net Sales
Gross Margin (b)
Earnings (Loss) From Continuing

Operations Before Income Taxes and
Minority Interest

Earnings (Loss) From Discontinued

Operations
Net Earnings (Loss)
Basic Earnings Per Share of Common Stock

Earnings (Loss) From Continuing

1st
Quarter

$6,011
1,545

2nd
Quarter

$5,916
1,501

3rd
Quarter

$6,036
1,504

4th
Quarter

$6,134
1,408

Year

$24,097
5,958

120(c)

259(e)

372(g)

(165)(i)

586(c,e,g,i)

(31)(d)
77(c,d)

(14)(d)
77(d,e,f)

281(d)
1,023(d,g,h)

5(d)
(77)(d,i,j)

241(d)
1,100(c-j)

Operations

$0.22(c)

$0.19(e,f)

$1.53(g,h)

$(0.17)(i,j)

$1.77(c,d-j)

Earnings (Loss) From Discontinued

Operations
Net Earnings (Loss)

Diluted Earnings Per Share of Common

Stock
Earnings (Loss) From Continuing

(0.06)(d)
0.16(c,d)

(0.03)(d)
0.16(d,e,f)

0.58(d)
2.11(d,g,h)

0.01(d)
(0.16)(d,i,j)

0.49(d)
2.26(c-j)

Operations

$0.22(c)

$0.19(e,f)

$1.48(g,h)

$(0.17)(i,j)

$1.74(c,d-j)

Earnings (Loss) From Discontinued

Operations
Net Earnings (Loss)

Dividends Per Share of Common Stock
Common Stock Prices

High
Low

2 0 0 4
Net Sales
Gross Margin (b)
Earnings From Continuing Operations 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

(0.06)(d)
0.16(c,d)
0.25

(0.03)(d)
0.16(d,e,f)
0.25

0.55(d)
2.03(d,g,h)
0.25

0.01(d)
(0.16)(d,i,j)
0.25

0.47(d)
2.21(c-j)
1.00

$42.59
35.67

$5,623
1,412

$37.92
30.16

$5,703
1,515

$35.05
29.45

$34.90
26.97

$42.59
26.97

$6,016
1,604

$6,017
1,603

$23,359
6,134

85(k)

112(m)

333(o)

194(p)

724(k,m,o,p)

25(l)
73(k,l)

156(l)
193(l,m,n)

(685)(l)
(470)(l,o)

13(l)
169(l,p)

(491)(l)

(35)(k-p)

$0.10(k)

$0.08(m,n)

$0.44(o)

$0.32(p)

$0.94(k,m-p)

Operations
Net Earnings (Loss)

0.05(l)
0.15(k,l)

0.32(l)
0.40(l,m,n)

(1.41)(l)
(0.97)(l,o)

0.03(l)
0.35(l,p)

(1.01)(l)
(0.07)(k-p)

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

$0.10(k)

$0.08(m,n)

$0.44(o)

$0.32(p)

$0.93(k,m-p)

0.05(l)
0.15(k,l)
0.25

0.32(l)
0.40(l,m,n)
0.25

(1.35)(l)
(0.91)(l,o)
0.25

0.03(l)
0.35(l,p)
0.25

(1.00)(l)
(0.07)(k-p)
1.00

High
Low

$45.01
39.80

$44.81
37.91

$44.65
38.22

$42.52
37.12

$45.01
37.12

Note: Since basic and diluted earnings per share are computed independently for each period and category, full year per share amounts may not equal the sum of the four quarters.

Footnotes to Interim Financial Results

(a) All periods presented have been restated to reflect
the Carter Holt Harvey Limited business and the
Weldwood of Canada Limited business as Dis-
continued operations.

(b) Gross margin represents net sales less cost of prod-

ucts sold.

(c) Includes a $24 million charge before taxes ($15 mil-
lion after taxes) for losses on early extinguishment
of debt and a $79 million charge before taxes ($52
million after taxes) for estimated losses of businesses
held for sale.

(d) Includes net income of CHH prior to its sale in the
third quarter of 2005. Also included in the 2005
third quarter is a gain of $29 million before taxes
($361 million after taxes) from the sale of CHH.
(e) Includes a $31 million charge before taxes ($19 mil-
lion after taxes) for organizational restructuring
charges, a pre-tax credit of $35 million ($21 million
after taxes) for insurance recoveries related to the
hardboard siding and roofing litigation, a $19 mil-
lion pre-tax credit ($12 million after taxes) for net
adjustments of losses on businesses previously sold,
and interest income of $11 million before taxes ($7
million after taxes) related to the collection of a
note receivable from a 2001 sale.

(f) Includes an $82 million increase in the income tax
provision, including approximately $79 million for
deferred taxes related to earnings repatriated during
the quarter under the American Jobs Creation Act
of 2004.

(g) Includes a $44 million charge before taxes ($32 mil-
lion after taxes) for organizational restructuring
charges, a pre-tax charge of $26 million ($16 mil-
lion after taxes) for losses on early extinguishment
of debt, a pre-tax credit of $188 million ($109 mil-
lion after taxes) for insurance recoveries related to
the hardboard siding and roofing litigation, a net
charge of $5 million before taxes ($3 million after
taxes) for adjustments of losses on businesses pre-
viously sold, a $3 million pre-tax credit ($2 million
after taxes) for the net adjustment of previously
provided reserves, and interest income of $43 mil-
lion before taxes ($26 million after taxes) relating to
a tax audit agreement.

(h) Includes a $517 million net reduction of the income
tax provision, including a credit of $553 million
from an agreement reached with the U.S. Internal
Revenue Service concerning the 1997 through 2000
U.S. federal income tax audits, a charge of $21 mil-
lion related to cash repatriations from non-U.S.
subsidiaries, and a charge of $15 million relating to a
change in Ohio state tax laws.

(i) Includes a $199 million charge before taxes ($123
million after taxes) for organizational restructuring
charges associated with the Company’s previously
announced Transformation Plan, a $27 million
charge before taxes ($16 million after taxes) for le-
gal reserves, a $7 million charge before taxes ($4
million after taxes) for losses on early debt ex-
tinguishment, a $35 million pre-tax credit ($21 mil-
lion after taxes) for insurance recoveries related to
the hardboard siding and roofing litigation, a pre-tax
charge of $46 million ($30 million after taxes) for
adjustments of estimated losses on businesses sold or
held for sale, and a $1 million credit for adjustments
of previously provided reserves.

(j) Includes an $11 million tax benefit, reflecting a $74
million favorable adjustment from the finalization of
the Company’s 1997 through 2000 U.S. federal in-
come tax audit, a $43 million provision for deferred
taxes related to earnings being repatriated under the
American Jobs Creation Act of 2004, and $20 mil-
lion of other tax charges.

(k) Includes a $14 million charge before taxes ($9 mil-
lion after taxes) for organizational restructuring pro-
grams, a $16 million charge before taxes ($10
million after taxes) for losses on early debt ex-
tinguishment, 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 mil-
lion before taxes ($4 million after taxes) for the net
reversal of restructuring and realignment reserves no
longer required.

(l) Includes net income of Weldwood of Canada, Lim-
ited, and CHH prior to their sales. 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) from the sale of the
CHH Tissue business in the 2004 third quarter, and
a charge of $306 million before taxes ($716 million
after taxes) to write down the assets of Weldwood to
their estimated net realizable value. The 2004 fourth
quarter also includes a charge of $17 million before
taxes ($5 million credit after taxes) to adjust the loss
on the sale of Weldwood.

(m)Includes a $32 million charge before taxes ($20 mil-
lion after taxes) for organizational restructuring pro-
grams, a $65 million charge before taxes ($40
million after taxes) for losses on early debt ex-
tinguishment, a charge of $31 million before taxes
($29 million after taxes) for estimated losses of
businesses held for sale, and a credit of $6 million
before taxes ($3 million after taxes) for the net re-
versal of restructuring and realignment reserves no
longer required.

(n) Includes a $32 million increase in the income tax
provision reflecting an adjustment of deferred tax
balances.

(o) Includes an $18 million charge before taxes ($11
million after taxes) for organizational restructuring
programs, a charge of $8 million before taxes ($5
million after taxes) for losses on early debt ex-
tinguishment, a credit of $103 million before taxes
($64 million after taxes) for insurance recoveries re-
lated to the hardboard siding and roofing litigation, 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.

(p) Includes a $10 million charge before taxes ($6 mil-
lion after taxes) for litigation settlements, a $3 mil-
lion 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 in-
surance 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.

ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures:

As of December 31, 2005, 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 the design and operation of our dis-
closure controls and procedures, pursuant to 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 effec-
tive to ensure that information required to be disclosed
by us in reports we file under the Act is recorded, proc-
essed, summarized, and reported by the 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

reporting,

Our management is responsible for establishing and
maintaining adequate internal controls over our finan-
cial
including the safeguarding of assets
against unauthorized acquisition, use or disposition.
These controls are designed to provide reasonable assur-
ance to management and the Board of Directors regard-
ing
financial
reliable
statements and such asset safeguarding, and the prepara-
tion of our consolidated financial statements in accord-
ance with accounting principles generally accepted in
the United States (GAAP). Our internal control over
financial reporting includes those policies and proce-
dures that:

preparation

published

(cid:127) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets;
(cid:127) provide reasonable assurance that transactions
are recorded properly to allow for the prepara-
tion of financial statements in accordance with
GAAP, and that our receipts and expenditures
are being made only in accordance with
authorizations of our management and direc-
tors;

(cid:127) provide reasonable assurance regarding pre-
vention or timely detection of unauthorized
acquisition, use, or disposition of our assets that

could have a material effect on our con-
solidated financial statements; and

(cid:127) provide reasonable assurance as to the de-

tection of fraud.

All internal control systems have inherent limi-
tations, including the possibility of circumvention and
overriding of controls, and therefore can provide only
reasonable assurance as to such financial statement
preparation and asset safeguarding. The system is sup-
ported by written policies and procedures, contains self-
monitoring mechanisms, and is audited by the internal
function. Appropriate actions are taken by
audit
management to correct deficiencies as they are identi-
fied.

As of December 31, 2005, management has assessed
the effectiveness of the Company’s internal control over
financial reporting. In a report included on page 38,
management concluded that, based on its assessment,
the Company’s internal control over financial reporting
is effective as of December 31, 2005.

In making this assessment, we used the criteria de-
scribed in “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of
the Treadway Commission.

Our independent registered public accounting firm,
Deloitte & Touche LLP, with direct access to our Board
of Directors through our Audit Committee, have aud-
ited the consolidated financial statements prepared by
us. Their report on the consolidated financial statements
is included in Part II, Item 8. Financial Statements and
Supplementary Data. Our management’s assessment of
our internal control over financial reporting has been
audited by Deloitte & Touche LLP, as stated in their
report included herein.

Management’s Process to Assess the Effectiveness
of Internal Control Over Financial Reporting

To comply with the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002, we followed a
comprehensive compliance process across the enterprise
to evaluate our internal control over financial reporting,
engaging employees at all levels of the organization. Our
internal control environment includes an enterprise-
wide attitude of integrity and control consciousness that
establishes a positive “tone at the top.” This is exempli-
fied 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 our business, which
have been distributed to all employees; a toll-free tele-
phone helpline whereby any employee may report sus-
pected violations of law or our policy; and an office of
ethics and business practice. The internal control system
further includes careful selection and training of super-

visory and management personnel, appropriate dele-
gation of authority and division of
responsibility,
dissemination of accounting and business policies
throughout the Company, and an extensive program of
internal audits with management follow-up. Our Board
of Directors, assisted by the Audit and Finance
Committee, monitors the integrity of our financial
statements and financial reporting procedures, the per-
function and in-
internal audit
formance of our
dependent auditors, and other matters set forth in its
charter. The Committee, which currently consists of
four independent directors, meets regularly with repre-
sentatives of management, and with the independent
auditors and the Internal Auditor, with and without
management representatives in attendance, to review
their activities.

Changes in Internal Control over Financial
Reporting

The Company has ongoing initiatives to stand-
ardize and upgrade its financial, operating and supply
chain systems. The system upgrades will be implemented
in stages, by business, over the next several years. Man-
agement believes the necessary procedures are in place
to maintain effective internal controls over financial
reporting as these initiatives continue.

During the fourth quarter of 2005, the Company
transitioned certain support activities for selected main-
frame and AS400 legacy information systems to a third-
party service provider. Based on post-transition testing,
management believes the necessary procedures are in
place to maintain effective internal controls over finan-
cial reporting for these support services.

ITEM 9B. OTHER INFORMATION

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

Information concerning our directors is hereby in-
corporated by reference to our definitive proxy state-
ment that 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 fi-
nancial expert, as that term is defined in Item 401(h) of
Regulation S-K. Further information concerning the
composition of the Audit and Finance Committee and
our audit committee financial experts is hereby in-
corporated by reference to our definitive proxy state-
ment 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 3 and 4
in Part
the caption,
this Form 10-K under
“Executive Officers of the Registrant.”

I of

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 the election of successors, subject
to removal by the Board.

The Company’s Code of Business Ethics (Code) 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 dis-
close any amendments to our Code and any waivers
from a provision of our Code 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 them, our Corporate
Governance Principles, our Code of Business Ethics and
the Charters of our Audit and Finance Committee,
Compensation
Management
Committee, Governance Committee and Public Policy
and Environment Committee. Requests for copies may
be directed to the corporate secretary at our corporate
headquarters.

Development

and

Information with respect to compliance with Sec-
tion 16(a) of the Securities and Exchange Act is hereby
incorporated by reference to our definitive proxy state-
ment 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 in-
corporated by reference to our definitive proxy state-
ment 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 AND RELATED
STOCKHOLDER MATTERS

A description of the security ownership of certain
beneficial owners and management and equity compen-
sation plan information is hereby incorporated by refer-
ence to our definitive proxy statement that 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.

ITEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES

Information with respect to fees paid to, and serv-
ices 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 that 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 State-

ments and Supplementary Data.

(2) Financial Statement Schedules – The following addi-
tional financial data should be read in conjunction with
the financial statements in Item 8. Schedules not in-
cluded with this additional financial data have been
omitted because they are not applicable, or the required
information is shown in the financial statements or the
notes thereto.

Additional Financial Data
2005, 2004 and 2003

Report of Independent Registered Public Account-
ing Firm on Financial Statement Schedule for
2005, 2004 and 2003 . . . 88

Consolidated Schedule: II-Valuation and Qualify-
ing Accounts. . . . . . . . . . .89

(3) Exhibits:

(3.1)

(3.2)

(3.3)

(3.4)

Form of Restated Certificate of Incorporation
of
International Paper Company (incor-
porated by reference to the Company’s Report
on Form 8-K dated November 20, 1990,
File No. 1-3157).

Incorporation of

Certificate of Amendment to the Certificate
International Paper
of
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).

Incorporation of

Certificate of Amendment of the Certificate
of
International Paper
Company (incorporated by reference to Ex-
hibit 3.1 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30,
2001, File No. 1-3157).

amended
the Company,
By-laws of
(incorporated by reference to the Company’s
Annual Report on Form 10-K for the year
ended December 31, 2001, File No. 1-3157).

(4.1)

(4.2)

(4.3)

(4.4)

(4.5)

(4.6)

(4.7)

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, be-
tween International Paper and The Bank of
New York, as Trustee (incorporated by refer-
ence 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 Interna-
tional 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 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 Sep-
tember 7, 2001, October 31, 2001, and Jan-
uary 16, 2002, File No. 333-69082).

(4.8)

(4.9)

(4.10)

(4.11)

(10.1)

(10.2)

(10.3)

between

International

6.75% Notes due 2011 Supplemental In-
denture
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 Interna-
tional 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
File
No. 1-3157).

December

2003,

31,

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).

with

accordance

In
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 re-
quest.

Amended and Restated Long-Term In-
centive Compensation Plan, as of Febru-
ary 2, 2005 (incorporated by reference to
Exhibit 99.1 of the Company’s Report on
Form 8-Q dated February 11, 2005, File
No. 1-3157).

Confidentiality

Form
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).

Management Incentive Plan, amended and
restated as of January 1, 2005 (incorporated
by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2005,
File No. 1-3157).

(10.4)

(10.5)

(10.6a)

(10.6b)

(10.7)

(10.8)

(10.9)

(10.10)

Form of individual non-qualified stock op-
tion 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 De-
cember 31, 2001, File No. 1-3157).

Compensation

individual executive continuity
Form of
the Company Long-Term
award under
Incentive
Plan
(incorporated by reference to Exhibit 10.9
to the Company’s Annual Report on Form
10-K for
the fiscal year ended De-
cember 31, 1999, File No. 1-3157).

Form of Change of Control Agreement—
Tier I (incorporated by reference to Exhibit
10.8b to the Company’s Report on Form
8-K filed on October 17, 2005, File
No. 1-3157).

Form of Change of Control Agreement—
Tier II (incorporated by reference to Ex-
hibit 10.4 to the Company’s Report on
Form 8-K filed on October 17, 2005, File
No. 1-3157).

Unfunded Supplemental Retirement Plan
for Senior Managers, as amended and re-
stated (incorporated by reference to Ex-
hibit 10.2 to the Company’s Report on
Form 10-Q for the quarter ended June 30,
2005, File No. 1-3157).

Amendment to Unfunded Supplemental
Retirement Plan for Senior Managers, as
amended and restated (incorporated by
reference to Exhibit 10.1 to the Company’s
Report on Form 8-K filed on February 17,
2006, File No. 1-3157).

International Paper Company Deferred
Compensation 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 Re-
storation Plan for Salaried Employees
(incorporated by reference to Exhibit 10.12
to the Company’s Form 10K/A for the year
2000
File
dated
No. 1-3157).

January

2002,

16,

(10.14)

(10.15)

(10.16)

(11)

(12)

EUR500 million 5-year credit
facility,
dated as of August 6, 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 finan-
cial institutions named therein and BNP
Paribas, as facility agent (incorporated by
reference to Exhibit 10.4 to the Compa-
ny’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, File
No. 1-3157).

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
File
No. 1-3157).

2003,

31,

Agreement dated November 21, 2005,
U.S. $800,000,000 Credit Facilities for
International
Investments
Paper
(Luxembourg) S.ar.l., arranged by ABN
AMRO Bank N.V., The Bank of Tokyo-
Mitsubishi Ltd., New York Branch, BNP
Paribas, Citigroup Global Markets Limited
and Deutsche Bank AG, London Branch,
with BNP Paribas as Facility Agent
(incorporated by reference to Exhibit 10.1
to the Company’s Report on Form 8-K
dated November 23, 2005, File No.
1-3157).

Statement of Computation of Per Share
Earnings.

to
Computation of Ratio of Earnings
Fixed Charges and Preferred Stock Divi-
dends.

(21)

List of Subsidiaries of Registrant.

(10.11)

(10.12)

(10.13)

$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 Syndi-
cation 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 refer-
ence to Exhibit 10.1 of the Company’s
Quarterly Report on Form 10-Q for the
ended March 31, 2003, File
quarter
No. 1-3157).

Securities,

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
as
Co-Documentation Agents, J.P. Morgan
Securities Inc., and Banc of America Secu-
rities LLC, as Lead Arrangers and Joint
Bookrunners, and JP Morgan 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).

Inc.,

Amended and Restated Credit and Secu-
rity 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 Guaran-
tor, The Conduits from Time to Time
Party
thereto, The Bank of Tokyo-
Mitsubishi, Ltd., New York Branch, as
Gotham Agent, JP Morgan Chase Bank,
N.A., as Prefco Agent, BNP Paribas, Act-
ing through its New York Branch, as Star-
Bird 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).

(23)

(24)

(31.1)

(31.2)

Consent of Independent Registered Public
Accounting Firm.

(32)

Power of Attorney (contained on the sig-
nature page).

(99.1)

Certification by John V. Faraci, Chairman
and Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act
of 2002.

Certification by Marianne M. Parrs,
Chief Financial Officer, pursuant to Sec-
the Sarbanes-Oxley Act
tion 302 of
of 2002.

(99.2)

Certification Pursuant to 18 U.S.C. Sec-
tion 1350, as adopted pursuant
to Sec-
tion 906 of the Sarbanes-Oxley Act of 2002.

Board Policy on Severance Agreements
with Senior Executives (incorporated by
reference to Exhibit 10.1 to the Company’s
Report on Form 8-K filed on October 17,
2005, File No. 1-3157).

Board Policy on Change of Control Agree-
ments (incorporated by reference to Exhibit
10.2 to the Company’s Report on Form 8-K
filed on October 17, 2005, File No. 1-3157).

R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M O N F I N A N C I A L S T A T E M E N T S C H E D U L E
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, 2005 and 2004, and for each of the three years in the period ended December 31, 2005,
management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of De-
cember 31, 2005, and the effectiveness of the Company’s internal control over financial reporting as of December 31,
2005, and have issued our reports thereon dated March 2, 2006; such consolidated financial statements and reports are
included in your 2005 Annual Report to Shareholders and are included elsewhere in this Form 10-K. Our audits also in-
cluded 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 2, 2006

S C H E D U L E I I – V A L U A T I O N A N D Q U A L I F Y I N G A C C O U N T S

INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(In millions)

SCHEDULE II

Description

Reserves Applied Against Specific Assets Shown on

Balance Sheet:
Doubtful accounts – current
Restructuring reserves

For the Year Ended December 31, 2005
Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Additions
Charged to
Earnings

Balance at
Beginning
of Period

Balance at
End
of Period

$124
–

$18
106

$–
–

$(32)(a)
(66)(b)

$110
40

Description

Reserves Applied Against Specific Assets Shown on Balance

Balance at
Beginning
of Period

For the Year Ended December 31, 2004
Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Additions
Charged to
Earnings

Balance at
End
of Period

Sheet:
Doubtful accounts – current
Restructuring reserves

$132
81

$18
64

$–
–

$(26)(a)
(145)(b)

$124
–

Description

Reserves Applied Against Specific Assets Shown on Balance

Balance at
Beginning
of Period

For the Year Ended December 31, 2003
Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Additions
Charged to
Earnings

Balance at
End
of Period

Sheet:
Doubtful accounts – current
Restructuring reserves

$163
104

$19
152

$–
–

$(50)(a)
(175)(b)

$132
81

(a) Includes write-offs, 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.

March 6, 2006

INTERNATIONAL PAPER COMPANY

By:

/S/ MAURA A. SMITH
Maura A. Smith
Senior Vice President, General Counsel
and Corporate Secretary

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and ap-
points Maura A. Smith and Nicole S. Jones, 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 or her and in his or her 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 perform 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 fol-

lowing persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/S/

JOHN V. FARACI
John V. Faraci

Chairman of the Board, Chief

March 6, 2006

Executive Officer and
Director

/S/ MARTHA FINN BROOKS

Director

Martha Finn Brooks

/S/ SAMIR G. GIBARA

Samir G. Gibara

/S/

JAMES A. HENDERSON
James A. Henderson

Director

/S/ W. CRAIG MCCLELLAND

Director

W. Craig McClelland

/S/ DONALD F. MCHENRY

Director

Donald F. McHenry

/S/

JOHN F. TURNER
John F. Turner

Director

March 6, 2006

Signature

Title

Date

/S/ WILLIAM G. WALTER

Director

William G. Walter

/S/ ALBERTO WEISSER

Director

Alberto Weisser

/S/ MARIANNE M. PARRS

Marianne M. Parrs

Executive Vice President and
Chief Financial Officer

/S/ ROBERT J. GRILLET

Robert J. Grillet

Vice President – Finance

and Controller

March 6, 2006

[THIS PAGE INTENTIONALLY LEFT BLANK]

2005 Listing of Facilities

(all facilities are owned except noted otherwise)

PRINTING PAPERS

Business Papers, Coated 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)

Quinnesec, Michigan

Sturgis, Michigan

(C & D Center)

Sartell, Minnesota

Ticonderoga, New York

Riegelwood, North Carolina

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

Svetogorsk, Russia

Inverurie, Scotland

Terre Haute, Indiana

Mansfield, Louisiana

Pineville, Louisiana

Vicksburg, Mississippi

International:

Hong Kong, China

Arles, France

Kenitra, Morocco

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

Hartford City, Indiana
Portland, Indiana leased
Lexington, Kentucky

Lafayette, Louisiana

Shreveport, Louisiana

Springhill, Louisiana

INDUSTRIAL AND CONSUMER

Auburn, Maine

PACKAGING

INDUSTRIAL PACKAGING

Containerboard

U.S.:

Prattville, Alabama

Savannah, Georgia

Brownstown, Michigan

Howell, Michigan

Kalamazoo, Michigan

Minneapolis, Minnesota

Houston, Mississippi

Kansas City, Missouri
North Kansas City, Missouri leased
Geneva, New York

A-1

Appendix I

King’s Mountain, North Carolina

Statesville, North Carolina
Bethesda, Ohio leased
Cincinnati, Ohio

Newark, Ohio

Solon, Ohio

Wooster, Ohio

Eighty-four, Pennsylvania

Lancaster, Pennsylvania

Mount Carmel, 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

Beijing, China

Chengdu, China

Dalian, China

Guangzhou, China

Shenyang, China

Tianjin, China

Arles, France

Chalon-sur-Saone, France

Creil, France

LePuy, France

Mortagne, France

Guadeloupe, French West Indies

Asbourne, Ireland

Bellusco, Italy

Catania, Italy

Pomezia, Italy

San Felice, Italy

Agadir, Morocco

(2 locations)
1 leased

Casablanca, Morocco

Kenitra, Morocco
Alcala, Spain leased

Almeria, Spain
Barcelona, Spain
Bilbao, Spain
Gandia, Spain
Valladolid, Spain
Chonburi, Thailand
Thrapston, United Kingdom
Winsford, United Kingdom

Kraft Paper

Courtland, Alabama
Bastrop, Louisiana
Roanoke Rapids, North Carolina
Franklin, Virginia

CONSUMER PACKAGING

D.N. Ashrat, Israel
Mexico City, Mexico

Shorewood Packaging

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

Bleached Board

International:

Pine Bluff, Arkansas
Augusta, Georgia
Riegelwood, North Carolina
Prosperity, South Carolina
Texarkana, Texas

Beverage Packaging

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
Jeddah, Saudi Arabia
Seoul, South Korea
Taipei, Taiwan
Guacara, Venezuela

Foodservice
U.S.:

Visalia, California
Shelbyville, Illinois
Kenton, Ohio

International:

Brisbane, Australia
Shanghai, China
Bogota, Columbia
Chesire, England

Brockville, Ontario, Canada
Smith Falls, Ontario, Canada
Toronto, Ontario, Canada
Guangzhou, China
Sacheon, South Korea
Ebbw Vale, Wales, United Kingdom

DISTRIBUTION

xpedx

U.S.:

Stores Group
Chicago, Illinois

137 locations nationwide

128 leased

South Central Region
Greensboro, North Carolina
34 branches in the Southeast States
and Ohio

21 leased
Midwest Region
Denver, Colorado
33 branches in the Great Lakes,
Mid-America, Rocky Mountain
and South Plain States
20 leased

West Region
Downey, California
25 branches in the
Northwest and Pacific States

19 leased
Northeast Region
Hartford, Connecticut
21 branches in the New England
and Middle Atlantic States

16 leased

A-2

Appendix I

International:
Mexico (20 locations)

all leased

FOREST PRODUCTS

Forest Resources

U.S.:

Approximately 6.5 million acres
in the South and North

International:

Approximately 1.3 million
acres in Brazil

Wood Products

U.S.:

Chapman, Alabama
Citronelle, Alabama
Maplesville, Alabama
Opelika, Alabama
Thorsby, Alabama
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

SPECIALTY BUSINESSES AND OTHER

Chemicals
U.S.:

Panama City, Florida
Pensacola, Florida
Port St. Joe, Florida
Savannah, Georgia
Valdosta, Georgia
Dover, Ohio

Appendix I

International:

Oulu, Finland

Niort, France

Sandarne, Sweden

Bedlington, United Kingdom

Chester-le-Street, United Kingdom

Chocolate Bayou Water Company

Alvin, Texas

IP Mineral Resources

Houston, Texas leased

Polyrey

Couze, France

Ussel, France

A-3

2005 CAPACITY INFORMATION

(in thousands of short tons)

Printing Papers

Uncoated Freesheet (1)

Bristols

Uncoated Papers and Bristols

Coated Freesheet

Coated Groundwood

Total Coated Papers

Uncoated Groundwood (SC Paper)

Total Coated & SC Papers

Dried Pulp

Newsprint

Total Printing Papers

Industrial Packaging

Containerboard

Kraft Paper

Consumer Packaging

Bleached Board

Total Packaging

Forest Products

U.S. Wood Business

21 Lumber mills (bd. ft.)

5 Plywood mills (sq. ft. 3/8" basis)

1 Laminated Veneer Lumber mill (cubic ft.)

2 Pole plants (cubic ft.)

Forest Resources

We own, manage or have an interest in more than 8 million

acres of forestlands worldwide. These forestlands and

associated acres are located in the following regions:

South

North

Total U.S.

Brazil

Total

We have harvesting rights in:

Russia

Total

Appendix II

U.S.

Europe

Americas,
other
than U.S.

3,700

835
4,535

700

1,200
1,900

100
2,000

1,325

—

1,290

—
1,290

—

—
—

228

123

447

—
447

—

221
221

—
221

—

Total

5,437

835
6,272

700

1,421
2,121

100
2,221

1,566

123

7,860

1,641

681

10,182

4,600

515

5,115

1,800

6,915

180

—

180

252

432

—

4,780

515

5,295

2,052

7,347

(Units - MM)

2,507

1,587

(M Acres)

5,701

826

6,527

1,282

7,809

502

(1) Reflects the shutdown of paper machines in Bastrop, Louisiana, Pensacola, Florida and Jay, Maine.

A-4

SENIOR LEADERSHIP

John V. Faraci
Chairman and
Chief Executive Officer

LH Puckett

Jeffrey A. Hearn

Senior Vice President
Coated and SC Papers

Vice President
Project Topaz

Robert M. Amen*

Carol Roberts

President

Newland A. Lesko

Executive Vice President
Manufacturing and Technology

Marianne M. Parrs

Executive Vice President and
Chief Financial Officer

Senior Vice President
IP Packaging Solutions

Maura Abeln Smith
Senior Vice President
General Counsel,
Corporate Secretary and
Public Affairs

John Balboni

Senior Vice President
Chief Information Officer

Michael J. Balduino
Senior Vice President
Foodservice and Beverage
Packaging
President, Shorewood Packaging

H. Wayne Brafford
Senior Vice President
Printing & Communications Papers

Jerome N. Carter
Senior Vice President
Human Resources and
Communications

C. Cato Ealy

Senior Vice President
Corporate Development

W. Michael Amick Jr.

Vice President
Supply Chain – North America

David A. Bailey
Vice President
International Paper Europe

Aleesa L. Blum
Vice President
Communications

Paul Brown
Vice President
European Container

Dennis J. Colley

Vice President
Containerboard

Jim Connelly
Vice President
xpedx

Thomas E. Gestrich
Senior Vice President
President, International Paper Asia

William P. Crawford

Vice President
Global Sourcing

Paul Herbert

Senior Vice President
Strategic Initiatives

Thomas G. Kadien
Senior Vice President
President, xpedx

Mary Laschinger

President
International Paper Europe

Andrew R. Lessin
Senior Vice President
Internal Audit

Maximo Pacheco
Senior Vice President
President, International
Paper do Brasil

retired March 31, 2006

Arthur J. Douville

Vice President
xpedx

Michael P. Exner

Vice President, Manufacturing
Containerboard and
Kraft 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

Peter Heist
Vice President
Coated Paperboard

William Hoel
Vice President
Container The Americas

Robert M. Hunkeler

Vice President
Trusts & Investments

Tommy S. Joseph

Vice President
Technology

Paul J. Karre
Vice President
Human Resources

Tim Kelly

Vice President,
Manufacturing and
Technology
International Paper Europe

Timothy P. Keneally

Vice President
Kraft Papers

Austin E. Lance
Vice President
Foodservice

David A. Liebetreu

Vice President
Forest Resources

Richard B. Lowe

Vice President
xpedx

Gerald C. Marterer

Vice President
Arizona Chemical

Brian McDonald

Vice President
Investor Relations

William A. Merrigan

Vice President
Global Supply Chain, Deliver

J. Scott Murchison

Vice President
Beverage Packaging

Ted R. Niederriter
Vice President and
Deputy General Counsel
Legal

Timothy S. Nicholls

Vice President and
Chief Financial Officer
International Paper Europe

Larry Norton
Vice President,
Manufacturing
Printing & Communications
Papers

Jean-Michel Ribieras

Vice President
Converting Papers and Pulp

Barbara L. Smithers

Vice President and
Chief Counsel
Legal

Darial R. Sneed
Vice President
Investor Relations

David B. Struhs
Vice President
Environmental, Health and
Safety

Mark S. Sutton
Vice President
Strategic Planning

Greg Wanta
Vice President,
Manufacturing
Coated Paperboard

Tom Weisenbach

Vice President
xpedx

Robert W. Wenker
Vice President and
Chief Technology Officer
Information Technology

Ann Wrobleski
Vice President
Public Affairs

DIRECTORS

SHAREHOLDER INFORMATION

John V. Faraci
Chairman and
Chief Executive Officer
International Paper Company

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

John F. Turner

Former Assistant Secretary of State
for Oceans and International
and Scientific Affairs

William G. Walter

Chairman, President and
Chief Executive Officer
FMC Corp.

Alberto Weisser
Chairman and
Chief Executive Officer
Bunge Limited

Papers used in this annual report:
Carolina® C2S Cover, 8 pt.,
made by our employees
at the Riegelwood, N.C., Mill.

Accent® Opaque, White,
Smooth, 80 lb. text,
made by our employees
at the Ticonderoga, N.Y., Mill.

Accent® Opaque, White,
Smooth, 50 lb. text,
made by our employees
at the Ticonderoga, N.Y., Mill.

Printed in the United States
by RR Donnelley.

Design: Perdue Creative, Memphis, Tenn.

Photography: Woody Woodliff, Memphis, Tenn.;
Tracey Kroll, Stamford, Conn.

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 8:30 a.m., Monday, May 8, 2006 at the
Hyatt Regency Greenwich, Old Greenwich, Connecticut.

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
Newport Office Center VII
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
Telephone Number: 1-800-678-8715
Foreign Shareholders: 1-201-680-6578
www.melloninvestor.com/isd

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 Registered Public Accounting Firm
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.

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

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

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 3006, K. Wah Center
1010 Huaihai Zhong Road
Shanghai, 200031
P. R. China
86-21-6113-3200

*As of July 1, 2006, global
headquarters will be located
in Memphis, Tenn.

I N T E R N AT I O N A L PA P E R S E N I O R L E A D E R S H I P

Seated, first row, from left: John Faraci, chairman and chief executive officer; Newland Lesko, executive vice president,
Manufacturing and Technology; and Marianne Parrs, executive vice president and chief financial officer.

Seated, second row, from left: Mary Laschinger, president, International Paper Europe; Wayne Brafford, senior vice president,
Printing & Communications Papers; and Tom Kadien, senior vice president and president, xpedx.

Standing, from left, Andy Lessin, senior vice president, Internal Audit; Paul Herbert, senior vice president, Strategic Initiatives;
Tom Gestrich, senior vice president and president, IP Asia; Cato Ealy, senior vice president, Corporate Development; Maura
Smith, senior vice president, general counsel/corporate secretary and Public Affairs; Jerry Carter, senior vice president,
Human Resources and Communications; Maximo Pacheco, senior vice president and president, IP do Brasil; John
Balboni, senior vice president and chief information officer; Carol Roberts, senior vice president, IP Packaging Solutions;
Mike Balduino, senior vice president, Foodservice and Beverage Packaging, and president, Shorewood Packaging.

www.internationalpaper.com

Listed on the New York Stock Exchange

Equal Opportunity Employer
(M/F/D/V)