International Paper Company Annual Report 2006

FY2006 Annual Report · International Paper Company

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In 2006, we further improved our
paper and packaging businesses by
expanding our margins, reducing
costs, improving productivity,
selectively growing our volume and
improving our mix. The foundation
for this progress continues to be our
focus on our three drivers of People,
Operational Excellence and Customers.

We are taking a disciplined
approach to selective reinvestments
in strategic opportunities that have
good returns. We completed joint
ventures in China in 2006 and an
asset swap in Brazil in early 2007
and are working toward forming
a joint venture in Russia – each of
these provides growth opportuni-
ties and helps us better serve our
global customers.

In 2006, we returned value to
shareowners through approxi-
mately $1.4 billion in share
repurchases. Over the long-term,
our goal remains the same –
having the #1 return versus our
peer group and earning more than
our cost of capital. In executing
“Year 2” of our plan, we will
continue to set our priorities and
targets to improve our earnings
and returns as we build a stronger,
more valuable International Paper.

The design above can be punched out
and folded into a cube to create a
desktop reminder of International Paper’s
transformation plan.

We focused our portfolio on
businesses where we have a
strong position on a global basis
and the ability to outperform the
competition – paper and packaging.
Complemented by our North
American distribution business,
xpedx, these are the right businesses
for International Paper.

As part of our transformation, we
committed to using part of our
proceeds from divestitures to
improve our balance sheet and
maintain our financial flexibility.
By year-end 2006, we had reduced
debt by $6.2 billion since the plan
began and made a $1 billion
voluntary contribution to our U.S.
pension fund.

The International Paper story for 2006 really
began in July 2005 when we announced a major
transformation plan to change and improve our
company. At that time, we made big, important
choices about what the future of International Paper
is going to be – a better, stronger, more competitive
and more profitable company. We made a lot of
progress during 2006 – “Year 1” of executing our
plan – in each of five elements of the transformation.

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, 2006

‘ 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.)

6400 Poplar Avenue
Memphis, Tennessee
(Address of principal executive offices)

38197
(Zip Code)

Registrant’s telephone number, including area code: (901)419-7000

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

Title of each class

Name of each exchange on which registered

Common Stock, $1 per share par value

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 Secu-
rities 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 (paragraph 229.405 of this
chapter) 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, 2006) was approximately $15,926,970,664.

The number of shares outstanding of the Company’s common stock, as of February 23, 2007 was 452,587,634.

Documents incorporated by reference:

Portions of the registrant’s proxy statement filed within 120 days of the close of the registrant’s fiscal year in connection
with registrant’s 2007 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, 2006

PART I.

ITEM 1.

ITEM 1A.

ITEM 1B.

ITEM 2.

ITEM 3.

ITEM 4.

PART II.

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

RISK FACTORS.

UNRESOLVED STAFF COMMENTS.

PROPERTIES.
Forestlands
Mills and Plants
Capital Investments and Dispositions

LEGAL PROCEEDINGS.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

ITEM 6.

ITEM 7.

SELECTED FINANCIAL DATA.

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

1
1
1
2
2
2
3
4
4
4
4
5
5

7
8
8

14
16
17
23
24
29
33
35
36
38
38
40
41
41
42

INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2006

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

RISK.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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.

ITEM 9B.

PART III.

ITEM 10.

ITEM 11.

ITEM 12.

CONTROLS AND PROCEDURES.

OTHER INFORMATION.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

EXECUTIVE COMPENSATION.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND

DIRECTOR INDEPENDENCE.

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 2006 LISTING OF FACILITIES

APPENDIX II 2006 CAPACITY INFORMATION

47
49
50
51
52
53
89

99
100

101

A-1

A-3

PART I.

ITEM 1. BUSINESS

GENERAL

International Paper Company (the “Company” or
“International Paper,” which may also be referred to
as “we” or “us”), is a global 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 organized in 1898. Our home page on
the Internet is www.internationalpaper.com. You can
learn more about us by visiting that site.

In the United States at December 31, 2006, the
Company operated 18 pulp, paper and packaging
mills, 94 converting and packaging plants, 24 wood
products facilities and six specialty chemicals plants.
Production facilities at December 31, 2006 in Europe,
Asia, Latin America and South America included six
pulp, paper and packaging mills, 51 converting and
packaging plants, and five specialty chemicals plants.
We distribute printing, packaging, graphic arts,
maintenance and industrial products principally
through over 268 distribution branches located
primarily in the United States. At December 31, 2006,
we owned or managed approximately 500,000 acres
of forestlands in the United States, approximately
370,000 acres in Brazil and had, through licenses and
forest management agreements, harvesting rights
on approximately 500,000 acres of government-
owned forestlands in Russia. Substantially all of our
businesses have experienced, and are likely to con-
tinue to experience, cycles relating to industry
capacity and general economic conditions.

For management and financial reporting purposes,
our businesses are separated into six segments:
Printing Papers;
Industrial Packaging; Consumer
Packaging; Distribution; Forest Products; and Spe-
cialty Businesses and Other. A description of these
business segments can be found on pages 23 and 24
of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations. A
discussion of the Company’s Transformation Plan to
concentrate on two key global platform businesses,
Uncoated Papers (including Distribution) and Pack-
aging, can be found on pages 33 through 35 of
Item 7.

From 2002 through 2006, International Paper’s capi-
tal expenditures approximated $5.1 billion, excluding
mergers and acquisitions. These expenditures reflect

our continuing efforts to improve product quality
lower costs and
and environmental performance,
improve forestlands. Capital spending for continuing
operations in 2006 was approximately $1.0 billion
and is expected to be approximately $1.2 billion in
2007. This amount is about the same as our expected
annual depreciation and amortization expense. You
can
capital
expenditures on page 30 of Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations.

find more

information

about

Discussions of acquisitions can be found on page 30
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 20 through 22 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

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

section of our

to,

FINANCIAL INFORMATION CONCERNING
INDUSTRY SEGMENTS

The financial information concerning segments is set
forth on pages 43 and 44 of Item 8. Financial State-
ments and Supplementary Data.

FINANCIAL INFORMATION ABOUT
INTERNATIONAL AND DOMESTIC
OPERATIONS

The financial
information concerning international
and domestic operations and export sales is set forth
on page 44 of Item 8. Financial Statements and
Supplementary Data.

COMPETITION AND COSTS

MARKETING AND DISTRIBUTION

Despite the size of the Company’s manufacturing
capacity for paper, paperboard, packaging and pulp
products, the markets in all of the cited product lines
are large and highly fragmented. The markets for
wood and specialty products are similarly large and
fragmented. There are numerous competitors, and
the major markets, both 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 produced 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
impact of prices and costs on operating profits on
pages 14 through 29 of Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and
Results of Operations. You can find information
about the Company’s manufacturing capacities on
page A-3 of Appendix II.

The Company sells paper, packaging products, build-
ing materials and other products directly to end
users and converters, as well as through agents,
resellers and paper distributors. We own a large
merchant distribution business that sells products
made both by International Paper and by other
companies making paper, packaging and graphic
arts supplies. Sales offices are located throughout
the United States as well as internationally.

DESCRIPTION OF PRINCIPAL PRODUCTS

The Company’s principal products are described on
pages 23 and 24 of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.

SALES VOLUMES BY PRODUCT

Sales volumes of major products for 2006, 2005 and 2004 were as follows:

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

Printing Papers (In thousands of tons)

Brazil Uncoated Papers
Europe & Russia Uncoated Papers and Bristols
U.S. Uncoated Papers and Bristols

Uncoated Papers and Bristols
Coated Papers (3)
Market Pulp (4)

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
Coated Bristols
Saturated and Bleached Kraft Papers

(1) Includes third-party and inter-segment sales.

2006

2005

2004

477

461
447
1,455 1,419 1,409
3,991 3,850 4,179

5,923 5,716 6,049
1,168 1,996 1,757
1,124 1,291 1,422

3,628 3,578 2,821
1,267 1,073 1,049
745
421

525

5,420 5,072 4,615
1,816 1,937 2,090
1,503 1,264 1,000
435
411
272
242

410
232

(2) Sales volumes for divested businesses are included through the date of sale, except for divested businesses classified as discontinued

operations.

(3) Sold in the third quarter of 2006. International Paper has a 10% continuing interest in the owning entity.

(4) Includes internal sales to mills.

RESEARCH AND DEVELOPMENT

laboratories. Additionally,

The Company operates its primary research and
development center at Loveland, Ohio, with smaller
facilities in Savannah, Georgia, a regional center for
applied forest research in Bainbridge, Georgia, and
several product
the
Company has a 1/3 interest in ArborGen, LLC, a joint
venture with certain other forest products and bio-
research and
technology companies. We direct
development activities to short-term, long-term and
technical assistance needs of customers and operat-
ing divisions and to process, equipment and product
innovations. Activities include studies on innovation
and improvement of pulping, bleaching, chemical
recovery, papermaking and coating processes;
packaging design and materials development;
reduction of environmental discharges; re-use of raw
materials in manufacturing processes; recycling of
consumer and packaging paper products; energy
conservation; applications of computer controls to
and
manufacturing
improvement of products; and development of vari-
ous new products. Our development efforts specifi-
cally address product safety as well as the
minimization of solid waste. The cost to the Com-
pany of its research and development operations
was $45 million in 2006, $63 million in 2005, and $67
million in 2004.

innovations

operations;

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

ENVIRONMENTAL PROTECTION

Information concerning the effects of the Company’s
compliance with federal, state and local provisions
enacted or adopted relating to environmental pro-
tection matters is set forth on pages 40 and 41 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

EMPLOYEES

As of December 31, 2006, we had approximately
60,600 employees, 42,000 of whom were located in

the United States. Of the U.S. employees, approx-
imately 27,700 are hourly, with unions representing
approximately 16,300 employees. Approximately
13,000 of the union employees are represented by
the United Steel Workers under individual location
contracts.

During 2006, new labor agreements were ratified at
four paper mills, with one paper mill, Savannah,
Georgia, carrying over to be ratified in early 2007. In
addition, negotiations at the Terre Haute, Indiana,
mill have also been carried over into 2007. During
2007, labor agreements are scheduled to be nego-
three additional paper mill operations
tiated at
including Georgetown, South Carolina; Vicksburg,
Mississippi; and Riverdale, Alabama.

During 2006, 25 labor agreements were settled in
non-paper mill operations. Settlements included
paper converting, chemical, distribution, consumer
packaging and woodlands operations. During 2007,
20 labor agreements are scheduled to be negotiated
in 19 non-paper mill operations, plus eight
non-paper mill contracts are carrying over from past
years.

EXECUTIVE OFFICERS OF THE
REGISTRANT

John V. Faraci, 57, chairman and chief executive offi-
cer 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.

Newland A. Lesko, 61, 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
International Paper in 1967.

Marianne M. Parrs, 62, executive vice president since
1999 and chief financial officer since 2005. Ms. Parrs
previously served as executive vice president-
1999
administration
for
information technology,
investor relations, global
sourcing, logistics and a large supply chain project.
She continues to oversee those areas in her current
role. Ms. Parrs joined International Paper in 1974.

responsible

since

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, 56, senior vice president of the
Company responsible for consumer products con-
verting business and president of the Company’s
Shorewood Packaging Corp. subsidiary since 2004.
Mr. Balduino joined the Company in 1992 and pre-
viously served as the Company’s senior vice presi-
dent of sales and marketing from 2000 to 2003.

H. Wayne Brafford, 55, senior vice president-printing
and communications papers since 2005. Previously,
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, 58, senior vice president-human
resources since 1999. Since 2005, Mr. Carter is also
responsible for overseeing the communications
function of the Company. Mr. Carter joined Interna-
tional Paper in 1999.

C. Cato Ealy, 50, 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, 60, senior vice president and
president-IP Asia since 2005. Previously, Mr. Gestrich
served as senior vice president-consumer packaging
from 2001 to 2005. 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, 57, senior vice president-strategic ini-
tiatives since 2005. He previously served as senior
vice president-printing and communication papers
from 2000 to 2005. Mr. Herbert joined International
Paper in 1992.

Thomas G. Kadien, 50, 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. Mr. Kadien joined
International Paper in 1978.

and

since

Europe

president-IP

Mary A. Laschinger, 46, senior vice president since
2005.
2007
Ms. Laschinger previously 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 Interna-
tional Paper in 1992.

Andrew R. Lessin, 64, senior vice president-internal
audit since 2002. Mr. Lessin previously served as vice

president-finance from 2000 to 2002. Mr. Lessin
joined International Paper in 1977.

Maximo Pacheco, 54, senior vice president since
2005 and president-IP do Brasil since 2004. Pre-
senior vice
viously, Mr. Pacheco served as
president-IP do Brasil from 2003 to 2004. Prior to
that, he was president-IP Latin America from 2000 to
2003. Mr. Pacheco joined International Paper in 1994.

Carol L. Roberts, 47, senior vice president-IP pack-
aging solutions since 2005. She previously served as
vice president-container of the Americas from 2000.
Ms. Roberts joined International Paper in 1981.

Maura A. Smith, 51, senior vice president, general
counsel and corporate secretary since 2003. Since
2005, Ms. Smith is also responsible for overseeing
the public affairs function of the Company. From
1998 to 2003, she served as senior vice president,
general counsel and corporate secretary of Owens
Corning and, in addition, from 2000 to 2003, as chief
restructuring officer of Owens Corning. Ms. Smith
joined International Paper in 2003.

Robert J. Grillet, 51, vice president-finance and con-
troller since 2003. He previously served as group
senior vice president-xpedx from 2000 to 2003.
Mr. Grillet joined International Paper in 1976.

RAW MATERIALS

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

FORWARD-LOOKING STATEMENTS

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

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 materi-
ally from those projected in any forward-looking
statement.

RISKS RELATING TO INDUSTRY CONDITIONS

C H A N G E S I N T H E C O S T O R A V A I L A B I L I T Y O F
R A W M A T E R I A L S A N D E N E R G Y. 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 earn-
ings has been, and will continue to be, affected by
changes in the costs and availability of such raw
materials and energy sources. We may not be able to
fully offset the effects of higher raw material or
energy costs through hedging arrangements, price
increases, and productivity improvements or cost
reduction programs.

C H A N G E S I N T R A N S P O R T A T I O N A V A I L A B I L I T Y
O R C O S T S. Our business depends on the trans-
portation of a large number of products, both
domestically and internationally.
In the United
States, an increase in transportation rates or fuel
surcharges could adversely affect our earnings, 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
reduce usage and improve transportation avail-
ability, there is no assurance that such availability
can continue to be effectively managed in the future.

C O M P E T I T I O N. We face intense competition, both
domestically and internationally, for our products in
all of our operating segments. 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 competitors could
negatively impact our revenues and financial results.

P R O D U C T M I X. Our results may be affected by a
change in the Company’s sales mix. Our outlook
assumes 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 and our financial results could be neg-
atively impacted.

P R I C I N G. Our outlook assumes that we will be suc-
cessful in implementing previously announced price
increases as well as other price increases that we
may in the future deem necessary and/or appro-
priate. Delays in the realization of
these price
results.
increases would negatively impact our
Moreover, price discounting, if required to maintain
our competitive position and our share of industry
sales, could result in lower than anticipated price
realizations.

D E M A N D F O R O U R P R O D U C T S. Demand for our
products is affected by general economic conditions
in North America, Europe, Latin America and Asia.
Changes in industrial non-durable goods production,
consumer spending, commercial printing and adver-
tising activity, white-collar employment levels, inter-
est rates and currency exchange rates may adversely
affect our businesses and our financial results.

RISKS RELATING TO MARKET AND ECONOMIC
FACTORS

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

N A T I O N A L L Y R E C O G N I Z E D S T A T I S T I C A L R A T-
I N G O R G A N I Z A T I O N S. Maintaining an investment
grade credit rating for our long-term debt continues
to be an important element in our overall financial
strategy. Our debt ratings are, from time to time,
reviewed by the rating organizations and remain
subject to change, and a downgrade in rating of our
debt could increase our interest cost and negatively
affect our earnings.

P E N S I O N A N D H E A L T H C A R E C O S T S. Our pen-
sion and health care costs are dependent upon
numerous factors resulting from actual plan experi-
ence and assumptions of future experience. Pension
plan assets are primarily made up of equity and fixed
income investments. 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 discount rates and
expected rates of return on plan assets could also
increase or decrease pension costs.

N A T U R A L D I S A S T E R S. The occurrence of a natural
disaster, such as a hurricane, tropical storm, earth-
quake,
flooding or other unanticipated
problems, could cause operational disruptions which
could impair our profitability.

tornado,

C H A N G E S I N I N T E R N A T I O N A L C O N D I T I O N S. Our
results could be substantially affected by foreign
market risks in the countries in which we have

manufacturing facilities or sell our products. Specifi-
cally, Brazil, Russia, Poland and China, where sub-
stantial manufacturing facilities exist, are countries
that are exposed to economic and political instability
in their respective regions of the world. Downturns in
economic 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.

C H A N G E S I N C U R R E N C Y E X C H A N G E R A T E S. We
are impacted by the movement of various currencies
relative to the U.S. dollar. From time to time, we may
hedge a portion 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.

RISKS RELATING TO THE COMPANY’S
TRANSFORMATION PLAN

T H E A B I L I T Y T O S U C C E S S F U L L Y E X E C U T E

T R A N S A C T I O N S

S A L E S
C U R R E N T L Y U N D E R
C O N T R A C T. The Company’s ability to successfully
execute sales transactions under contract (including
contracts executed pursuant to the Transformation
Plan) and to realize the anticipated sales proceeds is
dependent upon many factors, including the ability
to successfully consummate the transactions without
a purchase price adjustment, the successful fulfill-
ment (or waiver) of all conditions set forth in the
sales agreements, and the successful closing of the
transactions within the estimated timeframes.

T H E A B I L I T Y T O I N V E S T
P R O C E E D S W I T H
A T T R A C T I V E F I N A N C I A L R E T U R N S. The Com-
pany will selectively seek attractive investment
opportunities for a portion of the proceeds from
divestitures. The Company may be unable to identify
and negotiate acceptable investments with attractive
returns.

A B I L I T Y T O R E A L I Z E A N T I C I P A T E D P R O F I T

I M P R O V E M E N T F R O M T H E T R A N S F O R M A T I O N
P L A N. The profitability of the Company’s two plat-
form businesses, uncoated papers (including dis-
tribution) and packaging,
to variable
demand and the Company’s ability to execute
including
internal profit
ongoing manufacturing, supply chain and overhead
cost reduction initiatives, as well as volume/mix
improvements. There can be no assurance that profit
improvements will be achieved.

improvement

is subject

initiatives,

RISKS RELATING TO LEGAL PROCEEDINGS
AND COMPLIANCE COSTS

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

T H E C O S T O F C O M P L I A N C E W I T H E N V I R O N-

M E N T A L A N D O T H E R G O V E R N M E N T A L R E G U-
L A T I O N S. Our operations are subject to significant
regulation by federal, 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 regu-
lations will
capital
require
expenditures, or that existing reserves for specific
matters will, if regulations change, be adequate to
cover future unanticipated costs.

significant

not

R E S U L T S O F L E G A L P R O C E E D I N G S. The costs
and other effects of pending litigation against the
Company cannot be determined 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
factors that may impact our outlook. Obvious gen-
eral economic factors throughout the world (such as
inflation, a sudden drop in consumer or business
confidence, or an unexpected collapse in stock
markets) do not warrant further discussion, but are
noted to further emphasize the many contingencies
that may cause our actual results to differ from those
currently anticipated.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FORESTLANDS

The principal raw material used by International
Paper is wood in various forms. As of December 31,
2006, the Company or its subsidiaries owned or
managed approximately 500,000 acres of forest-
lands in the United States, approximately 370,000
acres in Brazil, and had, through licenses and forest
management agreements, harvesting rights on
approximately 500,000 acres of government-owned
forestlands in Russia. During 2006, in conjunction
with the Company’s Transformation Plan, approx-
imately 5.6 million acres of
forestlands in the
United States were sold under various agreements,
principally in October and November, for proceeds

totaling approximately $6.6 billion of cash and
notes. A further discussion of these sales trans-
actions can be found on page 21 of
Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and on page
Item 8. Financial Statements and Supple-
65 of
mentary Data.

representing approximately 17% of

During 2006, the Company’s U.S. forestlands sup-
plied 10.2 million tons of roundwood to its U.S.
facilities,
its
wood fiber requirements. The balance of our fiber
requirements came from residual chips supplied by
our Wood Products operations, other roundwood
and chips purchased from other suppliers, and from
other private industrial and nonindustrial forestland
owners, with an insignificant amount coming from
public lands of the U.S. government. In addition, in
2006, 3.4 million tons of wood from our forestlands
were sold to other users.
In 2007, the Company
expects that approximately 65% of its fiber require-
ments will come from roundwood, with over 80%
purchased on the open market and less than 20%
obtained under existing fiber supply agreements.
The remaining 35% of our fiber requirements will
come from wood chips obtained from other suppli-
ers and other private and nonindustrial forestland
owners and through chip supply agreements.

MILLS AND PLANTS

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

The Company’s facilities are in good operating con-
dition and are suited for the purposes for which they

are presently being used. We continue to study the
economics of modernization or adopting other
alternatives for higher cost facilities.

CAPITAL INVESTMENTS AND
DISPOSITIONS

Given the size, scope and complexity of our business
interests, we continually examine and evaluate a
wide variety of business opportunities and planning
alternatives,
including possible acquisitions and
sales or other dispositions of properties. You can
find a discussion about the level of planned capital
investments for 2007 on page 33, and dispositions
and restructuring activities as of December 31, 2006,
on pages 20 through 22, of Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, and on pages 59 through 67 of
Item 8. Financial Statements and Supplementary
Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal pro-
ceedings is set forth on pages 40 and 41 of Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and on pages
69 through 73 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, 2006.

PART II.

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

Dividend per share data on the Company’s common
stock and the high and low sales prices for the
Company’s common stock for each of the four quar-
ters in 2006 and 2005 are set forth on page 89 of
Item 8. Financial Statements and Supplementary

Data. The Company’s common shares are traded on
the following exchanges: New York, Swiss and
Amsterdam. International Paper options are traded
on the Chicago Board of Options Exchange. As of
February 23, 2007, there were approximately 23,669
record holders of common stock of the Company.

The table below presents information regarding the
Company’s purchase of its equity securities for the
time periods presented.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

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

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

Period

Total Number
of Shares
Purchased

Average Price
Paid per
Share

January 1, 2006 - January 31, 2006

4,139

$33.54

February 1, 2006 - February 28, 2006

March 1, 2006 - March 31, 2006

April 1, 2006 - April 30, 2006

May 1, 2006 - May 31, 2006

August 1, 2006 - August 31, 2006

172,980

36,300

836

1,260

1,777

32.70

35.22

34.57

37.06

34.31

September 1, 2006 - September 30, 2006

38,465,784(a)

36.00(b)

38,465,260

November 1, 2006 - November 30, 2006

4,263

33.16

December 1, 2006 - December 31, 2006
Total

1,220,558

33.84(b)

39,907,897(c)

–

38,465,260

–

(a) On August 15, 2006, the Company commenced a tender offer to buy back up to 41,666,667 shares of its common stock. The tender offer

expired on September 13, 2006, with the Company purchasing 38,465,260 shares.

(b) Excludes expenses paid to acquire the shares.

(c) 1,442,637 of these shares were not purchased pursuant to a publicly announced plan or program. These were principally open-market

repurchases, including 1,220,558 shares repurchased as part of the Company’s Transformation Plan.

No activity occurred in months not presented above.

PERFORMANCE GRAPH

The performance graph shall not be deemed to be
“soliciting material” or
to be “filed” with the
Commission or subject to Regulation 14A or 14C, or
the Securities
to the liabilities of Section 18 of
Exchange Act of 1934, as amended.

The following graph compares a $100 investment in
Company stock on December 31, 2001 with a $100
investment in each of our ROI Peer Group and the
S&P 500 also made on December 31, 2001. The graph
portrays total return, 2001–2006, assuming reinvest-
ment of dividends.

Return on $100 Invested in Stock

s
r
a

l
l

o
D

150

140

130

120

110

100

2001

2002

2003

2004

2005

2006

ROI Peer Group (1)

S&P 500

International Paper

(1) The companies included in the ROI Peer Group are Bowater Inc., Domtar Inc., MeadWestvaco Corp., M-Real Corp., Packaging Corporation

of America, Sappi Limited, Smurfit-Stone Container Corp., Stora Enso Group, UPM Corporation and Weyerhaeuser Co.

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY(a)

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

2006

2005

2004

2003

2002

RESULTS OF OPERATIONS
Net sales
Costs and expenses, excluding interest
Earnings from continuing operations before income taxes

and minority interest

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

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

BASIC PER SHARE OF COMMON STOCK
Earnings from continuing operations
Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes
Net earnings (loss)

DILUTED PER SHARE OF COMMON STOCK
Earnings from continuing operations
Discontinued operations, net of taxes and minority interest
Cumulative effect of accounting changes
Net earnings (loss)
Cash dividends
Common shareholders’ equity

COMMON STOCK PRICES
High
Low
Year-end

FINANCIAL RATIOS
Current ratio
Total debt to capital ratio
Return on equity
Return on investment from continuing operations

CAPITAL EXPENDITURES

NUMBER OF EMPLOYEES

$21,995 $21,700 $20,721 $19,883 $20,030
19,126
19,633

19,075

20,819

18,286

3,188(b)
17
(232)(c)
–

286(d)
9
416(e)
–

1,050(b,c) 1,100(d-f)
1,050(b,c) 1,100(d-f)

376(g)
24
(273)(h)
–
(35)(g-i)
(35)(g-i)

89(j)
79
186
(13)(k)
302(j-l)
302(j-l)

174(m)
44
(141)
(893)(n)
(880)(m-o)
(880)(m-o)

$ 3,996 $ 6,804 $ 9,506 $ 9,143 $ 9,025
9,559
2,359
33,792
–
12,328
7,374

9,348
2,279
35,525
1,770
13,127
8,237

9,402
2,099
34,217
209
13,626
8,254

9,073
2,127
28,771
1,178
11,019
8,351

8,993
259
24,034
692
6,531
7,963

$ 2.69 $ 1.41 $ 0.49 $ 0.27 $ 0.32
(0.29)
(1.86)
(1.83)

(0.56)
–
(0.07)

0.39
(0.03)
0.63

(0.48)
–
2.21

0.85
–
2.26

$ 2.65 $ 1.40 $ 0.49 $ 0.27 $ 0.32
(0.29)
(1.85)
(1.82)
1.00
15.21

0.39
(0.03)
0.63
1.00
16.97

(0.56)
–
(0.07)
1.00
16.93

(0.47)
–
2.18
1.00
17.56

0.81
–
2.21
1.00
17.03

$ 37.98 $ 42.59 $ 45.01 $ 43.32 $ 46.19
31.35
34.97

33.09
43.11

37.12
42.00

26.97
33.61

30.69
34.10

1.9
0.47
14.6(b,c)
8.1(b,c)

2.4
0.59
13.2(d-f)
5.2(d-f)

2.3
0.62
(0.4)(g-i)
3.1(g-i)

2.0
0.63

3.9(j-l)
2.5(j-l)

2.3
0.61
(8.8)(m-o)
2.5(m-o)

$ 1,073 $ 1,095 $ 1,119 $

935 $

859

60,600

68,700

79,400

82,800

91,000

ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL GLOSSARY

Current ratio—

current assets divided by current liabilities.

Total debt to capital ratio—

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

Return on equity—

net earnings divided by average common share-
holders’ equity (computed monthly).

Return on investment—

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

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

(a) All periods presented have been restated to
reflect the Carter Holt Harvey Limited, Weld-
wood of Canada Limited, Kraft Papers, Brazil-
ian Coated Papers, Beverage Packaging, and
Wood Products businesses as discontinued
operations.

2006:

(b)

the

associated with

Includes restructuring and other charges of
$300 million before taxes ($184 million after
taxes), including a $157 million charge before
taxes ($95 million after taxes) for organiza-
tional restructuring and other charges princi-
pally
Company’s
Transformation Plan, a charge of $165 million
for
before taxes ($102 million after taxes)
losses on early debt extinguishment, a $97
million charge before taxes ($60 million after
taxes) for legal reserves, a $115 million gain
before taxes ($70 million after taxes) for pay-
ments received relating to the Company’s par-
ticipation in the U.S. Coalition for Fair Lumber
Imports, and a credit of $4 million before taxes
($3 million after taxes) for other items. Also
included are a $4.8 billion gain before taxes
($2.9 billion after taxes) from sales of U.S.
forestlands included in the Company’s Trans-
formation Plan; a charge of $759 million before
and after taxes for the impairment of goodwill

in the coated paperboard and Shorewood
businesses; a $1.5 billion charge for net losses
on sales and impairments of businesses
including $1.4 billion before taxes ($1.3 billion
after taxes) for the U.S. Coated and Super-
calendered Papers business, $52 million before
taxes ($37 million after taxes) for certain assets
in Brazil, and $128 million before taxes ($84
million after taxes) for the Company’s Saillat
mill in France to reduce the carrying value of
net assets to their estimated fair value; the
recognition of a previously deferred $110 mil-
lion gain before taxes ($68 million after taxes)
related to a 2004 sale of forestlands in Maine;
and a pre-tax charge of $21 million (zero after
taxes) for other smaller items.

(c)

Includes a gain of $100 million before taxes
($79 million after taxes) from the sale of the
Brazilian Coated Papers business, and pre-tax
charges of $116 million ($72 million after tax-
es) for the Kraft Papers business, $269 million
($234 million after taxes) for the Wood Prod-
ucts business and $121 million ($90 million
after taxes) for the Beverage Packaging busi-
ness to reduce the carrying value of these
businesses to their estimated fair value.

2005:

the

associated with

Includes restructuring and other charges of
$340 million before taxes ($213 million after
taxes), including a $256 million charge before
taxes ($162 million after taxes) for organiza-
tional restructuring and other charges princi-
pally
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 concerning the 1997 through
2000 U.S. federal income tax audit, and $11
million before taxes ($7 million after taxes)

(d)

related to the collection of a note receivable
from the 2001 sale of a business.

(e)

(f)

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

Includes a $454 million reduction in the income
including a reduction of $627
tax provision,
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 million for deferred
taxes related to earnings repatriations under
the American Jobs Creation Act of 2004, and
$31 million of other tax charges.

2004:

(g)

Includes restructuring and other charges of
$164 million before taxes ($102 million after
taxes), including a $62 million charge before
taxes ($39 million after taxes) for organiza-
tional 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 credits of $123 million ($76 million after
taxes) for net insurance recoveries related to
the hardboard siding and roofing litigation, a
$35 million credit before taxes ($21 million
after taxes) for the net reversal of restructuring
reserves no longer required, and a pre-tax
charge of $139 million ($125 million after tax-
es) for net losses on sales and impairments of
businesses sold or held for sale.

(h)

Includes a gain of $268 million before taxes
and minority interest ($90 million after taxes
and minority 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.

(i)

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

2003:

(j)

Includes restructuring and other charges of
$252 million before taxes ($158 million after

taxes), including a $190 million charge before
taxes ($118 million after taxes) for asset shut-
downs 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
million ($33 million after taxes) for net losses
on sales and impairments of businesses held
for sale, and a credit of $26 million before taxes
($16 million after taxes) for the net reversal of
restructuring reserves no longer required.

(k)

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 cumu-
lative effect of an accounting change related to
the adoption of FIN 46, “Consolidation of
Variable Interest Entities, an Interpretation of
ARB No. 51.”

(l)

Includes a $110 million reduction of
the
income tax provision recorded for significant
tax events occurring in 2003.

2002:

(m) Includes restructuring and other charges of
$654 million before taxes ($417 million after
taxes), including a $163 million charge before
taxes ($113 million after taxes) for asset shut-
downs of excess internal capacity and cost
reduction actions, a $450 million pre-tax
charge ($278 million after taxes) for additional
exterior siding legal reserves, and a charge of
$41 million before taxes ($26 million after
taxes) for early debt retirement costs. Also
included are a charge of $25 million before
taxes (a credit of $60 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.

(n)

Includes an $893 million charge for the cumu-
lative effect of an accounting change for the
adoption of SFAS No. 142, “Goodwill and
Other Intangible Assets.”

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

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

EXECUTIVE SUMMARY

International Paper’s operating results in 2006 bene-
fited from strong gains in pricing and sales volumes
and lower operating costs. Our average paper and
packaging prices in 2006 increased faster than our
costs for the first time in four years. The improve-
ment in sales volumes reflects increased uncoated
papers, corrugated box, coated paperboard and
European papers shipments, as well as improved
revenues from our xpedx distribution business. Our
manufacturing operations also made solid cost
reduction improvements. Lower interest expense,
reflecting debt repayments in 2005 and 2006, was
also a positive factor. Together, these improvements
more than offset the effects of continued high raw
material and distribution costs,
lower real estate
sales, higher net corporate expenses and lower con-
tributions from businesses and forestlands divested
during 2006.

Looking forward to 2007, we expect seasonally
higher sales volumes in the first quarter. Average
paper price realizations should continue to improve
as we implement previously announced price
increases in Europe and Brazil.
Input costs for
fiber and chemicals are expected to be
energy,
mixed, although slightly higher in the first quarter.
Operating results will benefit
from the recently
completed International Paper/Sun Paperboard joint
ventures in China and the addition of the Luiz Anto-
nio paper mill to our operations in Brazil. However,
primarily as a result of lower real estate sales in the
first quarter, we anticipate earnings from continuing
operations will be somewhat lower than in the 2006
fourth quarter.

Significant steps were also taken in 2006 in the
execution of the Company’s Transformation Plan.
We completed the sales of our U.S. and Brazilian
Coated Papers businesses and 5.6 million acres of
U.S.
forestlands, and announced definitive sale
agreements for our Kraft Papers, Beverage Pack-
aging and Arizona Chemical businesses and a
majority of our Wood Products business, all
expected
Through
December 31, 2006, we have received approximately
$9.7 billion of the estimated proceeds from divest-
itures announced under this plan of approximately
$11.3 billion, with the balance to be received as the
remaining divestitures are completed in the first half
of 2007. We have strengthened our balance sheet by

during

2007.

reducing debt by $6.2 billion, and returned value to
our shareholders by repurchasing 39.7 million shares
of our common stock for approximately $1.4 billion.
We made a $1.0 billion voluntary contribution to our
U.S. qualified pension fund. We have identified
selective reinvestment opportunities totaling approx-
imately $2.0 billion, including opportunities in China,
Brazil and Russia. Finally, we remain focused on our
three-year $1.2 billion target for non-price profit-
ability improvements, with $330 million realized
during 2006. While more remains to be done in 2007,
we have made substantial progress toward achiev-
ing the objectives announced at the outset of the
Plan in July 2005.

Results of Operations

Industry segment operating profits are used by Inter-
national Paper’s management to measure the earn-
ings performance of its businesses. Management
believes that this measure allows a better under-
standing of trends in costs, operating efficiencies,
prices and volumes.
Industry segment operating
profits are defined as earnings before taxes and
minority interest, interest expense, corporate items
and corporate special items. Industry segment oper-
ating 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-
Industrial Packaging, Consumer Pack-
ing Papers,
aging, 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

2006

2005

2004

Industry segment operating profits

$ 2,074

$1,622

$1,703

Corporate items, net

Corporate special items*

Interest expense, net

Minority interest

Income tax (provision) benefit

Discontinued operations

(746)

2,373

(521)

(9)

(1,889)

(232)

(607)

(134)

(595)

(9)

407

416

(477)

(141)

(712)

(21)

(114)

(273)

Net earnings (loss)

$ 1,050

$1,100

$ (35)

* Corporate special items include gains on Transformation Plan

forestland sales, goodwill

impairment charges, restructuring

and other charges, net losses on sales and impairments of

businesses, insurance recoveries and reversals of reserves no

longer required.

Industry segment operating profits of $2.1 billion
were $452 million higher in 2006 than in 2005 due
principally to the benefits from higher average prices
($476 million), higher sales volumes ($143 million),
and cost reduction initiatives,
improved operating
performance and a more favorable product mix
($187 million), which more than offset the impacts of
higher energy and raw material costs ($101 million),
lower earnings from land sales ($27 million), higher
distribution costs ($113 million), reduced earnings
due to the sale of the Coated and Supercalendered
Papers business and loss of harvest income from our
divested forestlands ($53 million), and other items
($60 million).

Segment Operating Profits
(in millions)

$143

$476

$187

($101)

($27)

($113)

($53)

($60)

$2,074

$1,622

$2,400
$2,200
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0

D
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Oth

D
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2

st/O

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C

The principal changes in operating profits by seg-
ment were as follows:

•

Printing Papers’ profits of $677 million were
$204 million higher as the benefits of higher
improved
average sales price realizations,
manufacturing operations, reduced lack-of-order
downtime and higher sales volumes more than
offset the impacts of higher raw material and
energy costs, higher freight costs and a $128
million impairment charge to reduce the carry-
ing value of the fixed assets at the Saillat, France
mill.

Industrial Packaging’s profits of $399 million
were up $180 million as the impacts of improved
sales price realizations, increased sales volumes,
a more favorable mix, reduced market-related
downtime and strong mill performance were
partially offset by the effects of higher raw
material, freight and converting operating costs.

Consumer Packaging’s profits of $131 million
were $10 million higher due to higher sales
volumes, improved average sales price realiza-
tions,
reduced lack-of-order downtime and
favorable mill operations, which were partially

•

offset by higher raw material and freight costs,
unfavorable product mix and lower profits in our
Shorewood packaging business.

Forest Products’ profits of $678 million were $43
million lower. Decreased harvest and recrea-
tional income and lower earnings from the Real
Estate
sells
higher-and-better-use properties, were only
partially offset by higher earnings from forest-
land sales and lower operating costs.

division, which

principally

Distribution’s profits of $128 million were $44
million higher due to the impact of higher sales
improved average sales prices and
volumes,
lower operating expenses.

Specialty Businesses and Other’s profits of $61
million were $57 million higher reflecting higher
average sales prices and lower costs for Arizona
Chemical.

Corporate items, net, of $746 million of expense in
2006 were higher than the $607 million of expense in
2005 and $477 million of expense in 2004 due to
higher pension expenses, benefits-related expenses
and supply chain initiative costs, partially offset by
lower inventory-related costs.

Corporate special items, including gains on sales of
forestlands, restructuring and other charges, losses
on sales and impairments of businesses,
impair-
ments of goodwill,
insurance recoveries and
reversals of reserves no longer required, increased to
a gain of $2.4 billion from an expense of $134 million
in 2005 and an expense of $141 million in 2004. The
increase in 2006 principally reflects $4.8 billion of
gains on the sales of forestlands included in our
Transformation Plan, partially offset by $1.4 billion of
net charges related to the divestiture of certain oper-
ations, principally the U.S. Coated and Super-
calendered Papers business, and $759 million of
goodwill impairment charges.

Interest expense, net, of $521 million in 2006
decreased from $595 million in 2005 and $712 mil-
lion in 2004 reflecting lower average debt balances
from repayments made under the Company’s Trans-
formation Plan and lower interest rates from debt
refinancings and repayments. Additionally, the 2006
total includes a pre-tax credit of $6 million for inter-
est received from the Canadian government on
refunds of prior-year softwood lumber duties. Inter-
est expense, net, in 2005 includes 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.

The 2006 income tax provision of $1.9 billion con-
sists of $1.6 billion of deferred taxes (principally
reflecting deferred taxes on the 2006 Transformation
Plan forestland sales) and a $0.3 billion current tax
provision. The tax provision also includes an $11
million charge related to 2006 special tax adjustment
items. The $407 million benefit in 2005 included a
$454 million tax benefit related to 2005 special tax
adjustment items. The tax provision of $114 million
in 2004 included $32 million of expense related to
special items. See “Income Taxes” on page 19 for a
further discussion of these items.

Discontinued Operations

In the first quarter of 2006, management determined
that the future sale of the Kraft Papers business was
in the best interest of the Company’s shareholders. A
definitive agreement to sell this business was signed
during the second quarter. In the third quarter, Inter-
national Paper completed the sale of its Brazilian
Coated Papers business. During the fourth quarter,
International Paper determined that the sales of its
Beverage Packaging and Wood Products businesses
were in the best interests of the shareholders. A
definitive agreement to sell its Beverage Packaging
business was announced during the quarter, and the
Company
announced two separate definitive
agreements to sell 13 lumber mills and five wood
products plants.

During the 2005 third quarter, International Paper
completed the sale of the Carter Holt Harvey Limited
business. During 2004,
International Paper com-
pleted the sale of its Weldwood of Canada Limited
business in the fourth quarter.

As a result of these actions, the operating results of
these businesses and the associated gains/losses on
the sales are reported in discontinued operations for
all periods presented.

approximately $3.0 billion of unused, committed
credit facilities that we believe are adequate to
meet
future short-term liquidity requirements.
Maintaining an investment grade credit rating for
our long-term debt continues to be an important
element in our overall financial strategy.

Our focus in 2007 will be to continue to maximize
our financial flexibility and preserve liquidity.

Capital spending for 2007 is targeted at $1.2 billion,
or about equal to estimated depreciation and amor-
tization.

Critical Accounting Policies and Significant
Accounting Estimates

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

In recent years, the assumption estimates used for
pensions have resulted in increases in reported pen-
sion charges. Pension expenses for our U.S. plans
increased to $377 million in 2006 from $243 million
in 2005 due principally to a change in the mortality
assumption and the use of a lower assumed dis-
count rate. A decrease of approximately $182 million
is expected in 2007, reflecting earnings on the $1.0
billion voluntary cash contribution made by the
Company in 2006 and an increase in the assumed
discount rate. Our pension funding policy continues
to be, at a minimum,
to fully fund actuarially
determined costs, generally equal to the minimum
amounts required by the Employee Retirement
Income Security Act (ERISA). Unless changes are
made to our funding policy, it is unlikely that any
contributions to our U.S. qualified plan will be
required in 2007.

Liquidity and Capital Resources

Legal

For the year ended December 31, 2006, Interna-
tional Paper generated $1.0 billion of cash flow
from continuing operations, compared with $1.2
billion in 2005. The 2006 amount is net of a $1.0
billion voluntary pension plan cash contribution.
Capital spending from continuing operations for
the year totaled $1.0 billion, or 87% of depreciation
and amortization expense. We repaid approx-
imately $5.2 billion of debt during the year, includ-
ing various higher coupon-rate debt, that will result
in lower interest charges in future years. Our
liquidity position remains strong, supported by

An analysis of significant
litigation activity is
included in Note 10 of the Notes to Consolidated
Financial Statements in Item 8. Financial Statements
and Supplementary Data.

CORPORATE OVERVIEW

While the operating results for International Paper’s
various business segments are driven by a number
of business-specific factors, changes in International
Paper’s operating results are closely tied to changes
in general economic conditions in the United States,

Europe, South America and Asia. Factors that impact
the demand for our products include industrial
non-durable goods production, consumer spending,
commercial printing and advertising activity, white-
collar employment levels and movements in cur-
rency exchange rates.

Product prices tend to follow general economic
trends, and are also affected by inventory levels,
currency movements and changes in worldwide
operating rates. In addition to these revenue-related
factors, net earnings are impacted by various cost
drivers,
the more significant of which include
changes in raw material costs, principally wood fiber
and chemical costs; energy costs; salary and benefits
costs, including pensions; and manufacturing con-
version costs.

The following is a discussion of International Paper’s
results
ended
December 31, 2006, and the major factors affecting
these results compared to 2005 and 2004.

operations

year

the

for

RESULTS OF OPERATIONS

For the year ended December 31, 2006, International
Paper reported net sales of $22.0 billion, compared
with $21.7 billion in 2005 and $20.7 billion in 2004.
International net sales (including U.S. exports)
totaled $5.6 billion, or 25% of total sales in 2006. This
compares to international net sales of $5.3 billion in
2005 and 2004.

Full year 2006 net income totaled $1.1 billion ($2.18
per share), compared with net income of $1.1 billion
($2.21 per share) in 2005 and a net loss of $35 million
($0.07 per share)
in 2004. Amounts include the
results of discontinued operations.

Earnings from continuing operations after taxes in
2006 were $1.3 billion, compared with $684 million in
2005 and $238 million in 2004. However, included in
earnings from continuing operations in 2006 was an
incremental benefit of $292 million compared with
2005 from the special items discussed on pages 20
through 22. Excluding this benefit, earnings in 2006
were $306 million higher than in 2005. This increase
was driven by higher average prices, improved sales
volumes, favorable operating performance, benefits
from cost reduction initiatives and improved mix,
lower net
interest expense and the incremental
benefit from special items. These favorable items
more than offset the impact of higher average raw
material costs,
lower earnings from land sales,
higher Corporate expenses (including pensions),
higher distribution costs, reduced earnings due to
the sale of the Coated and Supercalendered Papers
business,
income from our
the loss of harvest
divested forestlands and higher tax expense.

See Industry Segment Results on pages 24 through
29 for a discussion of the impact of these factors by
segment.

Earnings From Continuing Operations
(after tax, in millions)

$115

$382

$150

( $81)

( $22)

($107)

( $91)

$94

$292

$1,282

($91)

( $43)

ntim

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orate Ite

orp
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Intere

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Ta

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2

$1,600
$1,500
$1,400
$1,300
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0

$684

D
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0
2

The following table presents a reconciliation of Inter-
to its total
national Paper’s net earnings (loss)
industry segment operating profit:

In millions

Net Earnings (Loss)
Deduct - Discontinued operations:

Earnings from operations

Loss (gain) on sales and impairments

Earnings From Continuing Operations
Add back (deduct):

2006

2005

2004

$ 1,050

$1,100

$ (35)

(85)

317

1,282

(55)

(361)

684

(348)

621

238

Income tax provision (benefit)

1,889

(407)

114

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

Gain on sale of forestlands

Impairments of goodwill

Net losses on sales and

impairments of businesses

Reserve adjustments

3,188

521

(8)

746

300

(19)

(4,788)

759

1,381

(6)

286

595

—

607

285

(258)

—

111

(4)

376

712

(3)

477

164

(123)

—

135

(35)

Industry Segment Operating Profit
Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other

Total Industry Segment Operating

$ 2,074

$1,622

$1,703

$ 677

$ 473

$ 508

399

131

128

678

219

121

721

373

155

542

Profit

$ 2,074

$1,622

$1,703

Discontinued Operations

2 0 0 6 : In 2006, after-tax charges totaling $317 million
were recorded for net losses on sales or impairments
of businesses reported as Discontinued operations.

During the fourth quarter of 2006, the Company
entered into an agreement to sell its Beverage Pack-
aging business to Carter Holt Harvey Limited for
approximately $500 million, subject
to certain
adjustments. The sale of the North American Bever-
age Packaging operations subsequently closed on
January 31, 2007, with the sale of the remaining
non-U.S. operations expected to close later in the
2007 first quarter. Also during the fourth quarter, the

Company entered into separate agreements for the
sale of 13 lumber mills for approximately $325 mil-
lion, expected to close in the first quarter of 2007,
and five wood products plants for approximately
$237 million, expected to close in the first half of
2007, both subject to various adjustments at closing.
Based on the commitments to sell these businesses,
management determined that
accounting
requirements for treatment as discontinued oper-
ations were met. As a result, net pre-tax charges of
$18 million ($11 million after taxes) for the Beverage
Packaging business and $104 million ($69 million
after
the Wood Products business
(including $58 million for pension and postretire-
ment benefit termination benefits) were recorded in
the fourth quarter as discontinued operations
charges to adjust the carrying value of these busi-
nesses to their estimated fair values less costs to sell.

taxes)

the

for

During the third quarter of 2006, management had
determined that there was a current expectation that,
more likely than not, the Beverage Packaging and
Wood Products businesses would be sold. Based on
the resulting impairment testing, pre-tax impairment
charges of $115 million ($82 million after taxes) and
$165 million ($165 million after taxes) were recorded
to reduce the carrying values of the net assets of the
Beverage Packaging and Wood Products businesses,
respectively, to their estimated fair values. Also dur-
ing the 2006 third quarter, International Paper com-
pleted the sale of
its interests in a Beverage
Packaging operation in Japan for a pre-tax gain of
$12 million ($3 million after taxes), and the sale of its
Brazilian Coated Papers business for approximately
$420 million, subject to certain post-closing adjust-
ments. As the Company had determined that the
accounting requirements for reporting the Brazilian
Coated Papers business as a discontinued operation
were met, the resulting $100 million pre-tax gain ($79
million after taxes) was recorded as a gain on sale of
a discontinued operation.

During the first quarter of 2006,
the Company
determined that the accounting requirements for
reporting the Kraft Papers business as a dis-
continued operation were met. Accordingly, a $100
million pre-tax charge ($61 million after taxes) was
recorded to reduce the carrying value of the net
assets of this business to their estimated fair value.
During the 2006 second quarter,
the Company
signed a definitive agreement to sell this business for
approximately $155 million in cash, subject to certain
closing and post-closing adjustments, and two addi-
tional payments totaling up to $60 million payable
five years from the date of closing, contingent upon

business performance. A $16 million pre-tax charge
($11 million after taxes) was recorded during the
second quarter to further reduce the carrying value
of the assets of the Kraft Papers business based on
the terms of this definitive agreement. The sale of
this business was subsequently completed on Jan-
uary 2, 2007.

Additionally during the fourth quarter, a $38 million
pre-tax credit ($23 million after taxes) was included
in earnings from discontinued operations for refunds
received from the Canadian government of duties
paid by the Company’s former Weldwood of Canada
Limited business.

2 0 0 5 : During the 2005 third quarter, the sale of the
Company’s majority share of Carter Holt Harvey
Limited (CHH) was completed resulting in a $361
million after-tax gain. This amount is included in gain
on sale of discontinued operations.

In the fourth quarter of 2004,

International
2 0 0 4 :
Paper sold its Weldwood of Canada Limited
(Weldwood) business for approximately $1.1 billion.
As a result of the sale, a $323 million pre-tax loss on
the sale ($711 million after taxes) was recorded as a
loss on sale of discontinued operations. In the 2004
second quarter, a $90 million discontinued oper-
ations gain after taxes and minority interest was
recorded from the sale of the Carter Holt Harvey
Tissue business.

Prior-period results for all periods presented have
been restated to present the operating results of
these businesses as earnings from discontinued
operations.

Income Taxes

The Company recorded an income tax provision for
2006 of $1.9 billion, consisting of a $1.6 billion
deferred tax provision (principally reflecting deferred
taxes on the 2006 Transformation Plan forestland
sales) and a $300 million current tax provision. The
tax provision also included an $11 million provision
for special
item tax adjustments. Excluding the
impact of special items, the tax provision was $272
million, or 29% of pre-tax earnings before minority
interest.

An income tax benefit of $407 million was recorded
in 2005 including a $454 million benefit related to
special tax adjustment items, consisting of a tax
benefit of $627 million resulting from an agreement
Internal Revenue Service
reached with the U.S.
concerning the 1997 through 2000 U.S.
federal
income tax audit, a $142 million charge for deferred

taxes related to earnings repatriations under the
American Jobs Creation Act of 2004 and $31 million
of other tax charges. Excluding the impact of special
items, the tax benefit was $83 million, or 20% of
pre-tax earnings before minority interest.

The income tax provision for 2004 was $114 million,
or 30% of pre-tax earnings from continuing oper-
ations before minority interest. This included a $32
million tax provision related to an adjustment of
deferred tax balances. Excluding the impact of spe-
cial items, the tax provision was $98 million, or 19%
of pre-tax earnings before minority interest.

The higher income tax rate of 29% in 2006 reflects a
higher proportion of earnings in higher tax rate
jurisdictions.

Corporate Items and Interest Expense

Minority interest expense, net of taxes, was $17 mil-
lion in 2006, compared with $9 million in 2005 and
$24 million in 2004. The increase in 2006 reflects the
Company’s acquisition of the Moroccan box plants in
the fourth quarter of 2005, and the formation of the
International Paper & Sun Cartonboard Co., Ltd. joint
ventures in the fourth quarter of 2006. The decrease
in minority interest from 2004 reflects a reduction
related to preferred securities that were replaced by
debt obligations in 2004.

Interest expense, net, of $521 million includes a
pre-tax credit of $6 million for interest received from
the Canadian government on refunds of prior-year
softwood lumber duties. Interest expense, net, for
2005 of $595 million includes a pre-tax credit of $43
million for interest related to the agreement reached
with the U.S. Internal Revenue Service concerning
federal
the Company’s 1997 through 2000 U.S.
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. Exclud-
ing special items, interest expense, net, of $527 mil-
lion in 2006 decreased from $649 million in 2005 and
$712 million in 2004 reflecting lower average debt
balances and lower
rates due to debt
interest
refinancings and repayments.

For the twelve months ended December 31, 2006,
corporate items totaled $746 million of expense,
compared with $607 million in 2005 and $477 million
in 2004. The increased expenses in 2006 compared
with both 2005 and 2004 are due to higher pension
expenses, benefits-related expenses and supply
chain initiative costs, partially offset by lower
inventory-related costs.

Special Items

Restructuring and Other Charges

International Paper continually evaluates its oper-
ations for improvement opportunities targeted to
(a)
focus our portfolio on our core businesses,
(b) rationalize and realign capacity to operate fewer
facilities with the same revenue capability and close
high cost facilities, and (c) reduce costs. Annually,
strategic operating plans are developed by each of
our businesses to demonstrate that they will achieve
a return at least equal to their cost of capital over an
economic cycle. If it subsequently becomes apparent
that a facility’s plan will not be achieved, a decision is
then made to (a) invest additional capital to upgrade
the facility, (b) shut down the facility and record the
corresponding charge, or (c) evaluate the expected
recovery of
the 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.

the carrying value of

2 0 0 6 : During 2006, total restructuring and other
charges of $300 million before taxes ($184 million
after taxes) were recorded. These charges included:

•

taxes)

a $157 million charge before taxes ($95 million
after
restructuring
for organizational
associated with the
programs, principally
Company’s Transformation Plan,

a $165 million charge before taxes ($102 million
after taxes) for early debt extinguishment costs,

a $97 million charge before taxes ($60 million
after
litigation settlements and
adjustments to legal reserves,

taxes)

for

a pre-tax credit of $115 million ($70 million after
taxes) for payments received relating to the
Company’s participation in the U.S. Coalition for
Fair Lumber Imports, and

a $4 million credit before taxes ($3 million after
taxes) for other items.

the reversal of reserves no longer required, and a $6
million pre-tax credit ($4 million after taxes) for
interest received from the Canadian government on
refunds of prior-year softwood lumber duties.

2 0 0 5 : During 2005, Corporate restructuring and
other charges of $285 million before taxes ($175 mil-
lion after
taxes) were recorded. These charges
included:

•

taxes)

a pre-tax charge of $201 million ($124 million
after
restructuring
for organizational
programs, principally costs associated with the
Company’s Transformation Plan,

a pre-tax charge of $57 million ($35 million after
taxes) for losses on early extinguishment of
debt, and

a $27 million pre-tax charge ($16 million after
taxes) for legal reserves.

Additionally, pre-tax restructuring charges totaling
$55 million ($38 million after taxes) were recorded in
business segment operating results.

Also recorded were pre-tax credits of $258 million
($151 million after taxes) for net insurance recoveries
related to the hardboard siding and roofing litigation
and a $4 million pre-tax credit ($3 million after taxes)
for
the net adjustment of previously provided
reserves.

2 0 0 4 : During 2004, restructuring and other charges
of $164 million before taxes ($102 million after taxes)
were recorded. These charges included:

•

a $62 million charge before taxes ($39 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 million charge before taxes ($6 million
after taxes) for legal settlements.

In addition, credits of $123 million before taxes ($76
million after taxes) for insurance recoveries related
to the hardboard siding and roofing litigation and
$35 million before taxes ($21 million after taxes) for
the net reversal of restructuring reserves no longer
needed were recorded.

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

Gain on Sale of Forestlands

During 2006,
in connection with the previously
the Company
announced Transformation Plan,
completed sales totaling approximately 5.6 million
acres of forestlands for proceeds of approximately
$6.6 billion, including $1.8 billion in cash and $4.8
billion of installment notes supported by irrevocable
letters of credit. The first of these transactions in the
second quarter included approximately 76,000 acres
sold for cash proceeds of $97 million, resulting in a
pre-tax gain of $62 million. During the third quarter,
476,000 acres of forestlands were sold for $401 mil-
lion, including $265 million in cash and $136 million
of installment notes, resulting in a pre-tax gain of
the
$304 million. Finally,
Company completed sales of 5.1 million acres of
forestlands for $6.1 billion, including $1.4 billion in
cash and $4.7 billion of installment notes, resulting in
pre-tax gains totaling $4.4 billion. These transactions
represent a permanent reduction in the Company’s
forestland asset base and are not a part of the nor-
mal, ongoing operations of the Forest Resources
business. Thus, the net gains resulting from these
sales totaling approximately $4.8 billion are sepa-
rately presented in the accompanying consolidated
statement of operations under the caption Gain on
sale of forestlands.

in the fourth quarter,

Impairments of Goodwill

During the fourth quarter of 2006, in connection with
annual goodwill impairment testing, charges of $630
million and $129 million were recorded to write
down the carrying values of goodwill of the Compa-
ny’s coated paperboard and Shorewood packaging
businesses, respectively, based on the estimated fair
values of these businesses determined using pro-
jected future operating cash flows.

Net Losses on Sales and Impairments of
Businesses

Net losses on sales and impairments of businesses
included in Corporate special items totaled $1.4 bil-
lion in 2006, $111 million in 2005 and $135 million in
2004. The principal components of
these gains/
losses were:

2 0 0 6 : During the fourth quarter of 2006, a charge of
$21 million before and after taxes was recorded for
losses on sales and impairments of businesses. This
charge included a pre-tax loss of $18 million ($6 mil-
lion after taxes) relating to the sale of certain box
plants in the United Kingdom and Ireland, and $3
million of pre-tax charges (a $6 million credit after
taxes) for other small asset sales.

During the third quarter of 2006, a net pre-tax gain of
$61 million ($38 million after taxes) was recorded for
gains (losses) on sales and impairments of busi-
nesses. This net gain included the recognition of a
previously deferred $110 million pre-tax gain ($68
million after taxes) related to a 2004 sale of forest-
lands in Maine, a pre-tax charge of $38 million ($23
million after taxes) to reflect the completion of the
sale of the Company’s Coated and Supercalendered
Papers business in the 2006 third quarter, and a net
pre-tax loss of $11 million ($7 million after taxes)
related to other smaller sales.

During the second quarter of 2006, a pre-tax charge
of $138 million ($90 million after
taxes) was
recorded, including a pre-tax charge of $85 million
($52 million after taxes) recorded to adjust the carry-
ing value of the assets of the Company’s Coated and
Supercalendered Papers business to their estimated
fair value based on the terms of a definitive sales
agreement signed in the second quarter, a pre-tax
charge of $52 million ($37 million after taxes)
recorded to reduce the carrying value of the assets of
the Company’s Amapa wood products operations in
Brazil to their estimated fair value based on esti-
mated sales proceeds since a sale of these assets,
which was completed in the third quarter, was con-
sidered more likely than not at June 30, 2006, and a
net charge of $1 million before and after taxes
related to other smaller items.

During the first quarter of 2006, a charge of $1.3 bil-
lion before and after taxes was recorded to write
the Company’s Coated and
down the assets of
Supercalendered Papers business to their estimated
fair value, as management had committed to a plan
to sell
In addition, other pre-tax
charges totaling $3 million ($2 million after taxes)
were recorded to adjust estimated losses of certain
smaller operations that are held for sale.

this business.

At the end of the 2006 first quarter, the Company had
reported its Coated and Supercalendered Papers
business as a discontinued operation based on a
plan to sell the business. In the second quarter of
2006, the Company signed a definitive agreement to
this business for approximately $1.4 billion,
sell

subject
to certain post-closing adjustments, and
agreed to acquire a 10 percent limited partnership
interest in CMP Investments L.P., the company that
will own this business. Since this limited partnership
interest represents significant continuing involve-
ment in the operations of this business under U.S.
generally accepted accounting principles, the operat-
ing results for Coated and Supercalendered Papers
were required to be included in continuing oper-
ations in the accompanying consolidated statement
of operations. Accordingly, the operating results for
this business, including the charge in the first quarter
of $1.3 billion to write down the assets of the busi-
ness to their estimated fair value, are now included
in continuing operations for all periods presented.

Additionally during the fourth quarter, a $128 million
pre-tax impairment charge ($84 million after taxes)
was recorded to reduce the carrying value of the
fixed assets of the Company’s Saillat mill in France
(included in the Printing Papers segment) to their
estimated fair value, and in the third quarter, a
pre-tax gain of $13 million ($6 million after taxes)
was recorded related to a sale of property in Spain
(included in the Industrial Packaging segment).

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,
principally $45 million to write down the carrying
value of the Company’s Polyrey business in France
to its estimated net realizable value.

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 taxes) 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 completed 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 business and related corporate assets to their
estimated net realizable value. The sale of Industrial
Papers was completed 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 pre-
viously sold.

In December 2004,

International Paper
2 0 0 4 :
committed to plans for the sale in 2005 of its Fine
Papers business and its Maresquel mill and Pape-
teries 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 recorded to write down the assets
of these entities to their estimated fair values less
costs to sell. In October 2004, International Paper
sold two box plants located in China to International
Paper Pacific Millennium, resulting in a pre-tax loss
of $14 million ($4 million after taxes).

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 approx-
imately $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
(included in the Consumer Packaging
segment).

Industry Segment Operating Profits

Industry segment operating profits of $2.1 billion in
2006 improved from both the $1.6 billion in 2005 and
the $1.7 billion in 2004. The benefits of significantly

sales price realizations

higher
($476 million),
increased sales volumes including the impact of
reduced lack-of-order downtime in our U.S. contain-
erboard, coated paperboard and uncoated papers
businesses ($143 million), the favorable impacts of
cost reduction initiatives, improved operating per-
formance and a more favorable product mix ($187
million) and other items ($15 million) were partially
offset by higher energy, wood and other
raw
material costs ($101 million), higher freight costs
($113 million), lower earnings from forestland and
real estate sales ($27 million) and an impairment
charge to reduce the carrying value of the fixed
assets at the Saillat, France mill ($128 million).

Lack-of-order downtime in 2006 totaled approx-
imately 155,000 tons, compared with 830,000 tons in
2005 and 70,000 tons in 2004, 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, Louisi-
ana; that were permanently closed in the fourth
quarter of 2005.

Looking forward to the first quarter of 2007, we
expect operating profits to be lower than in the 2006
fourth quarter, principally due to lower earnings
from real estate sales. Sales volumes should be
seasonally better in the quarter, and average price
realizations are expected to improve as previously
announced paper price increases in Europe and Bra-
containerboard in the U.S., are
zil, and for
implemented.
Input costs for energy, wood and
chemicals will be mixed, but should average slightly
higher in the first quarter. The first quarter will bene-
fit from contributions from our recent International
Paper/Sun coated paperboard joint ventures in Chi-
na, and earnings from the Luiz Antonio operations in
Brazil acquired during the quarter.

DESCRIPTION OF INDUSTRY SEGMENTS

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 cus-
tomer basis consistent with the business segmenta-
tion 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 uncoated 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 digi-
tal imaging printing as well as in advertising and
promotional materials such as brochures, pam-
phlets, greeting cards, books, annual reports and
direct mail publications. Uncoated papers also pro-
duces 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 brand names
that include Hammermill, Springhill, Williamsburg,
Postmark, Accent, 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.

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, mag-
azines,
inserts and commercial printing. Products
include coated free sheet, coated groundwood and
supercalendered groundwood papers. This business
was sold in the third quarter of 2006.

M A R K E T P U L P : Market pulp is used in the manu-
facture 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 and
southern softwood pulp, as well as northern, south-
ern and birch hardwood paper pulps. These products
are produced in the United States, France, Poland
and Russia, and are sold around the world. Interna-
tional Paper facilities have annual dried pulp capacity
of about 1.2 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, which
owns or manages approximately 370,000 acres of
forestlands in Brazil. Our annual production capacity
in Brazil is approximately 435,000 tons of uncoated
papers.

Industrial Packaging

I N D U S T R I A L P A C K A G I N G : With a world-wide
production capacity of about 4.9 million tons annu-
ally, International Paper is the third largest manu-
facturer of containerboard in the United States. Over
one-third of our production consists of specialty
grades, such as BriteTop. About 70% of our pro-
duction is converted domestically into corrugated
boxes and other packaging by our 65 U.S. container
plants.
In Europe, our operations include one
recycled containerboard mill in France and 22 con-
tainer plants in France,
Italy, Spain, Turkey and
Morocco. In Asia, our operations include eight con-
tainer plants in China and one container plant in
Thailand. Our container plants are supported by
regional design centers, which offer total packaging
solutions and supply chain initiatives. Unbleached
Kraft Papers, with an annual capacity of 405,000 tons,
was sold on January 2, 2007.

Consumer Packaging

C O N S U M E R P A C K A G I N G : Our coated paperboard
business produces high quality coated paperboard
for a variety of packaging and commercial printing
end uses. Our Everest®, Fortress®, and Starcote®
brands are used in packaging applications for every-
day products such as food, cosmetics, pharmaceut-
icals, computer software and tobacco products. Our
Carolina® brand is used in commercial printing end
uses such as greeting cards, paperback book covers,
lottery tickets, direct mail and point-of-purchase
advertising. International Paper is the world’s largest
producer of solid bleached sulfate board with annual
U.S. production capacity of about 1.9 million tons.
Mills producing coated board in Poland, Russia and
China complement our U.S. capacity, uniquely posi-
tioning us to provide value-added, innovative prod-
ucts for global customers.

Shorewood Packaging Corporation utilizes emerging
technologies in 18 facilities worldwide to produce
world-class packaging with high-impact graphics for
a variety of markets, including home entertainment,
tobacco, cosmetics, general consumer and pharma-
ceuticals. Our Foodservice business offers cups, lids,
food containers and plates through three
bags,
domestic plants and six international facilities.

Distribution

Through xpedx, our North American merchant dis-
tribution business, we provide distribution services
and products to a number of customer markets,
including the commercial printer with printing
papers and graphic art supplies; the building services

and away-from-home markets with facility supplies;
manufacturers with packaging supplies and equip-
ment; and to a growing number of customers, we
exclusively provide distribution capabilities including
warehousing and delivery services. xpedx is the
leading wholesale distribution marketer in these
customer and product segments in North America,
operating 126 warehouse locations and 142 retail
stores in the U.S. and Mexico.

Forest Products

F O R E S T R E S O U R C E S : International Paper owns or
manages approximately 500,000 acres of forestlands
in the United States, mostly in the South. All lands
are independently third-party certified under the
operating standards of the Sustainable Forestry Ini-
tiative (SFITM). As part of the Company’s Trans-
formation Plan, approximately 5.6 million acres of
forestlands were sold in 2006. Our remaining forest-
lands are managed as a portfolio to optimize the
economic value to our shareholders. Most of our
portfolio represents properties that are likely to be
sold to investors and other buyers for various uses
or held for real estate development.

Specialty Businesses and Other

C H E M I C A L S : Arizona Chemical
is a leading pro-
ducer of specialty resins based on crude tall oil, a
byproduct of
the wood pulping process. These
products, used in adhesives and inks, are made at 11
plants in the United States and Europe. This busi-
ness is currently subject to a definitive sale agree-
ment expected to close in the first quarter of 2007.

Products and brand designations appearing in italics
are trademarks of International Paper or one of its
affiliates.

INDUSTRY SEGMENT RESULTS

Printing Papers

Demand for Printing Papers products is closely corre-
lated with changes in commercial printing and
advertising activity, direct mail volumes and, for
uncoated cut-size products, with changes in white-
collar employment 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 producers in different
geographic regions. Principal cost drivers include
manufacturing efficiency and raw material and
energy costs.

P R I N T I N G P A P E R S net sales for 2006 decreased 3%
from both 2005 and 2004 due principally to the sale
of the U.S. coated papers business in August 2006.
However, operating profits in 2006 were 43% higher
than in 2005 and 33% higher than in 2004. Compared
with 2005, earnings improved for U.S. uncoated
papers, market pulp and European Papers, but this
was partially offset by earnings declines in Brazilian
papers. Benefits from higher average sales price
realizations in the United States, Europe and Brazil
($284 million), improved manufacturing operations
($73 million), reduced lack-of-order downtime ($41
million), higher sales volumes in Europe ($23
million), and other items ($65 million) were partially
offset by higher raw material and energy costs ($109
million), higher freight costs ($45 million) and an
impairment charge to reduce the carrying value of
the fixed assets at the Saillat, France mill ($128
million). Compared with 2004, higher earnings in
2006 in the U.S. uncoated papers, market pulp and
coated papers businesses were offset by lower earn-
ings in the European and Brazilian papers busi-
nesses. The printing papers segment took 555,000
tons of downtime in 2006, including 150,000 tons of
lack-of-order downtime to align production with
customer demand. This compared with 970,000 tons
of total downtime in 2005, of which 520,000 tons
related to lack-of-orders.

Printing Papers

In millions

Sales

Operating Profit

2006

$6,930

$ 677

2005

2004

$7,170

$ 473

$7,135

$ 508

U . S . U N C O A T E D P A P E R S net sales in 2006 were
$3.5 billion, compared with $3.2 billion in 2005 and
$3.3 billion in 2004. Sales volumes increased in 2006
over 2005, particularly in cut-size paper and printing
papers. Average sales price realizations increased
significantly, reflecting benefits from price increases
announced in late 2005 and early 2006. Lack-of-order
downtime declined from 450,000 tons in 2005 to
40,000 tons in 2006, reflecting firm market demand
and the impact of the permanent closure of three
uncoated freesheet machines in 2005. Operating
earnings in 2006 more than doubled compared with
both 2005 and 2004. The benefits of improved aver-
age sales price realizations more than offset higher
input costs for freight, wood and energy, which were
all above 2005 levels. Mill operations were favorable
compared with 2005 due to current-year improve-
ments in machine performance, lower labor, chem-
ical and energy consumption costs, as well as
approximately $30 million of charges incurred in
2005 for machine shutdowns.

U . S . C O A T E D P A P E R S net sales were $920 million
in 2006, $1.6 billion in 2005 and $1.4 billion in 2004.
Operating profits in 2006 were 26% lower than in
2005. A small operating loss was reported for the
business in 2004. This business was sold in the third
quarter of 2006. During the first two quarters of 2006,
sales volumes were up slightly versus 2005. Average
sales price realizations for coated freesheet paper
and coated groundwood paper were higher than in
2005, reflecting the impact of previously announced
price increases. However,
input costs for energy,
wood and other raw materials increased over 2005
levels. Manufacturing operations were favorable due
to higher machine efficiency and mill cost savings.

U . S . M A R K E T P U L P sales in 2006 were $509 mil-
lion, compared with $526 million and $437 million in
2005 and 2004, respectively. Sales volumes in 2006
were down from 2005 levels, primarily for paper and
tissue pulp. Average sales price realizations were
higher in 2006, reflecting higher average prices for
fluff pulp and bleached hardwood and softwood
pulp. Operating earnings increased 30% from 2005
and more than 100% from 2004 principally due to the
impact of the higher average sales prices. Input costs
for wood and energy were higher in 2006 than in
2005. Manufacturing operations were unfavorable,
driven primarily by poor operations at our Riegel-
wood, North Carolina mill.

B R A Z I L I A N P A P E R net sales for 2006 of $496 mil-
lion were higher than the $465 million in 2005 and
the $417 million in 2004. The sales increase in 2006
reflects higher sales volumes than in 2005, partic-
and a
for uncoated freesheet paper,
ularly
strengthening of the Brazilian currency versus the
U.S. dollar. Average
realizations
improved in 2006, primarily for uncoated freesheet
paper and wood chips. Despite higher net sales,
operating profits for 2006 of $122 million were down
from $134 million in 2005 and $166 million in 2004,
due principally to incremental costs associated with
an extended mill outage in Mogi Guacu to convert to
an elemental-chlorine-free bleaching process,
to
rebuild the primary recovery boiler, and for other
environmental upgrades.

sales price

E U R O P E A N P A P E R S net sales in 2006 were $1.5 bil-
lion, compared with $1.4 billion in 2005 and $1.5 bil-
lion in 2004. Sales volumes in 2006 were higher than
in 2005 at our Eastern European mills due to stron-
ger market demand. Average sales price realizations
increased in 2006 in both Eastern and Western
European markets. Operating earnings in 2006 rose
20% from 2005, but were 15% below 2004 levels. The
2005
improvement

compared with

2006

reflects the contribution from higher net sales, parti-
ally offset by higher input costs for energy, wood
and freight.

Entering 2007, earnings in the first quarter are
expected to improve compared with the 2006 fourth
quarter due primarily to reduced manufacturing
costs reflecting the completion of
the mill opti-
mization project in Brazil in the fourth quarter. Sales
volumes are expected to be seasonally better in the
U.S. uncoated paper and market pulp businesses,
but seasonally weaker in the Russian paper business.
Average sales price realizations should improve as
we continue to implement previously announced
price increases in Europe and Brazil, although U.S.
average price realizations are expected to remain
flat. Wood costs are anticipated to be higher due to
supply difficulties in the winter months, and energy
costs will be mixed. The first-quarter 2007 acquisition
of
in Brazil will provide
incremental earnings. During 2007, the Pensacola,
Florida mill will be converted to produce container-
board, reducing future U.S. production capacity for
uncoated freesheet paper.

the Luiz Antonio mill

Industrial Packaging

Demand for Industrial Packaging products is closely
correlated with non-durable industrial goods pro-
duction in the United States, as well as with demand
for processed foods, poultry, meat and agricultural
products. In addition to prices and volumes, major
factors affecting the profitability of Industrial Pack-
aging are
costs,
raw material
manufacturing efficiency and product mix.

and energy

I N D U S T R I A L P A C K A G I N G net sales for 2006
increased 6% compared with 2005 and 8% compared
with 2004. Operating profits in 2006 were 82% higher
than in 2005 and 7% higher than in 2004. Benefits
from improved price realizations ($156 million), sales
volume increases ($29 million), a more favorable mix
($21 million), reduced market related downtime ($25
million) and strong mill performance ($43 million)
were partially offset by the effects of higher raw
material costs ($12 million), higher freight costs ($48
million), higher converting operations costs ($21 mil-
lion) and other costs ($26 million). In addition, a gain
of $13 million was recognized in 2006 related to a
sale of property in Spain. The segment took 135,000
tons of downtime in 2006, none of which was
market-related, compared with 370,000 tons of
downtime in 2005, which included 230,000 tons of
lack-of-order downtime.

Industrial Packaging

In millions

Sales

Operating Profit

2006

$4,925

$ 399

2005

2004

$4,625

$ 219

$4,545

$ 373

U . S . C O N T A I N E R B O A R D net sales for 2006 were
$955 million, compared with $895 million in 2005
and $950 million for 2004. Average sales price
realizations in the first quarter of 2006 began the year
below first-quarter 2005 levels, but improved sig-
nificantly during the second quarter and were higher
than in 2005 for the remainder of the year. Sales
volumes were higher throughout 2006. Operating
profits in 2006 were more than double 2005 levels,
and 68% higher than in 2004. The favorable impacts
of the higher average sales price realizations, higher
sales volumes, reduced lack-of-order downtime and
strong mill performance were only partially offset by
higher input costs for freight, chemicals and energy.

U . S . C O N V E R T I N G O P E R A T I O N S net sales totaled
$2.8 billion in 2006, $2.6 billion in 2005 and $2.3 bil-
lion in 2004. Sales volumes throughout the year in
2006 were above 2005 levels, reflecting solid market
demand for boxes and packaging solutions. In the
first two quarters of 2006, margins were favorable
compared with the prior year as average sales prices
outpaced containerboard cost increases, but average
margins began to decline in the third quarter as
containerboard increases outpaced the increase in
box prices. Operating profits in 2006 decreased 72%
from 2005 and 86% from 2004 levels, primarily due
to higher distribution, utility and raw material costs,
and inventory adjustment charges.

E U R O P E A N C O N T A I N E R net sales for 2006 were
$1.0 billion, compared with $883 million in 2005 and
$865 million in 2004. The increase was principally
due to contributions from the Moroccan box plants
acquired in the fourth quarter of 2005, although sales
volumes for the rest of the business were also
slightly higher. Operating profits in 2006 were up
31% compared with 2005 and 6% compared with
2004. This increase included a $13 million gain on
the sale of property in Spain as well as the increased
contributions from the Moroccan acquisition, parti-
ally offset by higher energy costs.

I N T E R N A T I O N A L
P A P E R D I S T R I B U T I O N L I M-
I T E D , our Asian box and containerboard business,
had net sales for 2006 of $182 million. In 2005, net
sales were $104 million subsequent to International
Paper’s acquisition of a majority interest in August
2005. This business generated a small operating
profit in 2006, compared with a small loss in 2005.

Earnings for the first quarter of 2007 are expected to
than in the fourth quarter of 2006.
be lower
Containerboard export sales volumes are expected
to decline due to scheduled first-quarter main-
tenance outages. Sales volumes for U.S. converted
products will be higher due to more shipping days,
but expected softer demand should cause the ship-
ments per day to decrease. Average sales price real-
izations are expected to be comparable to fourth-
quarter averages. An additional containerboard price
increase was announced in January that is expected
to be fully realized in the second quarter. Costs for
wood, energy, starch, adhesives and freight are
expected to increase. Manufacturing costs will be
higher due to costs associated with scheduled main-
tenance outages in the containerboard mills. Euro-
pean Container operating results are expected to
improve as seasonally higher sales volumes and
improved margins more than offset slightly higher
manufacturing costs.

Consumer Packaging

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

C O N S U M E R P A C K A G I N G net sales increased 9%
compared with 2005 and 7% compared with 2004.
Operating profits rose 8% from 2005, but declined
15% from 2004 levels. Compared with 2005, higher
sales volumes ($9 million), improved average sales
price realizations ($33 million), reduced lack-of-order
downtime ($18 million), and favorable mill oper-
ations ($25 million) were partially offset by higher
raw material costs ($19 million) and freight costs
($21 million), unfavorable mix ($14 million) and other
costs ($21 million).

Consumer Packaging

In millions

Sales

Operating Profit

2006

$2,455

$ 131

2005

2004

$2,245

$ 121

$2,295

$ 155

C O A T E D P A P E R B O A R D net sales of $1.5 billion in
2006 were higher than $1.3 billion in 2005 and $1.1
billion in 2004. Sales volumes increased in 2006
compared with 2005, particularly in the folding car-
ton board segment, reflecting improved demand for
coated paperboard products.
In 2006, our coated
paperboard mills took 4,000 tons of lack-of-order
downtime,
of
lack-of-order downtime in 2005. Average sales price

compared with

82,000

tons

realizations were substantially improved in the cur-
rent year, principally for folding carton board and
cupstock board. Operating profits were 51% higher
in 2006 than in 2005, and 7% better than in 2004. The
impact of the higher sales prices along with more
favorable manufacturing operations due to strong
performance at the mills more than offset higher
input costs for energy and freight.

F O O D S E R V I C E net sales declined to $396 million in
2006, compared with $437 million in 2005 and $480
million in 2004, due principally to the sale of the
Jackson, Tennessee plant in July 2005. Sales vol-
umes were lower in 2006 than in 2005, although
average sales prices were higher due to the realiza-
tion of price increases implemented during 2005.
Operating profits for 2006 improved over 2005 and
2004 levels largely due to the benefits from higher
sales prices. Raw material costs for bleached board
were higher than in 2005, but manufacturing costs
were more favorable due to increased productivity
and reduced waste.

S H O R E W O O D net sales of $670 million were down
from $691 million in 2005 and $687 million in 2004.
Sales volumes in 2006 were down from 2005 levels
due to weak demand in the home entertainment and
consumer products markets, although demand was
strong in the tobacco segment. Average sales prices
for the year were lower than in 2005. Operating prof-
its were down significantly from both 2005 and 2004
due to the decline in sales, particularly in the higher
margin home entertainment markets, higher raw
material costs for bleached board and certain
inventory adjustment costs.

Entering 2007, coated paperboard first-quarter sales
volumes are expected to be seasonally stronger than
in the fourth quarter 2006 for folding carton board
and bristols. Average sales price realizations are
expected to rise with a price increase announced in
January. It is anticipated that manufacturing costs
will improve versus an unfavorable fourth quarter.
Foodservice earnings for the first quarter of 2007 are
expected to decline due to seasonally weaker vol-
ume. However, sales price realizations will be slightly
higher, and the seasonal switch to hot cup contain-
ers will have a favorable impact on product mix.
Shorewood sales volumes for the first quarter of
2007 are expected to seasonally decline, but the
earnings impact will be partially offset by pricing
improvements and an improved product mix.

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 seg-
ment is also dependent on corporate advertising and
promotional spending. Providing customers with the
best choice and value in both products and supply
chain services is a key competitive factor. Addition-
ally, efficient customer service, cost-effective logis-
tics, and focused working capital management are
key factors in this segment’s profitability.

Distribution

In millions

Sales

Operating Profit

2006

$6,785

$ 128

2005

2004

$6,380

$6,065

D I S T R I B U T I O N 2006 net sales increased 6% from
2005 and 12% from 2004. Operating profits in 2006
were 52% higher than in 2005 and 47% higher than
in 2004. Sales volumes rose for all segments, but
were particularly strong for packaging and facility
supplies. Average sales prices also increased in all
segments. The improvement in operating results
reflects the higher revenues and improvements in
operating expenses resulting from facility realign-
ments and cost reduction actions begun in the sec-
ond half of 2005 designed to increase the ongoing
efficiency of the xpedx distribution system.

Looking ahead to the first quarter of 2007, earnings
are expected to be comparable to strong 2006 fourth-
quarter results. Sales volumes should experience a
slight seasonal decline, but operating expense
improvements should lead to comparable operating
profits.

Forest Products

Forest Products currently manages approximately
500,000 acres of forestlands in the United States.
Forest Resources operating results have historically
been largely driven by demand and pricing for soft-
wood sawtimber, and to a lesser extent for softwood
pulpwood, by the volume of merchantable timber
harvested from Company forestlands, and by
demand and pricing for specific forestland tracts
offered for sale. With the significant decline in forest-
lands acreage in 2006,
future operations will
primarily consist of retail forestland and real estate
sales.

Forest Products

In millions

Sales

Operating Profit:

Forest Resources -

Sales of Forestlands

Havest & Recreational Income

Forestland Expenses

Real Estate Operations

Operating Profit

2006

$ 765

2005

2004

$ 995

$ 875

$ 447

$ 400

$ 315

222

(115)

124

269

(146)

198

281

(178)

124

$ 678

$ 721

$ 542

F O R E S T R E S O U R C E S sales in 2006 decreased 23%
from 2005 and 13% from 2004. Operating profits
were down 6% from 2005, but were up 25% from
2004. As part of the Company’s announced Trans-
formation Plan, 5.6 million acres of forestland were
sold in 2006, primarily in the fourth quarter, resulting
in a significant decline in forestland acreage. The
Company intends to focus future operations on
maximizing proceeds from the sale of the remaining
forestlands.

Operating profits from stumpage sales and recrea-
tional income were $222 million in 2006, compared
with $269 million in 2005 and $281 million in 2004,
reflecting the significant reduction in acreage in the
fourth quarter. Operating profits from forestland
sales were $447 million in 2006, compared with $400
million in 2005 and $315 million in 2004. Operating
expenses decreased to $115 million from $146 mil-
lion in 2005 and $178 million in 2004, reflecting the
continuing effects of restructuring efforts and cost
reduction initiatives. Operating profits for the Real
Estate
sells
which
higher-and-better-use properties, were $124 million,
$198 million and $124 million in 2006, 2005 and 2004,
respectively.

principally

division,

Looking forward to 2007, operating results will be
significantly impacted by the forestlands sold in
2006. Earnings from harvest and recreation income

will no longer be significant contributors to business
operating results, while expenses should also
decline significantly reflecting the reduced level of
operations. Operating earnings will primarily consist
of retail forestland and real estate sales of remaining
acreage.

Specialty Businesses and Other

The Specialty Businesses and Other segment
includes the results of the Arizona Chemical business
and certain divested businesses whose results are
included in this segment for periods prior to their
sale or closure.

This segment’s 2006 net sales increased 2% from
2005, but declined 17% from 2004. Operating profits
in 2006 were up substantially from both 2005 and
2004. The decline in sales compared with 2004
principally reflects declining contributions from
businesses sold or closed.

Specialty Businesses and Other

In millions

Sales

Operating Profit

2006

$935

$ 61

2005

$915

$ 4

2004

$1,120

A R I Z O N A C H E M I C A L sales were $769 million in
2006, compared with $692 million in 2005 and $672
million in 2004. Sales volumes declined in 2006
compared with 2005, but average sales price realiza-
tions in 2006 were higher in both the United States
and Europe. Operating earnings in 2006 were sig-
nificantly higher than in 2005 and more than 49%
higher than in 2004. The increase over 2005 reflects
the impact of the higher average sales price realiza-
tions and lower manufacturing costs, partially offset
by higher prices for crude tall oil (CTO). Earnings for
2005 also included a $13 million charge related to a
plant shutdown in Norway.

Other businesses in this operating segment include
operations that have been sold, closed or held for
sale, primarily the Polyrey business in France and, in
prior years,
the European Distribution business.
Sales for these businesses were approximately $166
million in 2006, compared with $223 million in 2005
and $448 million in 2004.

In December 2006, the Company entered into a
definitive agreement to sell the Arizona Chemical
business, expected to close in the first quarter of
2007.

LIQUIDITY AND CAPITAL RESOURCES

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 part of the continuing focus on improving our
return on investment, we have focused our capital
spending on improving our key paper and packaging
businesses both globally and in North America.
Spending levels have been kept below the level of
depreciation and amortization charges for each of
the last three years, and we anticipate spending will
again be slightly below depreciation and amor-
tization in 2007.

Financing activities in 2006 have been focused on the
Transformation Plan objective of strengthening the
balance sheet through repayment of debt, resulting
in a net reduction in 2006 of $5.2 billion following a
$1.7 billion net reduction in 2005. Additionally, we
made a $1.0 billion voluntary cash contribution to
our U.S. qualified pension plan in December 2006 to
begin
long-term funding
requirements and to lower future pension expense.
Our liquidity position continues to be strong, with
approximately $3.0 billion of committed liquidity to
cover future short-term cash flow requirements not
met by operating cash flows.

satisfying

projected

Management believes it is important for Interna-
tional Paper to maintain an investment-grade credit
rating to facilitate access to capital markets on
favorable terms. At December 31, 2006, the Com-
pany held long-term credit ratings of BBB (stable
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 $1.0
billion for 2006, compared with $1.2 billion for 2005
and $1.7 billion in 2004. The 2006 amount is net of a
$1.0 billion voluntary cash pension plan contribution
made in the fourth quarter of 2006. The major
components of cash provided by continuing oper-
ations are earnings from continuing operations

adjusted for non-cash income and expense items
and changes in working capital. Earnings from con-
tinuing operations, adjusted for non-cash items and
excluding the pension contribution,
increased by
$584 million in 2006 versus 2005. This compared
with a decline of $63 million for 2005 over 2004.

liabilities,

$997 million

International Paper’s investments in accounts receiv-
able and inventory less accounts payable and
at
totaled
accrued
December 31, 2006. Cash used for these working
capital components increased by $354 million in
2006, compared with a $558 million increase in 2005
and a $117 million increase in 2004. The increase in
2006 was principally due to decreases in accounts
payable and accrued liabilities.

Investment Activities

Investment activities in 2006 included $1.8 billion of
net cash proceeds received from divestitures, $1.6
billion of net cash proceeds received from the sale of
U.S.
the Company’s Trans-
formation Plan, and $1.1 billion of deposits made to
pre-fund project development costs for a pulp mill
project in Brazil.

forestlands under

Capital spending from continuing operations was
$1.0 billion in 2006, or 87% of depreciation and
amortization, comparable to $992 million, or 78% of
depreciation and amortization in 2005, and $925 mil-
lion, or 73% of depreciation and amortization in 2004.

The following table presents capital spending from
continuing operations by each of our business
segments for the years ended December 31, 2006,
2005 and 2004.

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Subtotal

Corporate and other

2006

$ 537

257

116

988

2005

$592

180

126

973

2004

$453

161

198

893

Total from continuing operations

$1,009

$992

$925

We expect capital expenditures in 2007 to be about
$1.2 billion, or about equal to estimated depreciation
and amortization. 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 and November 2006, International Paper
paid approximately $82 million for a 50% interest in
the International Paper & Sun Cartonboard Co., Ltd.
joint venture that currently operates two coated
paperboard machines in Yanzhou City, China.
In
December 2006, a 50% interest was acquired in a
venture, Shandong International
second joint
for
Paper & Sun Coated Paperboard Co., Ltd.,
approximately $28 million. This joint venture was
formed to construct a third coated paperboard
machine, expected to be completed in the first quar-
ter of 2009. The operating results of these con-
solidated joint ventures did not have a material effect
on the Company’s 2006 consolidated results of
operations.

On July 1, 2004, International Paper completed the
acquisition of all of the outstanding common and
preferred stock of Box USA Holdings, Inc. (Box USA)
for approximately $189 million in cash and a $15
million 6% note payable issued to Box USA’s
controlling shareholders.
International
Paper assumed approximately $197 million of debt,
approximately $193 million of which was repaid by
July 31, 2004. The operating results of Box USA are
included in the accompanying consolidated financial
statements from that date.

In addition,

Other Acquisitions

In October 2005, International Paper acquired approx-
imately 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 mil-
lion.

In 2001, International Paper and Carter Holt Harvey
Limited (CHH) had 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 existing agreement, International Paper pur-
chased a 50% third-party interest
in IPPM (now
renamed International Paper Distribution Limited) for
$46 million to facilitate possible further growth in
Asia. Finally, in May 2006, the Company purchased
the remaining 25% from CHH interest for $21 million.

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
acquisition.

Financing Activities

2 0 0 6: Financing activities during 2006 included debt
issuances of $223 million and retirements of $5.4 bil-
lion, for a net debt reduction of $5.2 billion.

In December 2006,
International Paper used pro-
ceeds of $2.2 billion to retire notes with interest rates
ranging from 3.8% to 10.0% and original maturities
from 2008 to 2029. Also in the fourth quarter of 2006,
International Paper Investments (Luxembourg) S.ar.l,
a wholly-owned subsidiary of International Paper,
repaid $343 million of long-term debt with an interest
rate of LIBOR plus 40 basis points and a maturity
date in November 2010.

In August 2006,
International Paper used approx-
imately $320 million of cash to repay its maturing
5.375% euro-denominated notes that were des-
ignated as a hedge of euro functional currency net
investments. Other debt activity in the third quarter
included the repayments of $143 million of 7.875%
notes and $96 million of 7% debentures, all maturing
within the quarter.

In June 2006, International Paper paid approximately
$1.2 billion to repurchase substantially all of its zero-
coupon convertible debentures at a price equal to
their accreted principal value plus interest, using
proceeds from divestitures and $730 million of third-
party commercial paper issued under the Company’s
receivables securitization program. At December 31,
2006,
the
International Paper had repaid all of
commercial paper borrowed under this program.

In February 2006, International Paper repurchased
$195 million of 6.4% debentures with an original
maturity date of February 2026. Other reductions in
the first quarter of 2006 included early payment of
approximately $495 million of notes with coupon
rates ranging from 4.0% to 8.875% and original
maturities from 2007 to 2029.

International Paper utilizes interest rate swaps to
change the mix between fixed and variable rate debt
and to manage interest expense. At December 31,
2006,
International Paper had interest rate swaps
with a total notional amount of $2.2 billion with
maturities ranging from one to 10 years. In 2006,
these swaps increased the weighted average cost of
debt from 6.05% to an effective rate of 6.18%. The
income from
the offsetting interest
inclusion of
short-term investments reduced this effective rate to
4.95%.

Other
financing activity in 2006 included the
repurchase of 39.7 million shares of International

Paper common stock for approximately $1.4 billion,
and the issuance of 2.8 million shares under various
incentive plans, including stock option exercises that
generated $32 million of cash.

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

In November and December 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 depend-
ing 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.

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 mil-
lion 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 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, 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 matur-
ities from 2006 to 2015.

Other financing activity in 2005 included the repa-
triation of $900 million of cash in the fourth quarter
and $1.2 billion of cash in the second quarter from
certain of International Paper’s foreign subsidiaries,
and the issuance of approximately 3.0 million
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 bil-
lion, including repayments of $193 million of debt
assumed in the Box USA acquisition in July, and
that was
approximately $340 million of debt
reclassified from Minority interest in 2004 prior to
repayment. Excluding these repayments,
the net
reduction in debt during 2004 was approximately
$1.0 billion.

In August 2004,

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

subsidiary

Also in August 2004, an International Paper wholly-
owned
euro-
issued
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.

500 million

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

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

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

International Paper borrowings

Other financing activity in 2004 included the issuance
of approximately 3.6 million treasury shares and
2.3 million common shares under various incentive
plans,
including stock option exercises that gen-
erated $164 million of cash.

Dividend payments totaled $485 million in 2006,
$490 million in 2005 and $485 million in 2004. The
International
dividend
remained at $1.00 per share during the three-year
period.

common

Paper

stock

2006,

during

principally

Common shareholders’ equity decreased by $388
reflecting
million
repurchases of common stock ($1.4 billion) and
payments of dividends ($485 million), partially offset
by net earnings for the year ($1.1 billion) and the
change in cumulative foreign currency translation
adjustment ($220 million).

Cash and temporary investments totaled $1.6 billion
at both December 31, 2006 and 2005.

Off-Balance Sheet Variable Interest Entities

During 2006 in connection with the sale of approx-
imately 5.6 million acres of forestlands under the
Company’s Transformation Plan,
the Company
exchanged installment notes totaling approximately
$4.8 billion and approximately $400 million of Inter-
national Paper promissory notes for interests in enti-
ties formed to monetize the notes.
International
Paper determined that it was not the primary benefi-
ciary of these entities, and therefore its investments
should be accounted for under the equity method of
accounting. During 2006, these entities acquired an
additional $4.8 billion of International Paper debt
securities for cash, resulting in a total of approx-
imately $5.2 billion of
International Paper debt
obligations held by these entities at December 31,
2006. Since International Paper has, and intends to
affect, a legal right to offset its obligations under
these debt instruments with its investments in the
entities, International Paper has offset $5.0 billion of
interest in the entities against $5.0 billion of Interna-
tional Paper debt obligations held by the entities.

International Paper also holds variable interests in
two financing entities that were used to monetize
long-term notes received from sales of forestlands in
2002 and 2001.

See Note 8 of the Notes to Consolidated Financial
Statements in Item 8. Financial Statements and
Supplementary Data for a further discussion of these
transactions.

Capital Resources Outlook for 2007

International Paper expects to be able to meet pro-
jected capital expenditures, service existing debt and
meet working capital and dividend requirements
during 2007 through current cash balances and cash
from operations and divestiture proceeds, supple-
mented as required by its various existing credit
facilities. International Paper has approximately $3.0
billion of committed liquidity, which we believe is
adequate to cover expected operating cash flow
variability during our industry’s economic cycles. In
March 2006, International Paper replaced its matur-
ing $750 million revolving bank credit agreement
with a 364-day $500 million fully committed revolv-
ing bank credit agreement that expires in March 2007
and has a facility fee of 0.08% payable quarterly, and
replaced its $1.25 billion revolving bank credit
agreement with a $1.5 billion fully committed revolv-
ing bank credit agreement that expires in March 2011
and has a facility fee of 0.10% payable quarterly. In
addition, in October 2006, the Company amended its
existing receivables securitization program that pro-
vides for up to $1.2 billion of commercial paper-
based financings with a facility fee of 0.20% and an
expiration date in November 2007, to provide up to
$1.0 billion of available commercial paper-based
financings with a facility fee of 0.10% and an expira-
tion date of October 2009. At December 31, 2006,
there were no borrowings under either of the bank
credit agreements or the receivables securitization
program.

Paper

International

Additionally,
Investments
(Luxembourg) S.ar.l., a wholly-owned subsidiary of
International Paper, has a $100 million bank credit
agreement maturing in December 2007, with $40
million
of
December 31, 2006.

outstanding

borrowings

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 in compliance with all its debt
covenants at December 31, 2006. Principal financial
covenants include maintenance of a minimum net
worth, defined as the sum of common stock, paid-in
capital and retained earnings,
less treasury stock,
plus any goodwill impairment charges, of $9 billion;
and a maximum total debt to capital 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. In the third quarter of 2006, Standard &
Poor’s reaffirmed the Company’s long-term credit
rating of BBB, revised its ratings outlook from neg-
ative to stable, and upgraded its short-term credit
rating from A-3 to A-2. At December 31, 2006, the
Company also held long-term credit ratings of Baa3
(stable outlook) and a short-term credit rating of P-3
from Moody’s Investor Services.

Contractual obligations for future payments under
existing debt and lease commitments and purchase
obligations at December 31, 2006, were as follows:

In millions

Total debt (a)

2007 2008

2009

2010 2011 Thereafter

$ 692 $129 $1,143 $1,198 $381

$3,680

Lease obligations (b)

144 117

Purchase obligations (c,d)

2,329 462

362

352 323

110

1,794

Total

$3,165 $708 $1,599 $1,624 $764

$5,584

(a) Total debt includes scheduled principal payments only.

(b) Included in these amounts are $76 million of lease obligations

related to discontinued operations and businesses held for sale

that are due as follows: 2007 - $23 million; 2008 - $19 million;

2009 - $15 million; 2010 - $7 million; 2011 - $5 million; and

thereafter - $7 million.

tions related to discontinued operations and businesses held

for sale that are due as follows: 2007 - $335 million; 2008 - $199

million; 2009 - $157 million; 2010 - $143 million; 2011 - $141

million; and thereafter - $331 million.

(d) Includes $2.2 billion relating to fiber supply agreements

entered into at the time of the Transformation Plan forestland

sales.

TRANSFORMATION PLAN

In July 2005, the Company had announced a plan to
focus its business portfolio on two key global plat-
form businesses: Uncoated Papers (including Dis-
tribution) and Packaging. The Plan’s other elements
include exploring strategic options for other busi-
nesses, including possible sale or spin-off, returning
value to shareholders, strengthening the balance
sheet, selective reinvestment to strengthen the paper

and packaging businesses both globally and in North
America, and on improving existing business profit-
ability by targeting an objective of $1.2 billion of
non-price improvements over a three-year period.

International Paper had indicated that after-tax pro-
ceeds from announced and possible future divest-
itures, plus additional free cash flow generated from
operations, would be used as follows:

•

Up to $3 billion to return value to share-
holders,

$6 to $7 billion to strengthen the balance
sheet through debt repayment and possible
voluntary cash contributions to its U.S.
pension plan,

A range of $2 to $4 billion for selective
reinvestment,
including possible uncoated
papers and packaging options in Brazil and
North America, uncoated papers or pack-
aging opportunities in China, and expanded
pulp, paper and packaging operations in
Russia in addition to current operations at
Svetogorsk.

In the third quarter of 2005, the Company completed
the sale of its 50.5% interest in Carter Holt Harvey
Limited for $1.1 billion in proceeds. In the third quar-
ter of 2006, the Company completed the sales of its
U.S. Coated and Supercalendered Papers business
for approximately $1.4 billion and its Brazilian
Coated Papers business for approximately $420 mil-
lion. Also during 2006, approximately 5.6 million
acres of U.S. forestlands were sold in a series of
transactions yielding approximately $6.6 billion of
proceeds. Additionally during 2006, the Company
announced definitive agreements for the sales of its
Kraft Papers business for approximately $155 mil-
lion, its Beverage Packaging business for approx-
imately $500 million, its Arizona Chemical business
for approximately $485 million, and the majority of
its Wood Products business in two separate trans-
actions totaling approximately $560 million. The
sales of the Kraft Papers business and the North
American portion of the Beverage Packaging busi-
ness were subsequently completed in January 2007.
Total estimated proceeds from these transactions are
approximately $11.3 billion.

As part of the use of Transformation Plan proceeds
to return value to shareholders, during the 2006 third
quarter, the Company purchased through a modified
“Dutch Auction” tender offer, 38,465,260 shares (or
approximately 6%) of its common stock at a price of

$36.00 per share, plus costs to acquire the shares, for
a total cost of approximately $1.4 billion. Addition-
ally, the Company purchased an additional 1,220,558
shares of its common stock in the open market in
December 2006 at an average price of $33.84 per
share, plus costs to acquire the shares, for a total
cost of approximately $41 million. Following the
completion of these share repurchases, International
Paper had approximately 454 million shares of
common stock outstanding.

To help strengthen the balance sheet, the Company
has reduced long-term debt by approximately $6.2
billion since the plan was announced, including $1.0
billion in 2005 and $5.2 billion during 2006. In addi-
tion, the Company made a $1.0 billion voluntary
contribution to its U.S. qualified pension fund in
December 2006 to begin satisfying projected long-
term funding requirements and to lower future pen-
sion expense. As a result of this contribution, the
pension fund is now approximately 94% funded.

As part of its selective reinvestment plan, the Com-
pany has identified opportunities totaling approx-
imately $2.0 billion, including:

•

$110 million of investments in the fourth
quarter of 2006 to acquire 50% interests in
two joint ventures with Sun Cartonboard
Co., Ltd.
in a coated board production
facility in Yanzhou City, China, and a joint
venture to construct an additional coated
paperboard machine, targeted to be com-
pleted in 2009,

an agreement to exchange pulp and paper
assets with Votorantim Celulose e Paper
S.A. (VCP) in Brazil, including approximately
$1.1 billion of pre-funded project develop-
ment costs and forestlands, for VCP’s Luiz
Antonio uncoated paper and pulp mill and
forestlands,

a planned new uncoated free sheet paper
machine in Brazil, with an estimated cost of
$290 million, and

a potential
investment of approximately
$400 million in 2007 in a 50-50 joint venture
for the operation of four pulp and paper
mills and other associated operations in the
European and Siberian regions of Russia,
subject to the completion of due diligence,
receipt of regulatory approvals and the
approvals of the respective boards of direc-
tors.

Finally, during 2006 in the initial year of the three-
year period, the Company realized $330 million of
non-price improvements to enhance existing busi-
ness profitability, representing solid progress against
the $1.2 billion three-year objective.

CRITICAL ACCOUNTING POLICIES

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

their application,

Accounting policies whose application may have a
significant effect on the reported results of oper-
ations and financial position of International Paper,
and that can require judgments by management that
affect
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’
106,
Pensions,”
Accounting
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” as amended by SFAS Nos.
132 and 132(R), “Employers’ Disclosures About
Pension and Other Postretirement Benefits,” SFAS
No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans,” and SFAS
No. 109, “Accounting for Income Taxes.” The follow-
ing is a discussion of the impact of these accounting
policies on International Paper:

SFAS No.

for

C O N T I N G E N T L I A B I L I T I E S . Accruals for contingent
liabilities, including legal and environmental matters,
are recorded when it is probable that a liability has
been incurred or an asset impaired and the amount
of the loss can be reasonably estimated. Liabilities
accrued for legal matters require judgments regard-
ing projected outcomes and range of loss based on
historical experience and recommendations of legal
counsel. Additionally, as discussed in Note 10 of the
Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary
Data, reserves for projected future claims settle-
ments 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
independent
in
third party consultant
developing these estimates. Liabilities for environ-
mental matters require evaluations of relevant envi-
future
ronmental

regulations and estimates of

to assist

remediation alternatives and costs.
International
Paper determines these estimates after a detailed
evaluation of each site.

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 A N D
G O O D W I L L . 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
impairment exists when the carrying
goodwill
amount of goodwill exceeds its fair value. Assess-
ments of possible impairments of long-lived assets
and goodwill are made when events or changes in
circumstances indicate that the carrying value of the
asset may not be recoverable through future oper-
ations. Additionally, testing for possible impairment
of recorded goodwill and intangible asset balances is
required annually. The amount and timing of
impairment charges for these assets require the
estimation of future cash flows and the fair market
value of the related assets.

A N D

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

B E N E F I T
P E N S I O N
O B L I G A T I O N S . The charges recorded for pension
and other postretirement benefit obligations are
determined annually in conjunction with Interna-
tional 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.

that

International Paper records its
I N C O M E T A X E S .
global tax provision based on the respective tax rules
and regulations for the jurisdictions in which it oper-
the
ates. Where the Company believes
deduction of an item is supportable for income tax
purposes, the item is deducted in its income tax
returns. However, where treatment of an item is
uncertain, tax accruals are recorded based upon the
expected most probable outcome taking into
consideration the specific tax regulations and facts of
each matter,
the results of historical negotiated
settlements, and the results of consultations with
outside specialists. These accruals are recorded in
the accompanying consolidated balance sheet in
Other liabilities. Changes to the reserves are only
made when an identifiable event occurs that changes
the probable outcome, such as settlement with rele-
vant tax authority, the expiration of statutes of limi-
tation for the subject tax year, change in tax laws or
a recent court case that addresses the matter.

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

SIGNIFICANT ACCOUNTING ESTIMATES

A N D

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

P E N S I O N
B E N E F I T
A C C O U N T I N G . The calculations of pension and
postretirement benefit obligations and expenses
require decisions about a number of key assump-
tions 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, 2006, for International Paper’s pen-
sion 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

$8,910

$8,366

327

624

248

–

179

–

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

2007

2006

2005

2004

Discount rate

5.75% 5.50% 5.75% 6.00%

Expected long-term return on plan

assets

Rate of compensation increase

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

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

2007

2006

2005

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

2012

2011

2010

Increasing (decreasing)

The expected long-term rate of return on plan assets
reflects projected returns for an investment mix
determined upon completion of a detailed asset/
investment
liability study that meets the plans’
objectives.
the expected
long-term rate of return on U.S. plan assets by an
additional 0.25% would decrease (increase) 2007
pension expense by approximately $19 million, while
a (decrease) increase of 0.25% in the discount rate
would (increase) decrease pension expense by
approximately $27 million. The effect on net post-
retirement benefit cost
from a 1% increase or
decrease in the annual trend rate would be approx-
imately $2 million.

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

Year

2006
2005

2004

2003

2002

Return

14.9%
11.7%

14.1%

26.0%

(6.7)%

Year

2001

2000

1999

1998

1997

Return

(2.4)%

(1.4)%

21.4%

10.0%

17.2%

The following chart, prepared by International Paper,
illustrates the quarterly performance ranking of our
pension fund investments compared with over 300
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.” For the last
International
Paper’s pension fund performance has averaged in
the top 75% of this peer group.

five years,

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

100%

75%

50%

25%

1998 1999 2000 2001 2002 2003 2004 2005 2006

these actuarial
International Paper determines
assumptions, after consultation with our actuaries,
on December 31 of each year to calculate liability
information as of that date and pension and post-
retirement expense for the following year. The dis-
count 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.

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, differ-
ences between the actual and expected return on
plan assets, and other assumption changes. These
net gains and losses are recognized in pension
expense prospectively over a period that approx-
imates 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. The estimated net loss and prior service cost
that will be amortized from OCI into net periodic
pension cost over the next fiscal year are $186 mil-
lion and $20 million, respectively.

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

In millions

2006

2005

2004

2003

2002

Pension expense (income)

U.S. plans (non-cash)

Non-U.S. plans

$377

$243

$111

$ 60

Postretirement expense

U.S. plans

Non-U.S. plans

$(75)

Net expense (income)

$404

$281

$181

$129

$ (5)

The increases in 2006 and 2005 U.S. pension
expense were principally due to a change in the
mortality assumption to use the Retirement Pro-
tection Act 2000 Tables beginning in 2006, increases
in the amortization of unrecognized actuarial losses
over a shorter average remaining service period, and
reductions in the discount rate.

Assuming that discount rates, expected long-term
returns on plan assets and rates of future compensa-
tion increases remain the same as in 2006, 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

2008 (a)

2007 (a)

$125

$195

$151

$218

(a) Based on 12/31/06 assumptions.

The Company estimates that it will record net pen-
sion expense of approximately $195 million for its
U.S. defined benefit plans in 2007, with the decrease
from expense of $377 million in 2006 principally
reflecting earnings on the $1.0 billion of voluntary
contributions discussed below, lower amortization of
prior service costs and actuarial
losses, and an
increase in the assumed discount rate to 5.75% in
2007 from 5.50% in 2006. The estimated pension

expense for our non-U.S. plans is $6 million. Net
increase
postretirement benefit costs in 2007 will
primarily reflecting the acceleration of prior service
cost credits into a one-time gain taken in 2006 as a
result of multiple divestitures and several plan
amendments.

The market value of plan assets for International
Paper’s U.S. qualified pension plan at December 31,
2006 totaled approximately $8.4 billion, consisting of
approximately 57% equity securities, 34% fixed
income securities, and 9% real estate and other
assets. Plan assets included approximately $430,000
of 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 Secu-
rity Act (ERISA). International Paper made voluntary
contributions of $1.0 billion to the qualified defined
benefit plan in the fourth quarter of 2006, and does
not expect to make any contributions in 2007. The
nonqualified plan is only funded to the extent of
benefits paid, which are expected to be $41 million in
2007.

A C C O U N T I N G F O R S T O C K O P T I O N S. International
Paper adopted the provisions of SFAS No. 123(R),
“Share-Based Payment” to account for stock options
in the first quarter of 2006 using the modified pro-
spective method. Under this method, expense for
stock options is recorded over the related service
period based on the grant-date fair market value.
Had SFAS No. 123(R) been applied in 2005 and 2004,
additional expense of $57 million in 2005 and $38
million in 2004 would have been recorded.

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

At December 31, 2006, 36.0 million options were
outstanding with exercise prices ranging from $29.31
to $66.81 per share. At December 31, 2005,
41.6 million options were outstanding with exercise
prices ranging from $29.31 to $66.81 per share.

INCOME TAXES

Before minority interest and discontinued oper-
ations, the Company’s effective income tax rates
were 59%, (142)% and 30% for 2006, 2005 and 2004,
respectively. These effective tax rates include the tax
effects of certain special and unusual items that can
affect the effective income tax rate in a given year,
but may not recur in subsequent years. Management
believes that the effective tax rate computed after
excluding these special or unusual items may pro-
vide 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. Exclud-
ing these special and unusual items, the effective
income tax rate for 2006 was 29% of pre-tax earnings
compared with 20% in 2005 and 19% in 2004. The
increase in the rate in 2006 reflects a higher pro-
portion of earnings in higher tax rate jurisdictions.
We estimate that the 2007 effective income tax rate
will be 30-32% based on expected earnings and
business conditions, which are subject to change.

RECENT ACCOUNTING DEVELOPMENTS

The following represent recently issued accounting
pronouncements that will affect reporting and dis-
closures in future periods.

E M P L O Y E R S ’

A C C O U N T I N G

F O R

D E F I N E D

B E N E F I T P E N S I O N A N D O T H E R P O S T R E T I R E-
In September 2006, the Financial
M E N T P L A N S .
Accounting Standards Board (FASB) issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an
Amendment of FASB Statements No. 87, 88, 106,
and 132(R).” This statement requires a calendar
year-end company with publicly traded equity secu-
rities that sponsors a postretirement benefit plan to
fully recognize, as an asset or liability, the over-
funded or underfunded status of its benefit plan(s) in
its 2006 year-end balance sheet. The Company
this standard as of
adopted the provisions of
December 31, 2006, recording an additional liability
of $492 million and an after-tax charge to Other
comprehensive income of $350 million for its defined
benefit and postretirement benefit plans.

In September
F A I R V A L U E M E A S U R E M E N T S .
2006, the FASB also issued SFAS No. 157, “Fair
Value Measurements,” which provides a single defi-
nition of fair value, together with a framework for
measuring it, and requires additional disclosure
about the use of fair value to measure assets and
liabilities.
It also emphasizes that fair value is a
market-based measurement, not an entity-specific

measurement, and sets out a fair value hierarchy
with the highest priority being quoted prices in active
markets. This statement
is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those
fiscal years, and is to be applied prospectively as of
the beginning of the year in which it is initially
applied. The Company is currently evaluating the
provisions of this statement.

In September 2006,

A C C O U N T I N G F O R P L A N N E D M A J O R M A I N-
the
T E N A N C E A C T I V I T I E S .
FASB issued FSP No. AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which per-
mits the application of three alternative methods of
accounting for planned major maintenance activities:
the direct expense, built-in-overhaul, and deferral
methods. The FSP is effective for the first fiscal year
beginning after December 15, 2006.
International
Paper will adopt
the direct expense method of
accounting for these costs in 2007 with no impact on
its annual consolidated financial statements.

A C C O U N T I N G F O R U N C E R T A I N T Y I N I N C O M E
T A X E S . In June 2006, the FASB issued FASB Inter-
pretation No.
“Accounting for
(FIN 48),
Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109.” FIN 48 prescribes a
recognition threshold and measurement attribute for
the financial statement recognition and measure-
ment of a tax position taken or expected to be taken
in a tax return. This interpretation also provides
guidance on classification,
interest and penalties,
accounting in interim periods and transition, and
disclosure
significantly
requirements.
tax positions
accounted for in accordance with SFAS No. 109 and
is
years beginning after
December 15, 2006. International Paper will apply the
provisions of this interpretation beginning in the first
quarter of 2007, and currently estimates that the
cumulative effect of its initial application on begin-
ning of the year retained earnings will be a charge of
approximately $75 million, which is subject
to
revision as management completes its analysis.

It applies

expands

effective

income

to all

fiscal

tax

for

A C C O U N T I N G F O R C E R T A I N H Y B R I D F I N A N C I A L
I N S T R U M E N T S . In February 2006, the FASB issued
SFAS No. 155, “Accounting for Certain Hybrid
Financial
Instruments – an Amendment of FASB
Statements No. 133 and 140,” which provides enti-
ties with relief from having to separately determine
the fair value of an embedded derivative that would
otherwise be required to be bifurcated from its host
contract in accordance with SFAS No. 133. This
statement allows an entity to make an irrevocable

financial

election to measure such a hybrid financial instru-
ment at fair value in its entirety, with changes in fair
value recognized in earnings. This statement
is
effective for all
instruments acquired,
issued, or subject to a remeasurement event occur-
ring after the beginning of an entity’s first fiscal year
that begins after September 15, 2006. International
Paper believes that the adoption of SFAS No. 155 in
2007 will not have a material impact on its con-
solidated financial statements.

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 . In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections,” which
changes the requirements for the accounting and
reporting of a change in accounting principle. SFAS
No. 154 is effective for accounting changes and cor-
rections 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.

F O R

A C C O U N T I N G

C O N D I T I O N A L

A S S E T
In March 2005, the
R E T I R E M E N T O B L I G A T I O N S .
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
unconditional even though uncertainty exists about
the
settlement.
Uncertainty about the timing and (or) method of set-
tlement of a conditional asset retirement obligation
should be factored into the measurement of the
liability when sufficient information exists to make a
reasonable estimate of the fair value of the obliga-
tion. International Paper adopted the provisions of
this interpretation in the fourth quarter of 2005 with
no material effect on its consolidated financial
statements.

timing and (or) method of

indeterminate settlement date, and the Company
believes that adequate information does not exist to
apply an expected-present-value technique to esti-
mate 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 March 2005,
the FASB issued FASB Staff Position (FSP) FIN
46(R)-5, “Implicit Variable Interests Under FASB
Interpretation No. 46(R), Consolidation of Variable
Interest Entities.” This FSP states that implicit varia-
ble 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
involves the
absorbing and (or) receiving of variability indirectly
from the entity (rather than directly). The identi-
fication of an implicit variable interest is a matter of
judgment that depends on the relevant facts and
circumstances.
International Paper applied the
provisions of FSP FIN 46(R)-5 in the second quarter
of 2005, with no material effect on its consolidated
financial statements.

A C C O U N T I N G F O R I N C O M E T A X E 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 certain of its foreign subsidiaries,
including
amounts eligible for this special deduction. Interna-
tional Paper recorded income tax expenses asso-
totaling
ciated with these
approximately $142 million for
the year ended
December 31, 2005.

cash repatriations

2004),

Payment,”

T R A N S A C T I O N S .

In
S H A R E - B A S E D P A Y M E N T
December 2004, the FASB issued SFAS No. 123
(revised
that
“Share-Based
requires compensation costs related to share-based
payment transactions to be recognized in the finan-
cial statements. The amount of the compensation
cost is measured based on the grant-date fair value
of the equity or liability instruments issued. In addi-
tion, liability awards are remeasured each reporting
period. Compensation cost is recognized over the
period that an employee provides service in
exchange for the award. This statement applies to all
awards granted after the required effective date and
to awards modified, repurchased, or cancelled after

that date.
International Paper adopted SFAS
in the first quarter of 2006 with no
No. 123(R)
material effect on its consolidated financial state-
ments.

In
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 .
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 measure-
ment 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 sig-
nificantly as a result of the exchange. International
Paper applied the provisions of SFAS No. 153 pro-
spectively in the first quarter of 2006, with no
material effect on its consolidated financial state-
ments.

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 Amend-
ment of ARB No. 43, Chapter 4.” This statement
idle facility
requires that abnormal amounts of
expense, freight, handling costs and wasted material
be recognized as current-period charges. This
statement also introduces the concept of “normal
capacity” and requires the allocation of fixed pro-
duction 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. International Paper
adopted SFAS No. 151 in the first quarter of 2006,
with no material impact on its consolidated financial
statements.

Prescription

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 Medi-
care
and
Drug,
Modernization Act of 2003,” that provides guidance
on the accounting and required disclosures for the
effects of the Medicare Prescription Drug, Improve-
ment and Modernization Act of 2003. International
Paper adopted FSP FAS 106-2 prospectively in the
third quarter of 2004.

Improvement

LEGAL PROCEEDINGS

Environmental Matters

International Paper is subject to extensive federal
and state environmental regulations as well as sim-
ilar regulations in all other jurisdictions in which we

performance,

operate. Our continuing objectives are to: (1) control
emissions and discharges from our facilities into the
air, water and groundwater to avoid adverse impacts
improve-
on the environment, (2) make continual
ments
and
environmental
(3) maintain 100% compliance with applicable laws
and regulations. A total of $161 million was spent in
2006 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 $35 mil-
lion in 2007 for similar capital projects, including the
costs to comply with the Environmental Protection
Agency’s (EPA) Cluster Rule and Industrial Boiler
MACT regulations. Amounts to be spent
for
environmental control projects in future years will
depend on new laws and regulations and changes in
requirements and environmental concerns.
legal
Taking these uncertainties into account, our prelimi-
nary
environmental
appropriations during the year 2008 is approximately
$27 million, and during the year 2009 is approx-
imately $30 million. This reduced capital forecast for
2007, 2008 and 2009 reflects the reduction in Cluster
Rule spending and completion of
significant
environmental improvement projects in Brazil, which
accounted for $65 million and $57 million of the 2006
spending, respectively.

additional

estimate

for

On April 15, 1998, the EPA issued final Cluster Rule
regulations
that established new requirements
regarding air emissions and wastewater discharges
from pulp and paper mills to be met by 2007. The
projected costs included in our spending estimate
related to the Cluster Rule regulations for the year
2007 are $6 million. The projected costs associated
with Industrial Boiler MACT regulations, that were
issued by the EPA on September 30, 2006 are $6 mil-
lion.

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

International Paper has been named as a potentially
remediation
responsible party in environmental
actions under various federal and state laws, includ-
ing the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). Most of
these proceedings involve the cleanup of hazardous

landfills

substances at
that
large commercial
received waste from many different sources. While
joint and several liability is authorized under CERCLA
and equivalent state laws, as a practical matter,
liability for CERCLA cleanups is allocated among the
many potential responsible parties. Based upon
previous experience with respect to cleanup of haz-
ardous substances and on presently available
information,
its
liability is not likely to be significant at 41 such sites
and that its liability at 46 sites is likely to be sig-
nificant, but not material to International Paper’s
consolidated financial statements. Related costs are
recorded in the financial statements when they are
probable and reasonably estimable.
International
Paper believes that the probable liability associated
with these 87 matters is approximately $40 million.

International Paper believes that

In addition to the above proceedings, other
remediation costs,
typically associated with the
cleanup of hazardous substances at International
Paper’s current or former facilities, are recorded as
liabilities in the balance sheet and totaled approx-
imately $49 million. Completion of these actions is
not expected to have a material adverse effect on our
consolidated financial statements.

As of February 2007, there were no other pending
judicial proceedings brought by government author-
ities 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
uncertainty, we believe that the outcome of any
proceeding,
is pending or
threatened, or all of them combined, will not have a
material adverse effect on our consolidated financial
statements.

lawsuit or claim that

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
contingencies is based largely on those assess-
ments. Ultimately, however, the determination of
any reserve balance is based on good faith estimates
and judgments which, given the unpredictable
nature of litigation, could prove to be inaccurate. 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 sig-
nificant litigation activity is discussed below, and

further details of these and other litigation matters
are discussed in Note 10 of the Notes to the Con-
solidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.

Antitrust Matters

In recent years, several antitrust class action lawsuits
were filed against companies in our industry. The
Company was named as a defendant in some of
those lawsuits, but has reached favorable settle-
ments after protracted litigation.

Current management has a strong commitment to
antitrust compliance. This is evidenced by the
Company’s adoption of a Code of Business Ethics
which applies to employees and executives alike,
and robust systems to ensure compliance with anti-
trust 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
distribute the Company’s Antitrust Compliance
Manual. In addition, the Company has a toll-free hot-
line which enables employees to make anonymous
reports about suspected violation of law or Company
policy. This reporting system is also available to the
general public with access information publicized on
these efforts,
our Internet site. We believe that
the
leadership
together with
strong
importance of
compliance, will minimize the
Company’s exposure in this area.

about

EFFECT OF INFLATION

While inflationary increases in certain input costs,
such as energy, wood fiber and chemical costs, have
an impact on the Company’s operating results,
inflation have had minimal
changes in general
impact on our operating 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.

FOREIGN CURRENCY EFFECTS

International Paper has operations in a number of
countries. Its operations in those countries 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 finan-
cial statements. Direct impacts include the trans-
local currency
lation of
financial statements into U.S. dollars.
Indirect
in competitive-
the
impacts

international operations’

change

include

ness of imports into, and exports out of, the United
States (and the impact on local currency pricing of
products that are traded internationally). In general, a
lower U.S. dollar and stronger local currency is
beneficial to International Paper. The currencies that
have the most impact are the Euro, the Brazilian real,
the Polish zloty and the Russian ruble.

net fair value liability of financial instruments with
exposure to interest rate risk was approximately $3.8
billion and $8.6 billion, respectively. The potential
loss in fair value resulting from a 10% adverse shift
in quoted interest rates would have been approx-
at
imately
December 31, 2006 and 2005, respectively.

$133 million

$326 million

and

MARKET RISK

Commodity Price Risk

We use financial instruments, including fixed and
variable rate debt, to finance operations, for capital
spending programs and for general corporate pur-
poses. 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 Interna-
tional Paper’s debt obligations is included in Note 12
of the Notes to Consolidated Financial Statements in
Item 8. Financial Statements and Supplementary
Data. A discussion of derivatives and hedging activ-
ities is included in Note 13 of the Notes to Con-
solidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.

The fair value of our debt and financial instruments
varies due to changes in market interest and foreign
currency rates and commodity prices since the
inception of the related instruments. We assess this
market risk utilizing a sensitivity analysis. The sensi-
tivity analysis measures the potential loss in earn-
ings,
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
obligations and investments in marketable securities.
We invest in investment-grade securities of financial
institutions and industrial companies and limit
exposure to any one issuer. Our investments in
marketable securities at December 31, 2006 are
stated at cost, which approximates market due to
interest
their short-term nature. Our
rate risk
investments was
related to these
exposure
immaterial.

We issue fixed and floating rate debt in a proportion
consistent with International Paper’s optimal capital
structure, while at the same time taking advantage of
market opportunities to reduce interest expense as
appropriate. Derivative instruments, such as interest
rate swaps, may be used to implement the optimal
capital structure. At December 31, 2006 and 2005, the

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 man-
fluctuations in
age risks associated with market
energy prices. At December 31, 2006, the net fair
value of such outstanding energy hedge contracts
was approximately a $12 million liability. At
December 31, 2005, the net fair value of such out-
standing energy hedge contracts was immaterial.
The potential loss in fair value resulting from a 10%
adverse change in the underlying commodity prices
would have been approximately $10 million for
December 31, 2006.

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 overseas 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 for-
eign exchange contracts. At December 31, 2006 and
2005, the net fair value of financial instruments with
exposure to foreign currency risk was approximately
a $95 million asset and a $211 million liability,
respectively. 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 $43 million and $20 million at
December 31, 2006 and 2005, respectively.

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 42, and under Item 8.
Financial Statements and Supplementary Data in
Note 13 of
the Notes to Consolidated Financial
Statements on pages 77 through 79.

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

INFORMATION BY INDUSTRY SEGMENT

INFORMATION BY INDUSTRY SEGMENT AND
GEOGRAPHIC AREA

International Paper’s industry segments, Printing
Papers, Industrial Packaging, Consumer Packaging,
Distribution, Forest Products and Specialty Busi-
nesses and Other, are consistent with the internal
structure used to manage these businesses. All
segments are differentiated on a common product,
common customer basis consistent with the busi-
ness segmentation generally used in the Forest
Products industry.

For management purposes,
International Paper
reports the operating performance of each business
based on earnings before interest and income taxes
(“EBIT”) excluding special and extraordinary items,
gains or losses on sales of businesses and cumu-
lative 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 sim-
ilar products or services. External sales are defined
as those that are made to parties outside Interna-
tional Paper’s consolidated group, whereas sales by
segment in the Net Sales table are determined by the
management approach and include intersegment
sales.

Prior-year industry segment information has been
restated to conform to the 2006 management struc-
ture and to reflect the Kraft Papers, Brazilian Coated
Papers, Beverage Packaging, Wood Products, Carter
Holt Harvey Limited and Weldwood of Canada Lim-
ited businesses as discontinued operations.

NET SALES

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate and Intersegment Sales

2006

2005

2004

$ 6,930

$ 7,170

$ 7,135

4,925

2,455

6,785

765

935

(800)

4,625

2,245

6,380

995

915

(630)

4,545

2,295

6,065

875

1,120

(1,314)

Net Sales

$21,995

$21,700

$20,721

OPERATING PROFIT

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Operating Profit

Interest expense, net

Minority interest (b)

Corporate items, net

Restructuring and other charges

Insurance recoveries

Gain on sale of forestlands

Impairments of goodwill

Net losses on sales and impairments of

2006

2005

2004

$ 677

$ 473

$ 508

399

131

128

678

2,074

(521)

(746)

(300)

4,788

(759)

219

121

721

1,622

(595)

–

(607)

(285)

258

–

373

155

542

1,703

(712)

(477)

(164)

123

–

businesses

(1,381)

(111)

(135)

Reversals of reserves no longer

required

Earnings From Continuing Operations

Before Income Taxes, Minority

Interest and Cumulative Effect of

Accounting Changes

$ 3,188

$ 286

$ 376

RESTRUCTURING AND OTHER CHARGES (c)

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate

Restructuring and Other Charges

2006

$ 54

–

205

$300

2005

$184

111

2004

$ 7

122

$340

$164

ASSETS

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate and other (d)

INFORMATION BY GEOGRAPHIC AREA

2006

2005

2004

$ 7,961

$ 8,146

$ 8,321

4,244

2,578

1,596

274

498

6,883

4,042

2,420

1,624

2,234

652

9,653

3,954

2,454

1,515

2,375

652

14,946

NET SALES (g)

In millions

United States (h)

Europe

Pacific Rim

Americas, other than U.S.

Net Sales

2006

2005

2004

$17,811

$17,934

$16,915

3,030

308

846

2,809

169

788

3,056

692

$21,995

$21,700

$20,721

Assets

$24,034

$28,771

$34,217

CAPITAL SPENDING

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Subtotal

Corporate and other

2006

$ 537

257

116

–

988

2005

$592

180

126

–

973

2004

$453

161

198

–

893

Total from Continuing Operations

$1,009

$992

$925

DEPRECIATION AND AMORTIZATION (e)

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate

233

212

126

218

152

126

219

150

Depreciation and Amortization

$1,158

$1,274

$1,262

EXTERNAL SALES BY MAJOR PRODUCT

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Other (f)

Net Sales

2006

2005

2004

$ 6,060

$ 6,435

$ 5,961

5,111

2,638

6,743

676

767

4,591

2,379

6,389

1,205

701

4,334

2,407

6,306

1,037

676

EUROPEAN SALES BY INDUSTRY SEGMENT

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Specialty Businesses and Other (a)

2006

$1,440

1,001

570

2005

2004

$1,364

$1,370

851

572

869

793

European Sales

$3,030

$2,809

$3,056

LONG-LIVED ASSETS (i)

In millions

United States

Europe

Pacific Rim

2006

$6,837

1,481

214

574

146

2005

2004

$ 8,776

$ 9,229

1,408

1,416

644

282

507

288

Long-Lived Assets

$9,252

$11,200

$11,501

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

nesses identified in the Company’s divestiture program.

(b) Operating profits for industry segments include each seg-

ment’s percentage share of the profits of subsidiaries included

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

minority interest for these subsidiaries is added here to present

consolidated earnings from continuing operations before

income taxes, minority interest, extraordinary items, and

cumulative effect of accounting changes.

business segment operating profits.

(d) Includes

corporate

assets

and assets of discontinued

operations.

(e) Includes cost of timber harvested.

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

lines.

2006

2005

2004

Americas, other than U.S.

$ 500

$ 677

$ 691

Corporate

$21,995

$21,700

$20,721

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

(h) Export sales to unaffiliated customers were $1.4 billion in 2006,

$1.5 billion in 2005 and $1.5 billion in 2004.

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

and Equipment, net.

REPORT OF MANAGEMENT ON:
FINANCIAL STATEMENTS

financial

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

financial

environment,

As can be expected in a complex and dynamic busi-
ness
statement
some
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 finan-
cial information contained in this annual report. We
have formed a Disclosure Committee to oversee this
process.

The accompanying consolidated financial statements
have been audited by the independent registered
public accounting firm, Deloitte & Touche LLP. Dur-
ing their audits, Deloitte & Touche LLP was given
unrestricted access to all
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.

financial

INTERNAL CONTROLS OVER FINANCIAL
REPORTING

The management of International Paper Company is
also responsible for establishing and maintaining
adequate internal controls over financial reporting
including the safeguarding of assets against
unauthorized acquisition, use or disposition. These
controls are designed to provide reasonable assur-
ance to management and the board of directors
regarding preparation of reliable published financial
statements and such asset safeguarding. 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 supported by

written policies and procedures, contains self-
monitoring mechanisms, and is audited by the
internal audit function.

financial

The Company has assessed the effectiveness of its
reporting as of
internal control over
December 31, 2006. In making this assessment, it
used the criteria described in “Internal Control –
Integrated Framework” issued by the Committee of
Treadway
Sponsoring Organizations
Commission (COSO). Based on this assessment,
management believes that, as of December 31, 2006,
the Company’s internal control over financial report-
ing is effective.

the

The Company’s
registered public
independent
accounting firm, Deloitte & Touche LLP, have 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 page 48.

INTERNAL CONTROL ENVIRONMENT
AND BOARD OF DIRECTORS
OVERSIGHT

internal control environment

includes an
Our
enterprise-wide attitude of
integrity and control
consciousness that establishes a positive “tone at
the top.” This is exemplified by our ethics program
that includes long-standing principles and policies on
ethical business conduct that require employees to
maintain the highest ethical and legal standards in
the conduct of International Paper business, 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
supervisory and management personnel, appro-
priate delegation of authority and division of
responsibility, dissemination of accounting and
International Paper,
business policies throughout
and an extensive program of internal audits. When
deficiencies are identified by these internal control
activities, appropriate corrective actions are taken by
management.

The Board of Directors, assisted by the Audit and
Finance Committee (Committee), monitors
the
integrity of the Company’s financial statements and
financial reporting procedures, the performance of
the Company’s
and
independent auditors, and other matters set forth in
its charter. The Committee, which currently consists
of five independent directors, meets regularly with

function

internal

audit

representatives of management, and with the
independent auditors and the Internal Auditor, with
and without management representatives in attend-
ance, to review their activities. The Committee’s
Charter takes into account
the New York Stock
Exchange rules relating to Audit Committees and the
SEC rules and regulations promulgated as a result of
the Sarbanes-Oxley Act of 2002. The Committee has
reviewed and discussed the consolidated financial
statements for the year ended December 31, 2006,
including critical accounting policies and significant
management judgments, with management and the
report
independent auditors. The Committee’s

recommending the inclusion of such financial state-
ments 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 FINAN-
CIAL OFFICER

REPORT OF DELOITTE & TOUCHE LLP,
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, ON CONSOLIDATED
FINANCIAL STATEMENTS

flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting
principles generally accepted in the United States of
America.

To the Shareholders of International Paper
Company:

We have audited the accompanying consolidated
balance sheets of International Paper Company and
subsidiaries (the “Company”) as of December 31,
2006 and 2005, and the related consolidated state-
ments of operations, changes in shareholders’ equi-
ty, and cash flows for each of the three years in the
period ended December 31, 2006. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an
opinion on the financial statements based on our
audits.

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

In our opinion, such consolidated financial state-
ments present fairly,
in all material respects, the
financial position of International Paper Company
and subsidiaries as of December 31, 2006 and 2005,
and the results of their operations and their cash

As discussed in Notes 4, 15 and 16 to the con-
solidated financial statements, the Company adopted
Statement of
Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and
132(R)”, effective December 31, 2006. As discussed
in Notes 1, 4 and 17 to the consolidated financial
the Company adopted Statement of
statements,
Financial Accounting Standards No. 123 (R), “Share-
Based Payment”, effective January 1, 2006.

the effectiveness of

We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight
Board (United States),
the
Company’s internal control over financial reporting
as of December 31, 2006, based on the criteria estab-
lished in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Orga-
nizations of
the Treadway Commission and our
report dated February 26, 2007 expressed an
unqualified opinion on management’s assessment of
the effectiveness of the Company’s internal control
over financial reporting and an unqualified opinion
on the effectiveness of the Company’s internal con-
trol over financial reporting.

Memphis, Tennessee
February 26, 2007

REPORT OF DELOITTE & TOUCHE LLP,
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM, ON INTERNAL
CONTROL OVER FINANCIAL REPORTING

To the Shareholders of International Paper
Company:

We have
assessment,
audited management’s
included in the accompanying Report of Manage-
ment on Internal Controls over Financial Reporting,
that International Paper Company and subsidiaries
(the “Company”) maintained effective internal con-
trol over financial reporting as of December 31, 2006,
based on criteria established in Internal Control –
Integrated Framework issued by the Committee of
Treadway
Sponsoring Organizations
Commission. The Company’s management
is
responsible for maintaining effective internal control
over financial reporting and for its assessment of the
effectiveness of internal control over financial report-
ing. 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.

the

financial

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

internal control over

A company’s internal control over financial reporting
is a process designed by, or under the supervision
of, the company’s principal executive and principal
financial officers, or persons performing similar
functions, and effected by the company’s board of
directors, management, and other personnel to pro-
vide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles. A compa-
ny’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 company;
the assets of
(2) provide reasonable assurance that transactions

are recorded as necessary to permit preparation of
financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in
accordance with authorizations of management and
directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect
on the consolidated financial statements.

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

In our opinion, management’s assessment that the
Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria
established in Internal Control—Integrated Frame-
work issued by the Committee of Sponsoring Orga-
nizations of the Treadway Commission. Also in our
in all material
opinion, the Company maintained,
respects, effective internal control over financial
reporting as of December 31, 2006, based on the
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

as of

We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight
the consolidated financial
Board (United States),
statements
ended
and for
December 31, 2006 of the Company and our report
dated February 26, 2007 expressed an unqualified
opinion on those financial statements and included
an explanatory paragraph regarding the Company’s
adoption of new accounting standards.

year

the

Memphis, Tennessee
February 26, 2007

International Paper

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
Gain on sale of forestlands (Note 7)
Impairments of goodwill (Note 11)
Net losses on sales and impairments of businesses
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

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
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
Net earnings (loss)

2006
$21,995

2005
$21,700

2004
$20,721

16,248
1,848
1,158
1,075
215
300
(19)
(4,788)
759
1,496
(6)
521

16,334
1,784
1,274
1,025
213
340
(258)
–
–
111
(4)
595

15,204
1,817
1,262
985
220
164
(123)
–
–
139
(35)
712

3,188
1,889
17
1,282
(232)
$ 1,050

286
(407)
9
684
416
$ 1,100

376
114
24
238
(273)
(35)

$ 2.69
(0.48)
$ 2.21

$ 1.41
0.85
$ 2.26

$ 0.49
(0.56)
$ (0.07)

$ 2.65
(0.47)
$ 2.18

$ 1.40
0.81
$ 2.21

$ 0.49
(0.56)
$ (0.07)

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 $85 in 2006 and $94 in 2005
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
Assets Held for Exchange (Note 18)
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, 2006-493.3 shares, 2005-490.5 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less: Common stock held in treasury, at cost, 2006-39.8 shares and 2005-0.1 shares

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

International Paper

2006

2005

$ 1,624
2,704
1,909
1,778
490
132
8,637
8,993
259
641
2,929
1,324
1,251
$24,034

692
1,907
466
333
1,243
4,641
6,531
2,233
2,453
213

$ 1,641
2,416
1,932
5,382
278
110
11,759
9,073
2,127
616
3,621
–
1,575
$28,771

$ 1,178
1,771
351
621
1,034
4,955
11,019
684
3,577
185

493
6,735
3,737
(1,564)
9,401
1,438
7,963
$24,034

491
6,627
3,172
(1,935)
8,355
4
8,351
$28,771

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

International Paper

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)
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 provision (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
Gain on sales of forestlands
Impairment of goodwill
Other, net
Voluntary pension plan contribution
Changes in current assets and liabilities
Accounts and notes receivable
Inventories
Accounts payable and accrued liabilities
Other

Cash provided by operations – continuing operations

Cash provided by operations – discontinued operations

Cash Provided by Operations

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
Net proceeds from divestitures
Net proceeds from sales of forestlands
Cash deposit for asset exchange
Other

Cash provided by (used for) investment activities – continuing operations

Cash (used for) provided by investment activities – discontinued operations

Cash Provided by Investment Activities

F I N A N C I N G A C T I V I T I E S
Issuance of common stock
Repurchases of common stock
Issuance of debt
Reduction of debt
Monetization of Timber Notes (Note 8)
Change in book overdrafts
Dividends paid
Other

Cash used for financing activities – continuing operations

Cash provided by (used for) financing activities – discontinued operations

Cash Used For Financing Activities

Effect of Exchange Rate Changes on Cash - Continuing Operations

Effect of Exchange Rate Changes on Cash - Discontinued Operations

Change in Cash and Temporary Investments

Cash and Temporary Investments

Beginning of the period

End of the period

Less - Cash, End of Year – Discontinued Operations

Cash, End of Year – Continuing Operations

2006

2005

2004

$ 1,050
232

$ 1,100
(416)

(35)
273

1,282
1,158
–
1,619
300
(19)
(79)
(6)
377
–
1,496
(4,788)
759
265
(1,000)

(39)
(43)
(202)
(70)

1,010

213

1,223

(1,009)
(64)
(103)
1,833
1,635
(1,137)
(48)

1,107

(73)

1,034

32
(1,433)
223
(5,391)
4,850
10
(485)
(131)

(2,325)

684
1,274
(627)
(29)
340
(258)
(184)
(4)
243
–
111
–
–
230
–

59
8
(634)
9

1,222

288

1,510

(992)
(103)
(116)
1,440
–
–
99

328

(321)

23
–
968
(2,669)
–
4
(490)
(39)

(2,203)

238
1,262
–
(82)
164
(123)
(220)
(35)
111
242
139
–
–
147
–

(39)
(84)
57
(51)

1,726

662

2,388

(925)
(194)
(186)
867
–
–
364

(74)

129

164
–
2,536
(4,217)
–
(145)
(485)
(80)

(2,227)

(174)

(208)

(2,304)

(2,377)

(2,435)

(17)

1,641

1,624
–

(90)

(5)

(955)

2,596

1,641
–

110

115

233

2,363

2,596
(416)

$ 1,624

$ 1,641

$ 2,180

Note: Certain prior year amounts have been reclassified for comparative purposes to conform to current year presentation of discontinued

operations.

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

CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY

International Paper

Common Stock
Issued

Shares Amount

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)(1)

485,162
2,333
–

$ 485
2
–

$ 6,500 $ 3,082
–
(485)

62
–

$ (1,690)
–
–

Treasury Stock

Shares Amount

3,668 $
(3,652)
–

140
(140)
–

Total
Common
Shareholders'
Equity

$ 8,237
204
(485)

In millions, except shares in thousands and per share
amounts

BALANCE, JANUARY 1, 2004
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: Reclassification adjustment for gains
included in net income (less tax of $13)

Total comprehensive income

–

–
–

–

–
–

–

–
–

–

(35)

–
–

–

33
1

255

(26)

BALANCE, DECEMBER 31, 2004

487,495

487

6,562

2,562

(1,357)

Issuance of stock for various plans, net
Cash dividends - Common stock ($1.00 per share)
Comprehensive income (loss):

3,006
–

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: Reclassification adjustment for gains
included in net income (less tax of $30)

Total comprehensive income

–

–
–

–

4
–

–

–
–

–

65
–

–

–
–

–

–
(490)

1,100

–
–

–

–
–

–

(304)
(1)

(251)

(68)

BALANCE, DECEMBER 31, 2005

490,501

491

6,627

3,172

(1,935)

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 $309)
Non-U.S. plans (less tax of $6)

Change in cumulative foreign currency translation

adjustment (less tax of $11)

Net gains on cash flow hedging derivatives:

Net gain arising during the period (less tax of $0)
Less: Reclassification adjustment for gains
included in net income (less tax of $0)

Total comprehensive income

Effect of adoption of SFAS No. 158 (less tax of $309)
BALANCE, DECEMBER 31, 2006

2,839
–
–

–

–
–

–

2
–
–

–

–
–

–

108
–
–

–

–
–

–

–
–
(485)

1,050

–
–

–

–
–
–

–

496
15

220

(12)

–

–
–

–

96
–

–

–
–

–

112

46
39,686
–

–

–
–

–

–
–

–

4
–

–

–
–

–

1
1,433
–

–

–
–

–

(35)

33
1

255

(26)

298
8,254

65
(490)

1,100

(304)
(1)

(251)

(68)

522
8,351

109
(1,433)
(485)

1,050

496
15

220

(12)

1,771
(350)
$ 7,963

–

–
493,340 $493 $6,735 $3,737

–

(350)
$(1,564)

–

–
39,844 $1,438

(1) The cumulative foreign currency translation adjustment (in millions) was $(60), $(280) and $(29) at December 31, 2006,
2005 and 2004, respectively, and is included as a component of accumulated other comprehensive income (loss).

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OUR BUSINESS

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

FINANCIAL STATEMENTS

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

CONSOLIDATION

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 where the
Company has significant influence over their oper-
ations are accounted for by the equity method.
International Paper’s share of affiliates’ earnings
totaled $38 million, $15 million and $14 million in
2006, 2005 and 2004, respectively.

TRANSFORMATION PLAN

returning

In July 2005, International Paper announced a plan
to focus its business
(the Transformation Plan)
portfolio on two key global platform businesses:
Uncoated Papers (including Distribution) and Pack-
aging. The Transformation Plan’s other elements
included exploration of strategic options for other
businesses,
shareholders,
strengthening the balance sheet, selective reinvest-
ment to strengthen the paper and packaging busi-
nesses both globally and in North America, and on
improving profitability by targeting $1.2 billion of
non-price improvements over a three-year period.
Actions taken in 2006 and 2005 to implement the
Transformation Plan are discussed in these Notes to
Consolidated Financial Statements.

value

REVENUE RECOGNITION

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

SHIPPING AND HANDLING COSTS

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

ANNUAL MAINTENANCE COSTS

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

The Company will adopt the direct expense method
of accounting for planned major maintenance activ-
ities effective January 1, 2007 (see Note 4).

TEMPORARY INVESTMENTS

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

INVENTORIES

Inventories are valued at the lower of cost or market
and include all costs directly associated with manu-
facturing products: materials, labor and manufactur-
In the United States, costs of raw
ing overhead.
materials and finished pulp and paper products are
generally determined using the last-in,
first-out
method. Other inventories are valued using the
first-in, first-out or average cost methods.

PLANTS, PROPERTIES AND EQUIPMENT

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

FORESTLANDS

At December 31, 2006, International Paper and its
subsidiaries owned or managed about 500,000 acres
of forestlands in the United States, approximately
370,000 acres in Brazil, and through licenses and
forest management agreements, had harvesting
rights
of
government-owned forestlands in Russia. Costs
attributable to timber are charged against income as
trees are cut. The rate charged is determined annu-
ally based on the relationship of incurred costs to
estimated current merchantable volume.

approximately

500,000

acres

As discussed in Note 7, during 2006 in conjunction
with the Company’s Transformation Plan, approx-
imately 5.6 million acres of forestlands in the United
States were sold under various agreements for pro-
ceeds totaling approximately $6.6 billion of cash and
notes.

GOODWILL

Goodwill relating to a single business reporting unit
is included as an asset of the applicable segment,
while goodwill arising from major acquisitions that
involve multiple business segments is classified as a
corporate asset for segment reporting purposes. For
goodwill impairment testing, this goodwill is allo-
cated to business segments. Annual
testing for
possible goodwill impairment is performed during
the fourth quarter as of the end of the third quarter of
each year.
In the fourth quarter of 2006 in con-
junction with annual goodwill impairments testing,
the Company recorded charges of $630 million and
$129 million related to its coated paperboard busi-
ness and Shorewood business, respectively. No
impairment charges had been recorded in 2005 or
2004 (see Note 11) .

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circum-
stances 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 (see Note 6). Long-lived assets classified as
held for sale are recorded at the lower of their carry-
ing amount or estimated fair value less costs to sell.

INCOME TAXES

International Paper uses the asset and liability
method of accounting for income taxes whereby
deferred income taxes are recorded for the future tax
consequences attributable to differences between
the financial statement and tax bases of assets and
liabilities. Deferred tax assets and liabilities are
measured using tax rates expected to apply to tax-
able 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 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 deducted in its income tax returns. However,
where treatment of an item is uncertain, tax accruals
are recorded based upon the expected most prob-
able outcome taking into consideration the specific
tax regulations and facts of each matter, the results
of historical negotiated settlements, and the results
of consultations with outside specialists. These
accruals are recorded in the accompanying con-
solidated balance sheet in Other liabilities. Changes
to the reserves are only made when an identifiable
event occurs that changes the probable outcome,
such as a settlement with the relevant tax authority,
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.

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

See Note 4 for a discussion of the adoption in 2007
of a recent accounting pronouncement on account-
ing for uncertain income tax positions.

STOCK-BASED COMPENSATION

ENVIRONMENTAL REMEDIATION COSTS

Effective January 1, 2006,
International Paper
adopted Statement of Financial Accounting Stan-
dards (SFAS) No. 123 (revised 2004), “Share-Based
Payment,” using the modified prospective transition
method. As required under this standard, costs
resulting from all stock-based compensation trans-
actions are recognized in the financial statements.
recorded is
The amount of compensation cost
measured based on the grant-date fair value of the
equity or liability instruments issued.
In addition,
liability awards are remeasured each reporting peri-
od. Compensation cost is recognized over the period
that an employee provides service in exchange for
the award. See Note 17 for a further discussion of
stock-based compensation plans.

Prior to January 1, 2006, stock options and other
stock-based compensation awards were 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 in
2005 and 2004 for International Paper’s stock-based
compensation programs been determined consistent
with the provisions of SFAS No. 123(R), net earnings,
basic earnings per common share and diluted earn-
ings per common share would have been reduced to
the pro forma amounts shown below:

In millions, except per share amounts

2005

2004

Net Earnings (Loss)

As reported

Pro forma

Basic Earnings (Loss) Per Common Share

As reported

Pro forma

Diluted Earnings (Loss) Per Common Share

As reported

Pro forma

$1,100

$ (35)

1,043

(73)

$ 2.26

$(0.07)

2.15

(0.15)

$ 2.21

$(0.07)

2.10

(0.15)

The effect on 2005 and 2004 pro forma net earnings,
basic earnings per common share and diluted earn-
ings per common share of expensing the estimated
fair market value of stock options is not necessarily
representative of the effect on reported earnings for
future years due to decreases in the number of
options outstanding due to the elimination of the
Company’s stock option program for all U.S.
employees in 2005.

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

ASSET RETIREMENT OBLIGATIONS

In accordance with the provisions of SFAS No. 143,
“Accounting for Asset Retirement Obligations,” a
liability and an asset are recorded equal to the pres-
ent value of the estimated costs associated with the
retirement of long-lived assets where a legal or con-
tractual obligation exists and the liability can be
reasonably 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 retirement obligations under this standard
principally relate to closure costs for
landfills.
Revisions to the liability could occur due to changes
in the estimated costs or timing of closures, or
possible new federal or state regulations affecting
these closures (see Note 11).

TRANSLATION OF FINANCIAL STATEMENTS

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 translations are included as cumulative
translation adjustments in Accumulated other com-
prehensive income (loss) (OCI). See Note 13 related
to derivatives and hedging activities.

NOTE 2 EARNINGS PER COMMON SHARE

Basic earnings per common share from continuing
operations are computed by dividing earnings from
continuing operations by the weighted average
number of common shares outstanding. Diluted
earnings per common share from continuing oper-
ations were computed assuming that all potentially
dilutive securities,
including “in-the-money” stock
options, were converted into common shares at the
beginning of each year. In addition, the computation
of diluted earnings per share reflects the inclusion of
contingently convertible securities in periods when
dilutive.

A reconciliation of
the amounts included in the
computation of earnings per common share from
continuing operations, and diluted earnings per
common share from continuing operations is as fol-
lows:

In millions, except per share amounts

2006

2005

2004

Earnings from continuing operations

$1,282

$ 684

$ 238

Effect of dilutive securities

–

Earnings from continuing operations -

assuming dilution

$1,295

$ 711

$ 238

Average common shares outstanding

476.1

486.0

485.8

Effect of dilutive securities

Restricted performance share plan

Stock options

Contingently convertible debt

Average common shares outstanding -

3.0

0.2

9.4

0.8

2.9

20.0

–

2.6

–

assuming dilution

488.7

509.7

488.4

Earnings per common share from

continuing operations

$ 2.69

$ 1.41

$ 0.49

Diluted earnings per common share from

continuing operations

$ 2.65

$ 1.40

$ 0.49

and an after-tax charge to Other comprehensive
income of $350 million for its defined benefit and
postretirement benefit plans.

FAIR VALUE MEASUREMENTS

In September 2006, the FASB also issued SFAS
No. 157, “Fair Value Measurements,” which provides
a single definition of fair value, together with a
framework for measuring it, and requires additional
disclosure about the use of fair value to measure
assets and liabilities.
It also emphasizes that fair
value is a market-based measurement, not an entity-
specific measurement, and sets out a fair value hier-
archy with the highest priority being quoted prices in
active markets. This statement is effective for finan-
cial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those
fiscal years, and is to be applied prospectively as of
the beginning of the year in which it is initially
applied. The Company is currently evaluating the
provisions of this statement.

ACCOUNTING FOR PLANNED MAJOR MAINTENANCE

Note: If an amount does not appear in the above table, the secu-

ACTIVITIES

rity was antidilutive for the period presented.

NOTE 3 INDUSTRY SEGMENT INFORMATION

Financial information by industry segment and geo-
graphic area for 2006, 2005 and 2004 is presented on
pages 43 and 44.

NOTE 4 RECENT ACCOUNTING
DEVELOPMENTS

EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT

PENSION AND OTHER POSTRETIREMENT PLANS

issued SFAS No.

In September 2006, the Financial Accounting Stan-
dards Board (FASB)
158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans – an Amendment of
FASB Statements No. 87, 88, 106, and 132(R).” This
statement requires a calendar year-end company
with publicly traded equity securities that sponsors a
postretirement benefit plan to fully recognize, as an
asset or liability, the overfunded or underfunded
status of its benefit plan(s) in its 2006 year-end bal-
ance sheet. It also requires a company to measure its
plan assets and benefit obligations as of its year-end
balance sheet date beginning with fiscal years end-
ing after December 15, 2008. The Company adopted
the provisions of this standard as of December 31,
2006, recording an additional liability of $492 million

In September 2006, the FASB issued FASB Staff
Position (FSP) No. AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which per-
mits the application of three alternative methods of
accounting for planned major maintenance activities:
the direct expense, built-in-overhaul, and deferral
methods. The FSP is effective for the first fiscal year
International
beginning after December 15, 2006.
Paper will adopt
the direct expense method of
accounting for these costs in 2007 with no impact on
its annual consolidated financial statements.

ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

In June 2006, the FASB issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109.” FIN 48 prescribes a recognition threshold
and measurement attribute for the financial state-
ment recognition and measurement of a tax position
taken or expected to be taken in a tax return. This
interpretation also provides guidance on classi-
fication, interest and penalties, accounting in interim
periods and transition, and significantly expands
income tax disclosure requirements. It applies to all
tax positions accounted for in accordance with SFAS
No. 109 and is effective for fiscal years beginning
after December 15, 2006.
International Paper will
apply the provisions of this interpretation beginning

in the first quarter of 2007, and currently estimates
that the cumulative effect of its initial application will
be a charge of approximately $75 million to begin-
ning of the year retained earnings, which is subject
to revision as management completes its analysis.

ACCOUNTING FOR CERTAIN HYBRID FINANCIAL

INSTRUMENTS

In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments
– an Amendment of FASB Statements No. 133 and
140,” which provides entities with relief from having
to separately determine the fair value of an
embedded derivative that would otherwise be
required to be bifurcated from its host contract in
accordance with SFAS No. 133. This statement
allows an entity to make an irrevocable election to
measure such a hybrid financial instrument at fair
value in its entirety, with changes in fair value
recognized in earnings. This statement is effective for
all financial instruments acquired, issued, or subject
to a remeasurement event occurring after
the
beginning of an entity’s first fiscal year that begins
after September 15, 2006.
International Paper
believes that the adoption of SFAS No. 155 in 2007
will not have a material impact on its consolidated
financial statements.

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
reporting of a change in accounting principle. SFAS
No. 154 is effective for accounting changes and cor-
rections 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

the FASB issued Interpretation
In March 2005,
No. 47, “Accounting for Conditional Asset Retire-
ment 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 unconditional even though uncertainty
exists about the timing and (or) method of settle-
ment. Uncertainty about the timing and (or) method
retirement
of settlement of a conditional asset

obligation should be factored into the measurement
of the liability when sufficient information exists to
make a reasonable estimate of the fair value of the
obligation.
International Paper adopted the provi-
sions of this interpretation in the fourth quarter of
2005 with no material effect on its consolidated
financial statements.

The Company’s principal conditional asset retire-
ment obligations relate to the potential future closure
or redesign 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 materials 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 regu-
lations and standards provide that the removal of
certain materials would only be required if the facility
were to be demolished or underwent major reno-
vations. At this time, any such obligations have an
indeterminate settlement date, and the Company
believes that adequate information does not exist to
apply an expected-present-value technique to esti-
mate 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 FSP FIN 46(R)-5,
“Implicit Variable Interests Under FASB Inter-
pretation No. 46(R), Consolidation of Variable Inter-
est Entities.” This FSP states that implicit 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
that
is a matter of
depends on the relevant facts and circumstances.
International Paper applied the provisions of FSP FIN
46(R)-5 in the second quarter of 2005, with no
material effect on its consolidated financial state-
ments.

judgment

ACCOUNTING FOR INCOME TAXES

In December 2004, the FASB issued FSP Financial
Accounting Standards (FAS) 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 certain of its foreign subsidiaries, includ-
ing amounts 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.

SHARE-BASED PAYMENT TRANSACTIONS

2004),

Payment,”

In December 2004, the FASB issued SFAS No. 123
(revised
that
“Share-Based
requires compensation costs related to share-based
payment transactions to be recognized in the finan-
cial statements. The amount of the compensation
cost is measured based on the grant-date fair value
of the equity or liability instruments issued. In addi-
tion, liability awards are remeasured each reporting
period. Compensation cost is recognized over the
period that an employee provides service in
exchange for the award. This statement applies to all
awards granted after the required effective date and
to awards modified, repurchased, or cancelled after
International Paper adopted SFAS
that date.
No. 123(R)
in the first quarter of 2006 with no
material effect on its consolidated financial state-
ments. See Notes 1 and 17 for a further discussion of
share-based payments.

EXCHANGES OF NONMONETARY ASSETS

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 measure-
ment 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 sig-
nificantly as a result of the exchange. International
Paper applied the provisions of SFAS No. 153 pro-
spectively in the first quarter of 2006, with no
material effect on its consolidated financial state-
ments.

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, handling
costs and wasted material be recognized as current-

period charges. This statement also introduces the
concept of “normal capacity” and requires the
allocation of fixed production 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.
International Paper adopted SFAS No. 151 in the first
quarter of 2006, with no material impact on its con-
solidated 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 the Medicare Prescription Drug, Improve-
ment 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 dis-
cussion.

NOTE 5 ACQUISITIONS

In October and November 2006, International Paper
paid approximately $82 million for a 50% interest in
the International Paper & Sun Cartonboard Co., Ltd.
joint venture that currently operates two coated
paperboard machines in Yanzhou City, China.
In
December 2006, a 50% interest was acquired in a
venture, Shandong International
second joint
Paper & Sun Coated Paperboard Co., Ltd.,
for
approximately $28 million. This joint venture was
formed to construct a third coated paperboard
machine, expected to be completed in the first quar-
ter of 2009. The operating results of these con-
solidated joint ventures did not have a material effect
on the Company’s 2006 consolidated results of
operations.

In addition,

The following unaudited pro forma information for
the year ended December 31, 2004 presents the
combined results of the continuing operations of
International Paper and Box USA as if the acquisition

had occurred as of January 1, 2004. This pro forma
information does not purport to represent Interna-
tional Paper’s actual results of operations if the
transaction described above would have occurred on
January 1, 2004, nor is it necessarily indicative of
future results.

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

Net sales

Earnings from continuing operations

Net loss

Earnings from continuing operations per common share

Net loss per common share-assuming dilution

2004

$20,975

243

(30)

0.50

(0.06)

OTHER ACQUISITIONS

The financial position and results of operations of
these acquisitions have been included in Interna-
tional Paper’s consolidated financial statements from
the dates of acquisition in 2005.

NOTE 6 RESTRUCTURING, BUSINESS
IMPROVEMENT AND OTHER CHARGES

This footnote discusses restructuring, business
improvement and other charges recorded for each of
the three years included in the period ended
December 31, 2006. It includes a summary of activity
for each year, a roll forward associated with sev-
erance and other cash costs arising in each year, and
tables presenting details of the 2006, 2005 and 2004
organizational restructuring programs.

2 0 0 6 : During 2006, total restructuring and other
charges of $300 million before taxes ($184 million
after taxes) were recorded. These charges included:

•

A $157 million charge before taxes ($95 million
after taxes) for organizational restructuring pro-
grams, principally associated with the Compa-
ny’s Transformation Plan,

a $165 million charge before taxes ($102 million
after taxes) for early debt extinguishment costs,

a $97 million charge before taxes ($60 million
after
litigation settlements and
adjustments to legal reserves (see Note 10),

taxes)

for

a pre-tax credit of $115 million ($70 million after
taxes) for payments received relating to the
Company’s participation in the U.S. Coalition for
Fair Lumber Imports, and

a $4 million credit before taxes ($3 million after
taxes) for other items.

Earnings also included a $19 million pre-tax credit
($12 million after taxes) for net insurance recoveries
related to the hardboard siding and roofing litigation,
a $6 million pre-tax credit ($3 million after taxes) for
the reversal of reserves no longer required, and a $6
million pre-tax credit ($4 million after taxes) for
interest received from the Canadian government on
refunds of prior-year softwood lumber duties, which
is included in Interest expense, net, in the accom-
panying consolidated statement of operations.

The following table presents a detail of the $157 mil-
restructuring
lion corporate-wide organizational
charge by business:

In millions

Printing Papers
Industrial Packaging

Consumer

Packaging

Forest Products

Distribution

Corporate

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total

$ 4
1

$18

$26(a,b)
2

$12(b)
–

$12(b) $ 54
7

$48

34(c)

$57

$34

$157

(a) Includes $15 million of pension and postretirement curtailment

charges and termination benefits.

(b) Includes $7 million, $9 million and $11 million in the 2006

second, third and fourth quarters, respectively, of accelerated

depreciation charges related to equipment to be taken out of

service as a result of the Transformation Plan.

relating to the relocation of the Company’s corporate head-

quarters from Stamford, Connecticut to Memphis, Tennessee.

the income tax provision was recorded, including a
credit of $627 million from an agreement reached
with the U.S. Internal Revenue Service concerning
the 1997 through 2000 U.S.
income tax
audits, a $142 million charge related to cash repa-
triations from non-U.S. subsidiaries, and $31 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.

federal

The following table presents a detail of the $256 mil-
lion corporate-wide organizational
restructuring
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

–

10(b)

–

13(d)

2(f)

–

20(g)

$27

$42

$187

$256

(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

Norway.

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

paper machines at Jay, Maine, Bastrop, Louisiana, and Pensa-

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

assets of the Bastrop, Louisiana mill to their estimated net real-

izable value of $105 million.

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

Forest Products headquarters from Savannah, Georgia to

Memphis, Tennessee.

The following table presents the components of the
organizational restructuring charge discussed above:

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Forest Products

Distribution

Corporate

Asset
Write-downs

Severance
and Other

$27

$ 27

–

Total

$ 54

$32

$125

$157

The following table presents a roll forward of the
severance and other costs included in the 2006
restructuring plans:

In millions

Opening Balance (first quarter 2006)

Additions (second quarter 2006)

Additions (third quarter 2006)

Additions (fourth quarter 2006)

2006 Activity

Cash charges

Reclassifications:

Pension and postretirement curtailments and

termination benefits

Balance, December 31, 2006

Severance
and Other

$ 18

(50)

(19)

$ 56

The severance charges recorded in 2006 related to
1,669 employees. As of December 31, 2006, 803
employees had been terminated.

2 0 0 5 : During 2005, restructuring and other charges
before taxes of $340 million ($213 million after taxes)
were recorded. Included in this charge were:

taxes)

a pre-tax charge of $256 million ($162 million
after
restructuring
for organizational
programs, principally costs associated with the
Company’s Transformation Plan,

•

Also recorded were pre-tax credits of $258 million
($151 million after taxes) for net insurance recoveries
related to the hardboard siding and roofing litigation,
and a $4 million pre-tax credit ($3 million after taxes)
for
the net adjustment of previously provided
reserves. In addition, a $454 million net reduction of

a pre-tax charge of $57 million ($35 million after
taxes) for losses on early extinguishment of
debt, and

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

national Paper’s headquarters from Stamford, Connecticut to

Memphis, Tennessee, and $12 million of transformation costs.

a $27 million pre-tax charge ($16 million after
taxes) for legal reserves.

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

Severance
and Other

$153

$31

–

Total

$184

In addition, credits of $123 million before taxes ($76
insurance recoveries
for net
million after taxes)
related to the hardboard siding and roofing litigation
and $35 million before taxes ($21 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 $62 mil-
lion corporate-wide organizational
restructuring
program charge in 2004, by business:

$166

$90

$256

In millions

First
Quarter

Second
Quarter

Third
Quarter

Printing Papers

$ 1

$ 5

Industrial Packaging

Consumer Packaging

Forest Products

Distribution

Specialty Businesses and

Other

Administrative Support

Groups

–

$14

$31

–

$17

Total

$ 7

$62

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

In millions

Opening Balance (first quarter 2004)

Additions (second quarter 2004)

Additions (third quarter 2004)

2004 Activity

Cash charges

Reclassifications:

Pension and postretirement curtailments and

termination benefits

Balance, December 31, 2004

Severance
and Other

$ 14

(40)

(22)

$ –

The severance charges recorded in 2004 related to
720 employees. As of December 31, 2004, 592
employees had been terminated and 128 employees
retained. Actual pension and postretirement costs
exceeded estimates despite the lower number of
employees terminated.

The following table presents a roll forward of the
severance and other costs included in the 2005
restructuring 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

termination benefits

2006 Activity

Cash charges

Reclassifications:

Pension and postretirement curtailments and

termination benefits

Environmental

Balance, December 31, 2006

Severance
and Other

$ 26

(47)

(10)

(23)

(3)

(7)

$ –

The severance charges recorded in 2005 related to
791 employees. As of December 31, 2006, all 791
employees had been terminated.

2 0 0 4 : During 2004, restructuring and other charges
before taxes of $164 million ($102 million after taxes)
were recorded. These charges included:

•

a $62 million charge before taxes ($39 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 million charge before taxes ($6 million
after taxes) for legal settlements.

NOTE 7 BUSINESSES HELD FOR SALE,
DIVESTITURES AND IMPAIRMENTS

DISCONTINUED OPERATIONS:

2 0 0 6 : During the fourth quarter of 2006, the Com-
pany entered into an agreement to sell its Beverage
Packaging business to Carter Holt Harvey Limited for
approximately $500 million, subject
to certain
adjustments. The sale of the North American Bever-
age Packaging operations subsequently closed on
January 31, 2007, with the sale of the remaining
non-U.S. operations expected to close later in the
2007 first quarter.

Also during the fourth quarter, the Company entered
into separate agreements for the sale of 13 lumber
mills for approximately $325 million, expected to
close in the first quarter of 2007, and five wood
products plants for approximately $237 million,
expected to close in the first half of 2007, both sub-
ject to various adjustments at closing.

Based on the fourth-quarter commitments to sell the
Beverage Packaging and Wood Products businesses,
the Company determined that
the accounting
requirements under Statement of Financial Account-
ing Standards No. 144, Accounting for the Impair-
ment or Disposal of Long-Lived Assets (SFAS
No. 144) as discontinued operations were met.
Accordingly, net pre-tax charges of $18 million ($11
million after taxes) for the Beverage Packaging busi-
ness and $104 million ($69 million after taxes) for the
Wood Products business (including $58 million for
termination
pension and postretirement benefit
benefits) were recorded in the fourth quarter as dis-
continued operations charges to adjust the carrying
value of these businesses to their estimated fair
value less costs to sell.

Revenues, earnings and earnings per share related
to the Beverage Packaging business for 2006, 2005
and 2004 were as follows:

In millions, except per share amounts

2006

2005

2004

Revenues

$ 816

$ 820

$ 763

Earnings from discontinued operation

Earnings from operation

Income tax expense

Earnings from operation, net of taxes

Loss on sales and impairments

Income tax benefit

Loss on sales and impairments, net of

taxes

Earnings (loss) from discontinued

$ 52

$ 40

$ 51

(16)

(121)

(90)

(18)

–

(17)

–

operation, net of taxes

$ (54)

$ 22

$ 34

Earnings per common share from

discontinued operation - assuming

dilution
Earnings from operation

Loss on sales and impairments

Earnings (loss) per common share from

discontinued operation, net of taxes

and minority interest - assuming

$ 0.07

(0.18)

$0.04

$0.07

–

dilution

$(0.11)

$0.04

$0.07

Revenues, earnings and earnings per share related
to the Wood Products business for 2006, 2005 and
2004 were as follows:

In millions, except per share amounts

2006

2005

2004

Revenues

$1,017

$1,135

$1,522

Earnings from discontinued operation

Earnings (loss) from operation

$ (15)

$ 197

$ 258

Income tax benefit (expense)

(77)

(100)

Earnings (loss) from operation, net of

taxes

Loss on sales and impairments

Income tax benefit

Loss on sales and impairments, net of

taxes

Earnings (loss) from discontinued

(10)

(269)

(234)

120

158

–

operation, net of taxes

$ (244)

$ 120

$ 158

Earnings (loss) per common share from

discontinued operation - assuming

dilution
Earnings (loss) from operation

$ (0.02)

$ 0.24

$ 0.32

Loss on sales and impairments

(0.47)

–

Earnings (loss) per common share from

discontinued operation, net of taxes

and minority interest - assuming
dilution

$ (0.49)

$ 0.24

$ 0.32

Additionally during the fourth quarter, a $38 million
pre-tax credit ($23 million after taxes) was recorded
for refunds received from the Canadian government
of duties paid by the Company’s former Weldwood
of Canada Limited business, and a pre-tax charge of
$1 million ($1 million after taxes) was recorded for
smaller adjustments of prior discontinued operation
estimates.

During the third quarter of 2006, management
determined there was a current expectation that,
more likely than not, the Beverage Packaging and
Wood Products businesses would be sold. Based on
the resulting impairment testing, pre-tax impairment
charges of $115 million ($82 million after taxes) and
$165 million ($165 million after taxes) were recorded
to reduce the carrying values of the net assets of the
Beverage Packaging and Wood Products businesses,
respectively, to their estimated fair values.

Also during the 2006 third quarter,
International
Paper completed the sale of its interests in a Bever-
age Packaging operation in Japan for a pre-tax gain
of $12 million ($3 million after taxes), and the sale of
its Brazilian Coated Papers business to Stora Enso
Oyj for approximately $420 million, subject to certain
post-closing adjustments. This business included a
coated paper mill and lumber mill in Aropoti, Parana
State,
hectares
(approximately 124,000 acres) of
forestlands in
the
Parana. As the Company determined that
accounting requirements under SFAS No. 144 for
reporting this business as a discontinued operation
were met, the resulting $100 million pre-tax gain ($79
million after taxes) was recorded as a gain on sale of
a discontinued operation.

as well

50,000

Brazil,

Revenues, earnings and earnings per share related
to the Brazilian Coated Papers business for 2006,
2005 and 2004 were as follows:

In millions, except per share amounts

Revenues

2006

$ 127

2005

2004

$ 218

$ 165

Earnings from discontinued operation

Earnings from operation

Income tax expense

Earnings from operation, net of taxes

Gain on sale

Income tax expense

Gain on sale, net of taxes

$ 20

$ 49

$ 38

(9)

100

(21)

(23)

–

(11)

–

Earnings from discontinued operation, net

of taxes

$ 90

$ 26

$ 27

Earnings per common share from

discontinued operation - assuming

dilution
Earnings from operation

Gain on sale

Earnings per common share from

discontinued operation, net of taxes and

$0.02

0.16

$0.05

–

minority interest - assuming dilution

$0.18

$0.05

During the first quarter of 2006,
the Company
determined that the accounting requirements under
SFAS No. 144 for reporting the Kraft Papers business
as a discontinued operation were met. Accordingly, a
$100 million pre-tax charge ($61 million after taxes)
was recorded to reduce the carrying value of the net
assets of this business to their estimated fair value.
During the 2006 second quarter,
the Company
signed a definitive agreement to sell this business for
approximately $155 million in cash, subject to certain
closing and post-closing adjustments, and two addi-
tional payments totaling up to $60 million payable
five years from the date of closing, contingent upon
business performance. A $16 million pre-tax charge
($11 million after taxes) was recorded during the
second quarter to further reduce the carrying value
of the assets of the Kraft Papers business based on
the terms of this definitive agreement. The sale of
this business was subsequently completed on Jan-
uary 2, 2007.

$ 41

$ 11

$ (1)

Income tax (expense) benefit

(15)

(116)

(72)

(4)

–

(1)

–

$ 0.05

(0.14)

$0.01

$ –

–

Earnings (loss) per common share from

discontinued operation - assuming dilution
Earnings (loss) from operation, net of taxes and

Revenues, earnings and earnings per share for 2005
and 2004 related to CHH were as follows:

In millions, except per share amounts

Revenues

Earnings (loss) from discontinued operation

Earnings (loss) from operation

2005

2004

$1,700

$2,300

$ (32)

(96)

Minority interest benefit (expense), net of taxes

and minority interest

(41)

Earnings (loss) from discontinued operation, net of

taxes and minority interest

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 minority interest

Earnings from discontinued operation, net of taxes

(120)

–

332

–

361

–

268

(69)

(109)

and minority interest

$ 241

$ 117

minority interest

$ (0.24)

$ 0.06

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

In the third quarter of 2004,

International
2 0 0 4 :
Paper entered into an agreement to sell its Weld-
wood of Canada Limited (Weldwood) business to
West Fraser Timber Co., Ltd. of Vancouver, Canada
(West Fraser), for approximately C$1.26 billion in
cash, subject
to certain adjustments at closing.
Accordingly, a $323 million pre-tax loss on impair-
ment ($711 million after taxes), including $182 mil-
lion of pre-tax credits from cumulative translation
adjustments, was recorded in Discontinued oper-
ations 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 proceeds
received from the sale were approximately U.S. $1.1
billion. The operating results of Weldwood in 2004
are presented in discontinued operations.

Revenues, earnings and earnings per share related
to the Kraft Papers business for 2006, 2005 and 2004
were as follows:

In millions, except per share amounts

Revenues

2006

$ 231

2005

$ 224

2004

$188

Earnings from discontinued operation

Earnings from operation

Income tax expense

Earnings from operation, net of taxes

Loss on sales and impairments

Income tax benefit

Loss on sales and impairments, net of

taxes

Earnings (loss) from discontinued

Earnings (loss) per common share from

discontinued operation - assuming

dilution
Earnings from operation

Loss on sales and impairments

Earnings (loss) per common share from

discontinued operation, net of taxes and

operation, net of taxes

$ (46)

$ (1)

minority interest - assuming dilution

$(0.09)

$0.01

$ –

The accompanying financial statements, and the
respective accompanying notes to consolidated
financial statements, have been revised to retro-
actively reclassify the operating results of Kraft
Papers, Brazilian Coated Papers, Beverage Packaging
and Wood Products as Discontinued operations for
all periods presented.

In the third quarter of 2005,

International
2 0 0 5 :
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 million pre-tax credit from cumu-
lative translation adjustments, was included in Dis-
continued operations, together with CHH’s operating
results prior to the sale. Additionally, in May 2004,
CHH sold its Tissue business. In accordance with
SFAS No. 144, International Paper has retroactively
reclassified the operating results of CHH for all peri-
ods to present CHH as a discontinued operation.

Revenues, earnings and earnings per share related
to Weldwood for 2004 were as follows:

In millions, except per share amounts

Revenues

Earnings 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

Loss from discontinued operation, net of taxes

Earnings per common share from discontinued operation

Earnings from operation, net of taxes
Asset impairment, net of taxes

Loss per common share from discontinued operation, net of

taxes

2004

$1,000

$ 153
(50)

103

(323)
(388)

(711)

$ (608)

$ 0.22
(1.47)

$ (1.25)

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

ried over in connection with the acquisition of Champion in

June 2000.

FORESTLANDS:

in connection with the previously
During 2006,
announced Transformation Plan,
the Company
completed sales totaling approximately 5.6 million
acres of forestlands for proceeds of approximately
$6.6 billion, including $1.8 billion in cash and $4.8
billion of installment notes supported by irrevocable
letters of credit (see Note 8). Additionally, the Com-
pany entered into fiber supply agreements with cer-
tain purchasers of these forestlands providing for the
future delivery of pulpwood to specified Company
facilities at market prices at time of delivery (see
Note 11). The first of these transactions in the second
quarter included approximately 76,000 acres sold for
cash proceeds of $97 million, resulting in a pre-tax
gain of $62 million. During the third quarter, 476,000
acres of
forestlands were sold for $401 million,
including $265 million in cash and $136 million of
installment notes, resulting in a pre-tax gain of $304
million. Finally, in the fourth quarter, the Company
completed sales of 5.1 million acres of forestlands
for $6.1 billion, including $1.4 billion in cash and $4.7
billion of installment notes, resulting in pre-tax gains
totaling $4.4 billion. These transactions represent a
permanent reduction in the Company’s forestland
asset base and are not a part of the normal, ongoing
operations of the Forest Resources business. Thus,
the net gains resulting from these sales are sepa-
rately presented in the accompanying consolidated
statement of operations under the caption Gain on
sale of forestlands.

OTHER DIVESTITURES AND IMPAIRMENTS:

2 0 0 6 : During the fourth quarter of 2006, a pre-tax
charge of $149 million ($84 million after taxes) was
recorded for losses on sales and impairments of
businesses. This charge included a $128 million
pre-tax impairment charge ($84 million after taxes) to
reduce the carrying value of the fixed assets of the
Company’s Saillat mill
in France (included in the
Printing Papers segment) to their estimated fair val-
ue, a pre-tax loss of $18 million ($6 million after
taxes) relating to the sale of certain box plants in the
United Kingdom and Ireland, and $3 million of
pre-tax charges (a $6 million credit after taxes) for
other small asset sales.

During the third quarter of 2006, a net pre-tax gain of
$74 million ($44 million after taxes) was recorded for
gains (losses) on sales and impairments of busi-
nesses. This net gain included the recognition of a
previously deferred $110 million pre-tax gain ($68
million after taxes) related to a 2004 sale of forest-
lands in Maine, a pre-tax charge of $38 million ($23
million after taxes) to reflect the completion of the
sale of the Company’s Coated and Supercalendered
Papers business in the 2006 third quarter, and a net
pre-tax gain of $2 million (a $1 million loss after
taxes) related to other smaller sales.

During the first quarter of 2006, a pre-tax charge of
$1.3 billion was recorded to write down the assets of
the Company’s Coated and Supercalendered Papers
business to their estimated fair value, as manage-
ment had committed to a plan to sell this business.
In addition, other pre-tax charges totaling $3 million
($2 million after taxes) were recorded to adjust esti-
mated losses of certain smaller operations that are
held for sale.

At the end of the 2006 first quarter, the Company
reported its Coated and Supercalendered Papers

business as a discontinued operation based on a
plan to sell the business. In the second quarter of
2006, the Company signed a definitive agreement to
this business for approximately $1.4 billion,
sell
subject
to certain post-closing adjustments, and
agreed to acquire a 10% limited partnership interest
in CMP Investments L.P., the company that will own
this business. Since this limited partnership interest
represents significant continuing involvement in the
operations of this business under U.S. generally
accepted accounting principles, the operating results
for Coated and Supercalendered Papers were
required to be included in continuing operations in
the accompanying consolidated statement of oper-
ations. Accordingly, the operating results for this
business, including the charge in the first quarter of
$1.3 billion before and after taxes to write down the
assets of the business to their estimated fair value,
are now included in continuing operations for all
periods presented.

The net 2006 pre-tax losses totaling approximately
$1.5 billion ($1.4 billion after taxes) discussed above
are included in Net losses on sales and impairments
of businesses in the accompanying consolidated
statement of operations.

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 mil-
lion after taxes) from the collection of a note receiv-
able from the 2001 sale of the Flexible Packaging
business and final charges related to the sales of
Fine Papers and Industrial Papers. In addition, inter-
est income of $11 million before taxes ($7 million
after taxes) was collected on the Flexible Packaging
business note, which is included in Interest expense,
net in the accompanying consolidated statement of
operations. During the first quarter of 2005, Interna-
tional 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 taxes) was recorded in the first quarter
to write down the net assets of the Fine Papers busi-
ness to their estimated net realizable value. The sale
of Fine Papers was completed 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 business and related corporate assets to their
estimated net realizable value. The sale of Industrial
Papers was completed 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 pre-
viously sold.

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

In December 2004,

International Paper
In the third quarter of 2004,
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 approx-
imately $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 mil-
lion 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
accompanying consolidated statement of operations.

In December 2006, the Company entered into a
its Arizona Chemical
definitive agreement to sell

business for approximately $485 million, subject to
the transaction,
certain adjustments. As part of
International Paper will acquire a minority interest of
approximately 10 percent in, and is expected to have
significant influence in the operations of, the new
entity. The transaction subsequently closed in the
first quarter of 2007.

At December 31, 2006 and 2005, assets of businesses
held for sale totaling approximately $1.8 billion and
$5.4 billion, respectively, and liabilities of businesses
held for sale totaling approximately $333 million and
$621 million, respectively, included the Kraft Papers
the
business,
Wood Products business,
the Arizona Chemical
business, the Coated and Supercalendered Papers
business, the Brazilian Coated Papers business, and
certain smaller businesses, and consisted of:

the Beverage Packaging business,

In millions

Accounts receivable, net

Inventories

Plants, properties and equipment, net

Forestlands

Goodwill

Other assets

Assets of businesses held for sale

Accounts payable

Accrued payroll and benefits

Other accrued liabilities

Other liabilities

Liabilities of businesses held for sale

2006

2005

$ 298 $ 511
515

401

995

2,728

–

1,422

143

$1,778 $5,382

$ 184 $ 336
83

113

$ 333 $ 621

Assets and liabilities of businesses held for sale by
business were:

In millions

Kraft Papers

Beverage Packaging

Wood Products

Arizona Chemical

Coated and Supercalendered

Papers

Brazilian Coated Papers

Other businesses

2006

2005

Assets Liabilities Assets Liabilities

$ 148

572

562

496

–

$ 16 $ 266
787
107

159

864

396

–

2,736

319

$ 17

179

135

142

Totals

$1,778

$333 $5,382

$621

NOTE 8 VARIABLE INTEREST ENTITIES AND
PREFERRED SECURITIES OF SUBSIDIARIES

VARIABLE INTEREST ENTITIES:

In connection with the 2006 sale of approximately
5.6 million acres of forestlands, International Paper
received installment notes (the Timber Notes) total-
ing approximately $4.8 billion. The Timber Notes,

which do not require principal payments prior to
their August 2016 maturity, are supported by irrev-
ocable letters of credit obtained by the buyers of the
forestlands. During the 2006 fourth quarter, Interna-
tional Paper contributed the Timber Notes to newly
formed entities (the Borrower Entities) in exchange
for Class A and Class B interests in these entities.
Subsequently,
International Paper contributed its
Class A interests in the Borrower Entities, along with
approximately $400 million of International Paper
promissory notes, to other newly formed entities
(the Investor Entities) in exchange for Class A and
Class B interests in these entities. International Paper
then sold its Class A membership interest in the
Investor Entities to a third party investor. As a result,
at December 31, 2006,
International Paper holds
Class B interests in the Borrower Entities and Class B
interests in the Investor Entities valued at approx-
imately $5.0 billion.
International Paper has no
obligation to make any further capital contributions
to these entities. Based on an analysis of these enti-
ties under the provisions of FIN 46(R), International
Paper determined that it is not the primary benefi-
ciary of these newly formed entities and therefore its
investments should be accounted for under the
equity method of accounting.

Also during 2006, the Borrower Entities acquired
approximately $4.8 billion of International Paper debt
obligations for cash, resulting in a total of approx-
International Paper debt
imately $5.2 billion of
obligations held by the Borrower and Investor Ent-
ities at December 31, 2006. The various agreements
entered into in connection with these transactions
provide that International Paper has, and Interna-
tional Paper intends to affect, a legal right to offset its
obligation under these debt instruments with its
investments in the entities. Accordingly for financial
reporting purposes, as allowed under the provisions
of FASB Interpretation No. 39, International Paper
has offset $5.0 billion of Class B interests in the enti-
ties against $5.0 billion of International Paper debt
obligations held by these entities. The remaining
$200 million of debt obligations is included in float-
ing rate notes due 2007 – 2016 in the summary of
long-term debt in Note 12.

International Paper also 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 accounted 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 primary beneficiary of
the entities. At December 31, 2006,
International
Paper’s $545 million preferred interest in one of the
entities has been offset against related debt obliga-
tions since International Paper has, and intends to
affect, a legal right of offset to net-settle these two
amounts. The remaining $455 million of debt obliga-
tions are included in floating rate notes due 2007 –
2016 in the summary of long-term debt in Note 12.

PREFERRED SECURITIES OF SUBSIDIARIES:

In March 2003, Southeast Timber, Inc. (Southeast
Timber), a consolidated subsidiary of International
Paper, issued $150 million of preferred securities to a
private investor with future dividend payments
based on LIBOR. Southeast Timber, which through a
subsidiary initially held approximately 1.5 million
acres of forestlands in the southern United States,
was International Paper’s primary vehicle for sales of
southern forestlands. As of December 31, 2006, sub-
stantially all of these forestlands have been sold.
These 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 con-
solidated balance sheet. Distributions paid to the
third-party investor were $13 million, $10 million and
$7 million in 2006, 2005 and 2004, respectively. The
expense related to these preferred securities is
shown in Minority interest expense in the accom-
panying consolidated statement of operations.

Prior to 2006, the agreement with the private investor
placed certain limitations on International Paper’s
ability to sell forestlands in the southern United
States. In 2006, the proceeds generated by Interna-
tional Paper’s sales of forestlands resulted in the
elimination of any limitations on future forestland
sales.

NOTE 9 INCOME TAXES

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

2006

2005

2004

In millions

Earnings (loss)

U.S.

Non-U.S.

Earnings from continuing operations

before income taxes and minority
interest

The provision (benefit) for income taxes by taxing
jurisdiction was:

In millions

2006

2005

2004

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.

$ 125

$(391)

$ 49

107

(52)

123

$ 270

$(378)

$196

$1,583

$ (5)

$ (34)

172

(136)

(10)

(14)

(53)

$1,619

$ (29)

$ (82)

Income tax provision (benefit)

$1,889

$(407)

$114

The Company’s deferred income tax provision
(benefit) includes a $1 million provision, a $3 million
benefit and a $2 million provision for 2006, 2005 and
2004, respectively,
for the effect of changes in
non-U.S. and state tax rates.

International Paper made income tax payments, net
of refunds, of $249 million, $440 million and $238
million in 2006, 2005 and 2004, 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

2006

2005

2004

Earnings from continuing operations
before income taxes and minority
interest

Statutory U.S. income tax rate

Tax expense using statutory
U.S. income tax rate
State and local income taxes
Tax rate and permanent differences on

non-U.S. earnings

Net U.S. tax on non-U.S. dividends
Tax benefit on export sales
Non-deductible business expenses
Sales and impairments of non-strategic

assets

Minority interest
Retirement plan dividends
Tax credits
Tax audit settlements
Other, net

$3,188

$ 286

$376

35%

1,116
136

(19)
33
(6)
15

646
–
(7)
(14)
–
(11)

100
(41)

(30)
169
(9)
13

(8)
–
(6)
(19)
(560)
(16)

132
19

(36)
44
(7)
12

(11)
(9)
(7)
(37)
–
14

$3,166

$ 53

233

$ (19)

395

Income tax expense (benefit)

$1,889

$(407)

$114

Effective income tax rate

59%

(142)%

30%

$3,188

$286

$376

The tax effects of significant temporary differences
representing deferred tax assets and liabilities at
December 31, 2006 and 2005, 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:

Plants, properties and equipment
Forestlands and related installment sales
Other

Total deferred tax liabilities

Net deferred tax liabilities

2006

2005

$ 381
258
400
1,156
285
59
446

$ 339
588
300
1,786
211
40
343

2,985
(111)

3,607
(118)

$ 2,874

$ 3,489

$(1,965)
(2,095)
(192)

$(2,580)
(753)
(281)

$(4,252)

$(3,614)

$(1,378)

$ (125)

Deferred tax assets and liabilities are recorded in the
accompanying consolidated balance sheet under the
captions Deferred income tax assets, Deferred
charges and other assets, Other accrued liabilities
and Deferred income taxes. The increase in 2006 in
Deferred income taxes principally reflects installment
sales treatment of certain forestland sales during the
year. Other contributing factors include the utilization
of U.S. net operating loss carryforwards, the gen-
eration of income tax credits and a decrease in
deferred tax assets relating to pension costs.

The valuation allowance for deferred tax assets as of
January 1, 2006, was $118 million. The net change in
the total valuation allowance for the year ended
December 31, 2006, was a decrease of $7 million.

The Company recorded an income tax provision for
2006 of $1.9 billion, consisting of a $1.6 billion deferred
tax provision (principally reflecting deferred taxes on
the 2006 Transformation Plan forestland sales) and a
$300 million current tax provision. The provision also
included an $11 million provision related to a special
tax adjustment. Excluding the impact of special items,
the tax provision was $272 million, or 29% of pre-tax
earnings before minority interest.

The Company recorded an income tax benefit for
2005 of $407 million, including a $454 million net tax
benefit related to special tax adjustment items, con-
sisting of a tax benefit of $627 million resulting from
an agreement reached with the U.S. Internal Rev-
enue Service concerning the 1997 through 2000 U.S.

federal income tax audit, a $142 million charge for
deferred taxes related to earnings repatriations
under the American Jobs Creation Act of 2004, and
$31 million of other tax charges. Excluding the
impact of special items, the tax provision was $83
million, or 20% of pre-tax earnings before minority
interest.

The income tax provision for 2004 was $114 million,
or 30% of pre-tax earnings from continuing oper-
ations before minority interest, including a $32 mil-
lion provision related to special items. Excluding the
impact of this special tax adjustment item, the tax
provision was $98 million, or 19% of pre-tax earnings
before minority interest.

International Paper has federal and non-U.S. net oper-
ating loss carryforwards that expire as follows: 2007
through 2016 – $161 million, 2017 through 2026 – $1.8
billion, and indefinite carryforwards of $890 million.
International Paper has tax benefits from net operating
loss carryforwards for state taxing jurisdictions of
approximately $338 million that expire as follows: 2007
through 2016 – $96 million and 2017 through 2026 –
$243 million.
International Paper also has federal,
non-U.S. and state tax credit carryforwards that expire
as follows: 2007 through 2016—$80 million, 2017
through 2026 – $90 million, and indefinite carryfor-
wards – $304 million. Further, International Paper has
state capital loss carryforwards that expire as follows:
2007 through 2016 – $10 million.

Deferred income taxes are not provided for temporary
differences of approximately $2.7 billion, $2.4 billion
and $2.7 billion as of December 31, 2006, 2005 and
2004, respectively, representing earnings of non-U.S.
subsidiaries intended to be permanently reinvested.
Computation of the potential deferred tax liability
associated 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 1996 through 2005. While the
Company believes that it is adequately accrued for
possible audit adjustments, the final resolution of
these examinations cannot be determined at this
time and could result in final settlements that differ
from current estimates.

NOTE 10 COMMITMENTS AND CONTINGENT
LIABILITIES

Certain property, machinery and equipment are
leased under cancelable and non-cancelable agree-
ments.

Unconditional purchase obligations have been
entered into in the ordinary course of business, prin-
cipally for capital projects and the purchase of cer-
tain pulpwood,
logs, wood chips, raw materials,
energy and services, including fiber supply agree-
ments to purchase pulpwood that were entered into
concurrently with the 2006 Transformation Plan for-
estland sales (see Note 7).

future minimum
At December 31, 2006,
commitments under existing non-cancelable leases
and purchase obligations were as follows:

total

In millions

2007 2008 2009 2010 2011 Thereafter

Lease obligations (a)

$ 144 $117 $ 94 $ 74 $ 60

Purchase obligations (b,c)

2,329

462

362

352

323

Total

$2,473 $579 $456 $426 $383

$ 110

1,794

$1,904

(a) Included in these amounts are $76 million of lease obligations

related to discontinued operations and businesses held for sale

that are due as follows: 2007 – $23 million; 2008 – $19 million;

2009 – $15 million; 2010 – $7 million; 2011 – $5 million; and

thereafter – $7 million.

(b) Included in these amounts are $1.3 billion of purchase obliga-

tions related to discontinued operations and businesses held

for sale that are due as follows: 2007 – $335 million; 2008 –

$199 million; 2009 – $157 million; 2010 – $143 million; 2011 –

$141 million; and thereafter – $331 million.

entered into at the time of the Transformation Plan forestland

sales.

Rent expense was $217 million, $216 million and
$225 million for 2006, 2005 and 2004, respectively.

International Paper entered into an agreement in
2000 to guarantee, for a fee, an unsecured con-
tractual credit agreement between a financial
institution and an unrelated third-party customer. In
the fourth quarter of 2006, the customer cancelled
the agreement and paid the Company a fee of $11
million, which is included in Cost of products sold in
the accompanying consolidated statement of oper-
ations. Accordingly,
the Company has no future
obligations under this agreement.

In connection with sales of businesses, property,
equipment, forestlands and other assets,
Interna-
tional Paper commonly makes representations and
warranties relating to such businesses or assets, and
may agree to indemnify buyers with respect to tax
and environmental
liabilities, breaches of repre-
sentations and warranties, and other matters. Where
liabilities for such matters are determined to be

probable and subject
to reasonable estimation,
accrued liabilities are recorded at the time of sale as
a cost of the transaction.

Under the terms of the sale agreement for the Bever-
age Packaging business, the purchase price received
by the Company is subject to a post-closing adjust-
ment if adjusted annualized earnings of the Beverage
Packaging business for the first six months of 2007
are less than a targeted amount. The adjustment, if
any, would equal five times the shortfall from the
targeted amount. While management does not cur-
is probable
rently believe that such adjustment
is reasonably
based upon current projections,
possible that an adjustment could be required in
2007.

International Paper does not currently believe that it
is reasonably possible that
future unrecorded
liabilities for other such matters, if any, would have a
material adverse effect on its consolidated financial
statements.

EXTERIOR SIDING AND ROOFING SETTLEMENTS

the Company,

Three nationwide class action lawsuits against the
Company and Masonite Corp., a formerly wholly-
owned subsidiary of
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 further described
below), were retained by the Company.

The first suit, entitled Judy Naef v. Masonite and
International Paper, was filed in December 1994 and
settled on January 15, 1998 (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 between January 1, 1980,
and January 15, 1998. For siding that was installed
between January 1, 1980, and December 31, 1989,
the deadline for filing claims expired January 18,
2005, and for siding installed between January 1,
1990, through January 15, 1998, claims must be
made by January 15, 2008.

The second suit, entitled Cosby, et al. v. Masonite
Corporation, et al., was filed in 1997 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 hav-
ing 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
plaintiffs alleged that Woodruf roofing manufactured
by Masonite was defective and caused damage to
the structure underneath the roofing. The class con-
sisted 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 set-
tlement amounts paid to class members.

CLAIMS FILING AND EVALUATION

For all of the settlements, once a claim is determined
to be valid, the amount of the claim is determined 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 Company 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 dam-
age, the process of degradation, once begun, con-
tinues until
repairs are made. The Company
estimates that approximately 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 Omni-
wood Settlement and 86,000 structures have
installed products that are the subject of the Woodruf
Settlement. Masonite stopped selling the products
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 respective terms established under
the settlement agreements for making claims. The
warranty period generally extends for 25 years fol-
lowing 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.

CLAIMS PAYMENT DATA

Through December 31, 2006, net settlement pay-
ments totaled approximately $1.1 billion ($883 mil-
lion for the Hardboard Settlement, $153 million for
the Omniwood Settlement and $54 million for the
including $159 million of
Woodruf Settlement),
non-refundable attorneys’ fees.

The average settlement cost per claim for the years
ended December 31, 2006, 2005 and 2004 for the
Hardboard, Omniwood and Woodruf Settlements
are set forth in the table below:

AVERAGE SETTLEMENT COST PER CLAIM

In thousands

December 31, 2006
December 31, 2005

December 31, 2004

Hardboard
Multi-
Family

Single
Family

Omniwood
Multi-
Family

Single
Family

Woodruf
Multi-
Family

Single
Family

$2.2
2.5

2.3

$3.4
2.2

3.1

$4.6
4.6

4.3

$3.0
6.1

4.2

$4.4
4.3

4.2

$3.7
0.5

4.0

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

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

Settlements for the years ended December 31, 2006,
2005 and 2004:

In thousands

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

No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2006

CLAIMS ACTIVITY

Hardboard

Omniwood

Woodruf

Total

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Total

26.4

56.0

(28.6)

(14.9)

38.9

27.3

(30.7)

(15.3)

20.2

18.3

(12.7)

(4.0)

21.8

2.8

8.0

(3.7)

(2.1)

5.0

5.6

(5.3)

(2.1)

3.2

0.6

(1.6)

(0.1)

2.1

1.8

5.2

(4.0)

(0.6)

2.4

4.6

(4.1)

(0.5)

2.4

5.4

(4.3)

(0.8)

2.7

0.5

–

(0.1)

–

0.4

(0.3)

–

0.5

0.3

(0.2)

–

0.6

0.8

0.6

(0.4)

(0.1)

0.9

0.6

(0.5)

(0.2)

0.8

0.6

(0.4)

(0.2)

0.8

0.3

–

0.3

–

0.3

–

0.3

29.0

61.8

(33.0)

(15.6)

42.2

32.5

(35.3)

(16.0)

23.4

24.3

(17.4)

(5.0)

25.3

3.6

8.0

(3.8)

(2.1)

5.7

6.0

(5.6)

(2.1)

4.0

0.9

(1.8)

(0.1)

3.0

32.6

69.8

(36.8)

(17.7)

47.9

38.5

(40.9)

(18.1)

27.4

25.2

(19.2)

(5.1)

28.3

At December 31, 2006, there were $19 million of
payments due for claims that have been determined
to be valid ($13 million for Hardboard, $5 million for
Omniwood and $1 million for Woodruf) and an esti-
mated $8 million of payments associated with claims
currently under evaluation ($6 million for claims
related to Hardboard, $2 million for claims related to
Omniwood and none for claims related to Woodruf).
In addition, there was approximately $4 million of
costs associated with administrative and legal fees
incurred but not paid prior to year-end.

RESERVE FOR SIDING AND ROOFING SETTLEMENTS

At December 31, 2006, net reserves for the settle-
ments discussed above totaled $124 million, of which
$72 million is attributable to the Hardboard Settle-
ment, $49 million to the Omniwood Settlement and
$3 million 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 December 31, 2006, 2005 and 2004:

In millions

Balance, December 31, 2003

Payments

Insurance collections

Balance, December 31, 2004

Payments

Insurance collections

Balance, December 31, 2005

Additional provision

Payments

Balance, December 31, 2006

Hard-
board

Omni-
wood

Woodruf

$ 261

(111)

158

(119)

(5)

(52)

$117

(20)

–

(23)

–

(25)

$ 9

(5)

–

(4)

–

(2)

Total

$ 387

(136)

259

(146)

–

113

(79)

$ 72

$ 49

$ 3

$ 124

While, for tracking purposes, the Company maintains
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
the aggregate reserve,
as to the adequacy of

studies of

we employ a third-party consultant to conduct stat-
future costs utilizing recent
istical
claims experience data. These projections are
updated annually using recent claims activity and
other factors typically considered in projecting future
claims and costs.

Throughout 2006, Omniwood and Woodruf claims
activity were in line with projections. However, dur-
ing the first three quarters of 2006, claims activity for
Hardboard claims was in excess of projected
amounts as both the number and average cost per
claim exceeded projections. In the first quarter, the
Company was advised by its third-party consultant
that most of the 1980’s Hardboard Claims had been
processed and a reasonable estimate could be made
of the amount necessary to settle the remaining
claims. Accordingly, a charge of $15 million was
recorded in the first quarter to increase the reserve to
management’s best estimate of the amount required
for future payments. At the end of the third quarter,
the Company determined that, pending completion
of an updated projection by the third-party con-
sultant, an additional $35 million charge was
required to increase the reserve balance to reflect the
higher claims activity for the 1990’s Hardboard
claims. This updated projection was completed in
the fourth quarter taking into account claims data
through December 31, 2006. As a result, an addi-
tional pre-tax charge of $40 million was recorded in
the fourth quarter
to increase the reserve to
management’s best estimate of projected future
claims and expense payments through the end of
the claims period (January 15, 2008).

A number of factors could cause actual results to
vary from our projections, including a higher than
projected cost per claim (due to higher construction,
wood, energy and replacement costs, all of which
affect the inflation factor for the Means Price Data
discussed above).

The Company believes that, as of the end of 2006,
the aggregate reserve balance for the Hardboard,
Omniwood and Woodruf Settlements is adequate.
However, the Company will continue to evaluate the
relevant data through the end of the claims period in
order to determine if any further adjustments to its
aggregate reserve will be warranted.

HARDBOARD INSURANCE MATTERS

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

These matters have been favorably resolved result-
ing in the execution of settlement agreements that
require the insurance carriers to pay the Company an
aggregate of approximately $625 million.

In millions

Insurance settlements

Income recognized

Cash settlements received, net

2006

$22

2005

$334

258

114

2004

$174

123

Including collections received prior to 2003, cumu-
lative net cash settlements received totaled $384 mil-
lion through December 31, 2006. Approximately
$111 million of additional cash will be collected in
2007 and 2008 under current settlement agreements.

In 2004, the Company settled a dispute with a third
party relating to an alternative risk-transfer agree-
ment. Under that agreement, the Company received
$100 million for certain costs relating to the Hard-
board 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 maximum of $95 million. As of
December 31, 2006, approximately $66 million had
been paid to the third party under this settlement.

SUMMARY

The Company is also involved in various other
inquiries, administrative proceedings and litigation
relating to contracts, sales of property, environ-
mental protection, tax, antitrust, personal injury and
other matters, some of which allege substantial
monetary damages. While any proceeding or liti-
gation has the element of uncertainty, the Company
believes that the outcome of any of the lawsuits or
claims that are pending or threatened (other than
those that cannot be assessed due to their prelimi-
nary nature), or all of them combined, including the
preceding antitrust matters, will not have a material
adverse effect on its consolidated financial state-
ments.

NOTE 11 SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION

Inventories by major category were:

In millions at December 31

Raw materials

Finished pulp, paper and packaging

products

Operating supplies

Other

Inventories

2006

$265

1,341

271

$1,909

2005

$249

1,383

259

$1,932

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 fin-
ished products inventories were valued using this
method.
If the first-in, first-out method had been
used, it would have increased total inventory balan-
ces by approximately $252 million and $239 million
at December 31, 2006 and 2005, respectively.

$16,665

$15,968

IPPM on May 1, 2006, a $9 million decrease representing the

Plants, properties and equipment by major classi-
fication were:

In millions at December 31

2006

2005

Pulp, paper and packaging facilities

Mills

Packaging plants

Other plants, properties and equipment

Gross cost

Less: Accumulated depreciation

Plants, properties and equipment, net

5,093

1,285

23,043

14,050

$8,993

5,068

1,450

22,486

13,413

$9,073

Interest costs related to the development of certain
long-term assets are capitalized and amortized
over the related assets’ estimated useful lives.
Capitalized net interest costs were $21 million in
2006, $14 million in 2005 and $10 million in 2004.
Interest payments made during 2006, 2005 and
2004 were $734 million, $819 million and $773
million, respectively. The 2005 interest 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 $651 million in 2006, $681
million in 2005, net of a $46 million credit related to
the settlement of the tax audits discussed above
and $782 million in 2004. Interest income was $130
million, $86 million and $70 million in 2006, 2005
and 2004, respectively.

The following tables present changes in the goodwill
balances as allocated to each business segment for
the years ended December 31, 2006 and 2005.

Balance
January 1,
2006 (a)

Reclassifi-
cations
and
Other (b)

Additions/
Reductions

Balance
December 31,
2006

In millions

Printing Papers

$1,674

$(174)

–

$1,500

Industrial

Packaging

Consumer

Packaging

Distribution

Corporate

Total

677

960

299

(11)(c)

179

(11)

(688)(d)

–

670

451

308

–

$3,621

$(699)

$2,929

Paper Containers (UK) Limited and International Paper Ireland,

a $1 million increase from the completion of the accounting for

the 50% interest in IPPM acquired August 1, 2005, a $5 million

increase from the purchase of an additional 25% interest in

completion of the purchase accounting for a 66.5% interest

acquired in Compagnie Marocaine des Cartons et des Papiers

in October 2005, and a $5 million decrease from the completion

of the purchase accounting for the Box USA acquisition.

(d) Represents charges of $630 million and $129 million related to

the annual impairment testing of the coated paperboard busi-

ness and Shorewood packaging business, respectively, and a

$71 million increase related to the accounting for certain joint

ventures in China.

Balance
January 1,
2005 (a)

Reclassifi-
cations
and
Other (b)

Additions/
Reductions

Balance
December 31,
2005

In millions

Printing Papers

$1,672

$ 3

$ –

$1,675

Industrial

Packaging

Consumer

Packaging

Distribution

Corporate

591

987

299

(28)

–

67(c)

1(d)

–

(13)(e)

676

960

299

Total

$3,573

$ (7)

$ 55

$3,621

(a) Restated to show the Kraft Papers, Beverage Packaging, Wood

Products and Brazil Coated Papers businesses as discontinued

operations and Arizona Chemical and Coated and Super-

calendered Papers as businesses held for sale.

(b) Represents the effects of foreign currency translations and

reclassifications.

Box USA of $23 million, the acquisition of Compagnie Mar-

ocaine des Cartons et des Papiers of $12 million and the

acquisition of a 50% interest in IPPM of $38 million, offset by

the effects of the sale of the Industrial Papers business of $6

million.

(d) Reflects a $5 million adjustment resulting from the acquisition

of a minority interest in Shorewood EPC Europe Limited and $1

million related to the acquisition of a 20% interest in IP Korea

Ltd., offset by $5 million related to the reclassification of IP Pty

Australia Ltd. to equity method investments.

(e) Reflects the sale of International Paper’s Fine Papers business.

(a) Restated to show the Kraft Papers, Beverage Packaging, Wood

Products and Brazil Coated Papers businesses as discontinued

operations and Arizona Chemical and Coated and Super-

calendered Papers as businesses held for sale.

(b) Represents the effects of foreign currency translations and

reclassifications, principally $179 million relating to the move-

ment of the coated bristols business from Printing Papers to

Consumer Packaging.

Excluded from the above tables is goodwill totaling
approximately $1.2 billion at December 31, 2005
relating to the Company’s Coated and Super-
calendered Papers business included in Assets of
businesses held for sale that was written off in con-
nection with the 2006 first-quarter $1.3 billion pre-tax
charge to reduce the net assets of that business to
estimated fair value.

In the fourth quarter of 2006, in conjunction with
impairments,
annual testing for possible goodwill
the Company recorded charges of $630 million and
$129 million related to its coated paperboard busi-
ness and Shorewood business, respectively, based
on the estimated fair values of these businesses
determined using projected future operating cash
flows.

The following table presents an analysis of activity
related to asset retirement obligations since Jan-
uary 1, 2005:

In millions

Asset retirement obligation at January 1

New liabilities

Liabilities settled

Net adjustments to existing liabilities

Accretion expense

2006

$33

2005

$30

(4)

(1)

(5)

(2)

Asset retirement obligation at December 31

$30

$33

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,
2006 and 2005:

In millions

Balance, beginning of year

Interest of CHH in an IP consolidated subsidiary

Purchase of CHH’s interest in an IP consolidated

subsidiary

Minority interest of acquired entities

Dividends paid

Minority interest expense

Other, net

Balance, end of year

2006

$185

–

2005

$152

(15)

(12)

–

(11)

$213

$185

In December 2004, International Paper completed the
sale of 1.1 million acres of forestlands in Maine and
investment
New Hampshire to a private forest
company for $244 million. Since International Paper
had some continuing interest in these forestlands
through a long-term fiber supply agreement, no gain
was recognized in 2004 on this transaction. However,
the net cash proceeds from the transaction of
approximately $242 million are included as a source
of cash in the accompanying consolidated statement
of cash flows. The deferred gain on the transaction
totaling $112 million at December 31, 2005 was
included in Other liabilities in the accompanying
consolidated balance sheet. In the third quarter of
2006, the remaining deferred gain was recognized
upon the sale of the Company’s Coated and Super-

calendered business (see Note 7).

NOTE 12 DEBT AND LINES OF CREDIT

During 2006, International Paper used proceeds from
divestitures and cash from operations to retire
approximately $5.2 billion of long-term debt.

International Paper

In December 2006,
retired
approximately $2.2 billion of notes with interest rates
ranging from 3.8% to 10.0% and original maturities
from 2008 to 2029. Also in the fourth quarter of 2006,
International Paper Investments (Luxembourg) S.ar.l,
a wholly-owned subsidiary of International Paper,
repaid $343 million of long-term debt with an interest
rate of LIBOR plus 40 basis points and a maturity
date in November 2010.

In June 2006, International Paper paid approximately
$1.2 billion to repurchase substantially all of its zero-
coupon convertible debentures at a price equal to
their accreted principal value plus interest, using
proceeds from divestitures and $730 million of third-
party commercial paper issued under the Company’s
receivables
of
December 31, 2006, International Paper had repaid
all of the commercial paper borrowed under this
program.

securitization

program.

In February 2006, International Paper repurchased
$195 million of 6.4% debentures with an original
maturity date of February 2026. Other reductions in
the first quarter of 2006 included early payment of
approximately $495 million of notes with coupon
rates ranging from 4% to 8.875% and original matur-
ities from 2007 to 2029.

Pre-tax early debt retirement costs of $165 million
related to the above 2006 debt reductions are
included in Restructuring and other charges in the
accompanying consolidated statement of operations.

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 depend-

ing 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 on the credit
rating of the Company, and with a maturity date in
November 2006.

In December 2005, International Paper used a portion
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.

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 reduc-
tions in the first quarter of 2005 included early
payment of approximately $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 million
related to the above 2005 redemptions is included in
Restructuring and other charges in the accompany-
ing 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 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 2007

6.4% to 7.75% debentures - due 2025 - 2027

5.85% notes - due 2012

5.25% to 5.5% notes - due 2014 - 2016
5 3⁄8% euro notes - due 2006
5 1⁄8% debentures - due 2012
3.8% to 4.25% notes - due 2008 - 2010

Zero-coupon convertible debentures - due 2021

Medium-term notes - due 2009 (a)

Floating rate notes - due 2007 - 2016 (b)

Environmental and industrial development bonds -

due 2007 - 2033 (c)

Commercial paper and bank notes (d)

Other (e)

Total (f)

Less: Current maturities

Long-term debt

2006

2005

198

130

195

147

254

284

839

–

110

913

1,690

1,934

246

7,223

692

136

125

437

351

819

344

571

969

1,296

296

106

1,152

1,185

1,764

2,005

415

12,197

1,178

$6,531

$11,019

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

2006 and 2005.

(b) The weighted average interest rate on these notes was 5.0% in

2006 and 4.2% in 2005.

2006 and 5.5% in 2005.

(d) The weighted average interest rate was 5.4% in 2006 and 4.9%

in 2005.

Includes $150 million of non-U.S. denominated

borrowings with a weighted average interest rate of 5.1% in

2006.

(e) Includes $3 million at December 31, 2006, and $6 million at

December 31, 2005, related to interest rate swaps treated as

fair value hedges (see Note 13).

(f) The fair market value was approximately $7.3 billion at

December 31, 2006 and $12.3 billion at December 31, 2005.

Total maturities of long-term debt over the next five
years are 2007 - $692 million; 2008 - $129 million;
2009 - $1.1 billion; 2010 - $1.2 billion; and 2011 - $381
million.

At December 31, 2006 and 2005, International Paper
classified $100 million and $1.25 billion, respectively,
of tenderable bonds, contingently convertible secu-
rities, commercial paper and bank notes, and Current
long-term debt as Long-term debt.
maturities of
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, 2006, International Paper’s unused
contractually committed bank credit agreements
totaled $3.0 billion. The agreements generally pro-
vide for interest rates at a floating rate index plus a
pre-determined margin dependent upon Interna-
tional Paper’s credit rating. In March 2006, Interna-
tional Paper replaced its maturing $750 million
revolving bank credit agreement with a 364-day $500
million fully committed revolving bank
credit
agreement that expires in March 2007 and has a
facility fee of 0.08% payable quarterly, and replaced
its $1.25 billion revolving bank credit agreement with
a $1.5 billion fully committed revolving bank credit
agreement that expires in March 2011 and has a
facility fee of 0.10% payable quarterly. In addition, in
October 2006, the Company amended its existing
receivables securitization program that provides for
up to $1.2 billion of commercial paper-based financ-
ings with a facility fee of 0.20% and an expiration
date in November 2007, to provide up to $1.0 billion
of available commercial paper-based financings with
a facility fee of 0.1% and an expiration date of
October 2009. At December 31, 2006, there were no
borrowings under either the bank credit agreements
or receivables securitization program.

Paper

International

Investments
Additionally,
(Luxembourg) S.ar.l. has a $100 million bank credit
agreement maturing in December 2007, with $40
million
of
December 31, 2006.

outstanding

borrowings

At December 31, 2006, outstanding debt included
approximately $246 million of commercial paper and
bank notes with interest rates that fluctuate based on
market conditions and the Company’s credit rating.

NOTE 13 DERIVATIVES AND HEDGING
ACTIVITIES

International Paper periodically uses derivatives and
other financial instruments to hedge exposures to
interest rate, commodity and currency risks. For
hedges that meet the criteria under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging

Activities,” International Paper, at inception, formally
designates and documents the instrument as a
hedge of a specific underlying exposure, as well as
the risk management objective and strategy for
undertaking each hedge transaction. Because of the
high degree of effectiveness between the hedging
instrument and the underlying exposure being
hedged, fluctuations in the value of the derivative
instruments are generally offset by changes in the
value or cash flows of the underlying exposures
being hedged. Derivatives are recorded in the con-
solidated balance sheet at fair value, determined
using available market information or other appro-
priate valuation methodologies, in Other current or
noncurrent assets or liabilities. The earnings impact
resulting from the change in fair value of
the
derivative instruments is recorded in the same line
item in the consolidated statement of operations as
the underlying exposure being hedged. The financial
instruments that are used in hedging transactions
are assessed both at inception and quarterly there-
to ensure they are effective in offsetting
after
changes in either the fair value or cash flows of the
related underlying exposures. The ineffective portion
of a financial instrument’s change in fair value, if
any, would be recognized currently in earnings
together with the changes in fair value of any
derivatives not designated as hedges.

INTEREST RATE RISK

Interest rate swaps may be used to manage interest
rate risks associated with International Paper’s debt.
These instruments are evaluated at
inception to
determine if they qualify for hedge accounting, in
accordance with SFAS No. 133. Interest rate swap
agreements with a total notional amount at
December 31, 2006, of approximately $500 million
and maturities ranging from two to 18 years do not
qualify as hedges under SFAS No. 133. For the years
ended December 31, 2006, 2005 and 2004,
the
change in fair value of these swaps was immaterial.
The fair value of
the swap contracts as of
December 31, 2006, 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, 2006
and 2005, outstanding notional amounts for its
interest rate swap fair value hedges amounted to
approximately
billion,
billion
respectively. The fair values of these swaps were net
assets of approximately $2 million and $7 million at
December 31, 2006 and 2005, respectively.

$1.9

$1.7

and

In 2006 and 2005, interest rate swap hedges with a
notional value of $1.4 billion and $313 million,

respectively, were terminated, or undesignated as an
effective fair value hedge, in connection with various
early retirements of debt. The resulting gains of
approximately
$6 million,
respectively, are included in Restructuring and other
charges in the accompanying consolidated state-
ment of operations (see Note 6).

$17 million

and

In connection with International Paper’s debt tender
during the fourth quarter of 2006, reverse treasury
rate locks were used to offset changes in the
redemption price of tendered notes due to move-
ments in treasury rates prior to the tender pricing
date. These instruments resulted in a loss of approx-
imately $9 million, which is included in Restructuring
and other charges in the accompanying consolidated
statement of operations (see Note 6).

COMMODITY RISK

the

For

year

purchased.

To minimize volatility in earnings due to large fluctua-
tions in the price of commodities, International Paper
may use swap and option contracts to manage risks
associated with market fluctuations in energy prices.
Such cash flow hedges are accounted for by defer-
ring the after-tax quarterly change in fair value of the
outstanding contracts in OCI. On the date a contract
matures, the gain or loss is reclassified into cost of
products sold concurrent with the recognition of the
commodity
ended
December 31, 2006, the reclassification to earnings
was an after-tax loss of $7 million, representing the
after-tax cash settlements on maturing energy hedge
contracts. In 2005, there was no reclassification from
OCI to earnings related to commodity hedging, and
in 2004, the reclassification to earnings was immate-
rial. Unrealized after-tax losses of $13 million for
2006 and $2 million for 2005 and 2004 were recorded
to OCI. After-tax losses of approximately $5 million
as of December 31, 2006, are expected to be
reclassified to earnings in 2007. The net fair value of
energy hedge contracts as of December 31, 2006, is a
$12 million liability recorded in Other liabilities in the
accompanying consolidated balance sheet.

FOREIGN CURRENCY RISK

International Paper’s policy has been to hedge cer-
tain investments in non-U.S. operations through
borrowings denominated in the same currency as
the operation’s functional currency, or by entering
into cross-currency and interest rate swaps or for-
ward exchange contracts. These financial
instru-
ments are effective as hedges against fluctuations in
currency exchange rates. Gains or losses from
changes in the fair value of these instruments, which

the hedging instruments,

are offset in whole or in part by translation gains and
losses on the non-U.S. operation’s net assets
hedged, are recorded as translation adjustments in
OCI. Upon liquidation or sale of the foreign invest-
ments, the accumulated gains or losses from the
together
revaluation of
with the translation gains and losses on the net
assets, are included in earnings. For the years ended
December 31, 2006, 2005 and 2004, net gains and
included in the cumulative translation
losses
adjustment relating to derivative and debt instru-
ments hedging foreign net investments amounted to
a $11 million loss, a $19 million gain and a $74 mil-
interest,
lion loss
respectively. The 2004 loss includes $50 million relat-
ing to net investment hedges that were included in
the loss on sale of Weldwood in Discontinued oper-
ations in 2004.

and minority

taxes

after

Foreign exchange contracts (including forward, swap
and purchase option contracts) are also used to
hedge certain transactions, primarily trade receipts
and payments denominated in foreign currencies, to
manage volatility associated with these transactions
and to protect International Paper from currency
fluctuations between the contract date and ultimate
settlement. These contracts, most of which have
been designated as cash flow hedges, had maturities
of three years or less as of December 31, 2006. For
the years ended December 31, 2006, 2005 and 2004,
net unrealized gains after taxes and minority interest
totaling $18 million, $48 million and $72 million,
respectively, were recorded to OCI. Net after-tax
gains of $20 million, $14 million and $4 million were
reclassified to earnings. Gains relating to CHH, after
taxes and minority interest, totaling $14 million and
$22 million are included in Discontinued operations
for the years ended December 31, 2005 and 2004,
respectively. Cumulative OCI after-tax and minority
interest gains of $40 million are included in the gain
on sale of CHH in Discontinued operations in 2005.
As of December 31, 2006, gains of $24 million after
taxes are expected to be reclassified to earnings in
2007. 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 non-
performance by the counterparties.

NOTE 14 CAPITAL STOCK

The authorized capital stock at both December 31,
2006 and 2005, consisted of 990,850,000 shares of
common stock, $1 par value; 400,000 shares of
cumulative $4 preferred stock, without par value
(stated value $100 per share); and 8,750,000 shares
of serial preferred stock, $1 par value. The serial
preferred stock is issuable in one or more series by
the Board of Directors without further shareholder
action.

In July 2006, in connection with the planned use of
projected proceeds from the Company’s Trans-
formation Plan, International Paper’s Board of Direc-
tors authorized a share repurchase program to
acquire up to $3.0 billion of the Company’s stock. In
a modified “Dutch Auction” tender offer completed
in September 2006, International Paper purchased
38,465,260 shares of its common stock at a price of
$36.00 per share, plus costs to acquire the shares, for
a total cost of approximately $1.4 billion. In addition,
in December 2006, the Company purchased an addi-
tional 1,220,558 shares of its common stock in the
open market at an average price of $33.84 per share,
plus costs to acquire the shares, for a total cost of
approximately $41 million. Following the completion
of these share repurchases, International Paper had
approximately 454 million shares of common stock
issued and outstanding.

NOTE 15 RETIREMENT PLANS

U.S. DEFINED BENEFIT PLANS

International Paper maintains pension plans that
provide retirement benefits to substantially all
domestic employees hired prior to July 1, 2004.
These employees generally are eligible to participate
in the plans upon completion of one year of service
and attainment of age 21. Employees hired after
June 30, 2004, who are not eligible for these pension
plans receive an additional company contribution to
their savings plan (see “Other Plans” on page 83).

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).

For its qualified defined benefit pension plan, Interna-
tional Paper makes contributions that are sufficient

to fully fund its actuarially determined costs, gen-
erally equal to the minimum amounts required by
the Employee Retirement
Income Security Act
(ERISA). In addition, International Paper made volun-
tary contributions of $1.0 billion to the qualified
defined benefit plan in 2006, and does not expect to
make any contributions in 2007.

The Company also has two unfunded nonqualified
defined benefit pension plans: a Pension Restoration
Plan available to employees hired prior to July 1,
2004 that provides retirement benefits based on
eligible compensation in excess of limits set by the
Internal Revenue Service, and a supplemental
retirement plan for senior managers (SERP), which is
an alternative retirement plan for senior vice presi-
dents and above who are designated by the chief
executive officer as participants. These nonqualified
plans are only funded to the extent of benefits paid,
which are expected to be $41 million in 2007.

Net Periodic Pension Expense

Service cost is the actuarial present value of benefits
attributed by the plans’ benefit formula to services
rendered by employees during the year. Interest cost
represents the increase in the projected benefit obli-
gation, which is a discounted amount, due to the
passage of time. The expected return on plan assets
reflects the computed amount of current year earn-
ings from the investment 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

Expected return on plan assets

Actuarial loss

Amortization of prior service cost

2006

$ 141

506

(540)

243

2005

2004

$ 129

$ 115

474

(556)

167

467

(592)

Net periodic pension expense (a)

$ 377

$ 243

$ 111

(a) Excludes $9.1 million, $6.5 million and $3.4 million in 2006,

2005 and 2004, respectively,

in curtailment losses, and $8.7

million, $3.6 million and $1.4 million in 2006, 2005 and 2004,

respectively, of 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 $77.2 million

and $14.3 million in 2006 and 2005, respectively, in curtailment

losses, and $18.6 million and $7.6 million of termination bene-

fits in 2006 and 2005, respectively, related to certain divest-

itures recorded in Net losses on sales and impairments of

businesses held for sale in the consolidated statement of oper-

ations.

The increase in 2006 pension expense was princi-
pally due to a change in the mortality assumption to
use the RP 2000 Table and the use of a lower
assumed discount
rate. The increases in 2005
expense reflects a lower assumed discount rate, a
decrease in the assumed long-term return on plan
assets, and an increase in the amortization of
unrecognized actuarial losses.

International Paper evaluates its actuarial assump-
tions annually as of December 31 (the measurement
date) and considers changes in these long-term fac-
tors based upon market conditions and the require-
ments of SFAS No. 87, “Employers’ Accounting for
Pensions.” These assumptions are used to calculate
benefit obligations as of December 31 of the current
year, and pension expense to be recorded in the fol-
lowing year.

Weighted average assumptions used to determine
net pension expense for 2006, 2005 and 2004 were as
follows:

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2006

2005

2004

5.50% 5.75% 6.00%
8.50% 8.50% 8.75%
3.25% 3.25% 3.25%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2006 and
2005, were as follows:

Discount rate

Rate of compensation increase

2006

2005

5.75% 5.50%
3.75% 3.25%

The expected long-term rate of return on plan assets
is based on projected rates of return for current and
planned asset classes in the plan’s investment
portfolio. Projected rates of return are developed
through an asset/liability study in which projected
returns for each of the plan’s asset classes are
determined after analyzing historical experience and
future expectations of returns and volatility of the
various asset classes. Based on the target asset allo-
cation for each asset class, the overall expected rate
of return for the portfolio is developed considering
the effects of active portfolio management and
expenses paid from plan assets. The discount rate
assumption is determined based on a yield curve
that incorporates approximately 500-550 Aa-graded
bonds. The plan’s projected cash flows are then
matched to the yield curve to develop the discount
rate. To calculate pension expense for 2007, the
Company will use an expected long-term rate of
return on plan assets of 8.50%, a discount rate of
5.75% and an assumed rate of compensation

increase of 3.75%. The Company estimates that it
will record net pension expense of approximately
$195 million for its U.S. defined benefit plans in 2007,
with the decrease from expense of $377 million in
2006 principally reflecting expected earnings on a
$1.0 billion contribution made to the plan in the
fourth quarter of 2006 as part of the Company’s
Transformation Plan, and an increase in the assumed
discount rate to 5.75% in 2007 from 5.50% in 2006.

The following illustrates the effect on pension
expense for 2007 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

Investment Policy / Strategy

2007

$27

(6)

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. In 2006, Interna-
tional Paper modified its investment policy to use
interest rate swap agreements to extend the dura-
tion of the Plan’s bond portfolio to better match the
duration of the pension obligation, thus helping to
stabilize the ratio of assets to liabilities when inter-
est rates change. Thus, when interest rates fall, the
value of the swap agreements increases direction-
ally with increases in the pension obligation. The
current portfolio is hedged at approximately 35%
of the plan’s liability, with plans to increase this
ratio to 50% by no later than the end of 2008. This
new strategy is not expected to alter the long-term
rate of return on plan assets. Periodic reviews are
made of investment policy objectives and invest-
ment manager performance.

International Paper’s pension plan asset allocations
by type of fund at December 31, 2006 and 2005, and
target allocations by asset category are as follows:

Percentage of

Plan Assets

at December 31,

2006

2005

Target
Allocations

52% - 63%

26% - 34%

5% - 10%

2% - 8%

57%

34%

61%

28%

100%

Asset Category

Equity securities

Debt securities

Real estate

Other

Total

At December 31, 2006, plan assets included 12,800
shares of International Paper common stock with a
market value of approximately $430,000. No plan
assets were invested in International Paper common
stock at December 31, 2005.

At December 31, 2006, projected future pension
benefit payments are as follows:

In millions

2007

2008

2009

2010

2011

2012 - 2016

$ 547

528

533

543

556

3,018

Minimum Pension Liability Adjustment

At December 31, 2002, International Paper’s qualified
defined benefit pension plan had a prepaid benefit
cost of approximately $1.7 billion. At that date, the
market value of the plan assets was less than the
accumulated benefit obligation (ABO) for this plan. In
accordance with the requirements of SFAS No. 87,
the prepaid asset was reversed and an additional
minimum liability of $2.7 billion was established
equal to the shortfall of the market value of plan
assets below the ABO plus the prepaid benefit cost.
This resulted in an after-tax direct charge to
Accumulated other comprehensive income (OCI) of
$1.5 billion, with no impact on earnings, earnings per
share or cash.

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, result-
ing in a reduction in the required additional mini-
to
mum pension liability. As a result, a credit
after-tax OCI was recognized in the amount of $41
million at December 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. At December 31, 2006,
an after-tax credit
to OCI of $484 million was
recorded. International Paper also incurred adjust-
ments to the nonqualified plan additional minimum
liabilities and recorded an after-tax credit to OCI of
$12 million in 2006 and an after-tax charge of $14
million in 2005.

In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans – an amendment of
FASB Statements No. 87, 88, 106 and 132(R)”. This
Statement requires that the funded status of benefit
plans be recorded on the consolidated balance sheet.
International Paper adopted SFAS No. 158 as of
December 31, 2006. The effect of the adoption of this
Statement on the Company’s consolidated balance
sheet for the U.S. defined benefit plans is shown
below.

In millions

Intangible asset

Liability

Deferred tax

Accumulated OCI

Before
Adoption

Adjustments

After
Adoption

$ 176

(435)

749

1,204

$(176)

(436)

235

377

–

(871)

984

1,581

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, 2006 and 2005:

In millions

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

2006

2005

$9,237

$9,278

8,855
8,801
8,366(a) 6,944

(a) Reflects a $1.0 billion voluntary contribution in the fourth quar-

ter of 2006.

Unrecognized Actuarial Losses

SFAS No. 87 provides for delayed recognition of
actuarial gains and losses, including amounts aris-
ing 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 assump-
tion 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 December 31, 2006) to the extent that they are
not offset by gains in subsequent years. The esti-
mated net loss and prior service cost that will be
amortized from OCI into net periodic pension cost
during the next fiscal year are $186 million and $20
million, respectively.

Change in projected benefit obligation:

Expected return on plan assets

Benefit obligation, January 1

$9,278

$ 8,294

Actuarial loss

Non-U.S. Defined Benefit Plans

Generally,
International Paper’s non-U.S. pension
plans are funded using the projected benefit as a
target, except in certain countries where funding of
benefit plans is not required. Net periodic pension
expense for non-U.S. plans was as follows:

In millions

Service cost

Interest cost

Estimated expenses

2006

2005

2004

$ 13

$ 11

$10

(13)

–

(10)

–

(8)

Net periodic pension expense (a)

$ 17

$ 15

$15

(a) Excludes $10 million of curtailment losses in 2006 related to

multiple divestitures to include the sale of Beverage Packaging,

Coated Papers, Polyrey and U.K. Container recorded in Net

losses on sales and impairments of businesses held for sale in

the consolidated statement of operations. Also excludes $1.7

million of curtailment gains in 2005 related to the divestiture of

Maresquel recorded in Net losses on sales and impairments of

businesses held for sale in the consolidated statement of oper-

ations.

Weighted average assumptions used to determine
net pension expense for 2006, 2005 and 2004 were
as follows:

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2006

2005

2004

4.86% 5.11% 5.43%
6.80% 6.68% 6.66%
3.39% 3.32% 3.50%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2006 and
2005, were as follows:

Discount rate

Rate of compensation increase

2006

2005

5.21% 4.86%
3.35% 3.39%

The following table shows the changes in the benefit
obligation and plan assets for 2006 and 2005, and the
plans’ funded status. The benefit obligation as of
December 31, 2006 decreased by $41 million, princi-
pally as a result of an increase in the discount rate
assumption used in computing the estimated benefit
obligation. Plan assets increased by $1.4 billion,
reflecting the $1.0 billion contribution made in 2006
and favorable investment results.

In millions

2006

2005

Service cost

Interest cost

Actuarial loss

Benefits paid

Divestitures

Restructuring

Special termination benefits

Plan amendments

141

506

(118)

(540)

(31)

(28)

129

474

833

(515)

(4)

Benefit obligation, December 31

$9,237

$ 9,278

Change in plan assets:

Fair value of plan assets, January 1

$6,944

$ 6,745

Actual return on plan assets

Company contributions

Benefits paid

935

1,027

(540)

694

(515)

Fair value of plan assets, December 31

$8,366

$ 6,944

Funded status, December 31

$ (871)

$(2,334)

Amounts recognized in the consolidated balance

sheet:

Intangible asset

Current liability

Non-current liability

Amounts recognized in accumulated other

comprehensive income under SFAS 158 (pre-tax):
Net actuarial loss

Prior service cost

–

(41)

(830)

$ (871)

$2,389

175

$2,564

Unrecognized actuarial losses totaled $3.2 billion at
December 31, 2005. The accompanying consolidated
balance sheet at December 31, 2005 included an
accrued benefit liability of $1.9 billion and a $2.8 bil-
lion minimum pension liability adjustment included
in Other comprehensive income.

The following table shows the changes in the benefit
obligation and plan assets for 2006 and 2005 and the
plans’ funded status as of December 31, 2006 and
2005.

In millions

Change in projected benefit obligation:

Benefit obligation, January 1

Obligations for additional plans

Service cost

Interest cost

Participants’ contributions

Divestitures

Curtailment gains

Actuarial (gain) loss

Benefits paid

Effect of foreign currency exchange rate movements

2006

2005

$276

$ 365

(61)

(121)

–

(23)

(9)

(2)

(12)

(21)

Benefit obligation, December 31

$248

$ 276

Change in plan assets:

Fair value of plan assets, January 1

$173

$ 255

Actual return on plan assets

Company contributions

Benefits paid

Participants’ contributions

Divestitures

Effect of foreign currency exchange rate movements

Fair value of plan assets, December 31

Funded status

Amounts recognized in the consolidated balance

sheet:

Non-current assets

(Liabilities)

Total asset/(liability) recognized

Amounts recognized in accumulated other

comprehensive income (pre-tax):

Transition (asset)/obligation

Prior service cost
Net (gain)/loss

Total accumulated other comprehensive income at

end of year

(9)

(62)

(12)

(108)

(11)

$179

$ 173

$ (69)

$(103)

$ 10

(79)

$ (69)

$ –

$ 23

In 2005, excluding a $57 million unrecognized net
actuarial loss, a $1 million unrecognized transition
asset, and $1 million of unamortized prior service
costs, prepaid benefit costs of $2 million, an accrued
benefit liability of $93 million, and a $43 million
minimum pension liability adjustment included in
Other comprehensive income were included in the
accompanying consolidated balance sheet.

For non-U.S. plans with accumulated benefit obliga-
tions in excess of plan assets, the projected benefit
obligations, accumulated benefit obligations and fair

values of plan assets totaled $206 million, $180 mil-
lion and $127 million, respectively, at December 31,
2006. Plan assets consist principally of common
stock and fixed income securities. Adjustments to
the non-U.S. plans’ additional minimum liabilities at
December 31, 2006, resulted in a charge to OCI of
$15 million after taxes.

The effect of the adoption of the provisions of SFAS
No. 158 on the balance sheet at December 31, 2006 for
the non-U.S. defined benefit plans is shown below.

In millions

Prepaid benefit cost

Liability

Deferred tax

Accumulated OCI

OTHER PLANS

Before
Adoption

Adjustments

After
Adoption

$ 2

(70)

$ 8

(9)

—

$ 10

(79)

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
personal funds and to provide additional benefits to
for their
employees hired after June 30, 2004,
retirement. Contributions may be made on a
before-tax basis to substantially all of these plans.

As determined by the provisions of each plan, Inter-
national Paper matches the employees’ basic volun-
tary contributions and, for employees hired after
June 30, 2004, contributes an additional percentage
of pay. Such contributions to the plans totaled
approximately $96 million, $88 million and $87 mil-
lion for the plan years ending in 2006, 2005 and 2004,
respectively.

NOTE 16 POSTRETIREMENT BENEFITS

U.S. POSTRETIREMENT BENEFITS

International Paper provides certain retiree health
care and life insurance benefits covering a majority
of U.S. salaried and certain hourly employees. These
employees are generally eligible for benefits upon
retirement and completion of a specified number of
years of creditable service. Excluded from company-
provided medical benefits are salaried employees
whose age plus years of employment with the
Company 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.

International Paper evaluates its actuarial assump-
tions annually as of December 31 (the measurement
date) and considers changes in these long-term fac-
tors based upon market conditions and the require-
ments of SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions.”

The discount rates used to determine net cost for
the years ended December 31, 2006, 2005 and 2004
were as follows:

Discount rate

2006

2005

2004

5.50% 5.50% 6.00%

The weighted average
assumptions used to
determine the benefit obligation at December 31,
2006 and 2005, were as follows:

Discount rate

Health care cost trend rate assumed for next year

Rate that the cost trend rate gradually declines to

Year that the rate reaches the rate it is assumed to

remain

2006

2005

5.75% 5.50%
10.00% 10.00%
5.00% 5.00%

2011

2010

benefit

obligation

postretirement

A 1% increase in the assumed annual health care
cost trend rate would have increased the accumu-
lated
at
December 31, 2006, by approximately $33 million. A
1% decrease in the annual trend rate would have
decreased the accumulated postretirement benefit
obligation at December 31, 2006, by approximately
$29 million. The effect on net postretirement benefit
cost from a 1% increase or decrease would be
approximately $2 million.

On December 8, 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003
(the Medicare Act) was signed into law. This Act
introduces a prescription drug benefit under Medi-
care (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
Medicare Act on International Paper’s plans have
been recorded prospectively beginning July 1, 2004.
This resulted in a reduction of net postretirement
benefit cost of approximately $8 million and a reduc-
tion of the accumulated postretirement benefit obli-
gation (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 regu-
lations for the implementation of the Medicare Act
were released on January 21, 2005. This resulted in a
remeasurement of the plan that reduced net post-
retirement benefit costs by $14 million and reduced
the APBO by $59 million in 2005.

The components of postretirement benefit expense
in 2006, 2005 and 2004, were as follows:

In millions

Service cost

Interest cost

Actuarial loss

Amortization of prior service cost

2006

2005

2004

$ 2

$ 6

(50)

(40)

Net postretirement benefit expense (a)

$ 7

$ 20

$ 53

(a) Excludes $1.3 million, $1.8 million and $1.0 million of curtail-

ment gains in 2006, 2005 and 2004, respectively, and $2.6 mil-

lion and $0.8 million in 2005 and 2004,

respectively, of

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 $0.2 million and $4.1 million in curtailment gains in

2006 and 2005, respectively, and $13.7 million and $1 million of

termination benefits in 2006 and 2005, respectively, related to

certain divestitures recorded in Net

losses on sales and

impairments of businesses held for sale in the consolidated

financial statements.

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 2006 and 2005:

The effect of the adoption of the provisions of SFAS
No. 158 on the balance sheet at December 31, 2006
for U.S. postretirement benefit plans is shown
below:

In millions

Change in benefit obligation:

Benefit obligation, January 1

Service cost

Interest cost

Participants’ contributions

Actuarial (loss)/gain

Benefits paid

Less Federal subsidy

Plan amendments

Divestitures

Restructuring

Special termination benefits

2006

2005

$ 703

$ 838

(133)

(88)

(100)

(136)

–

In millions

Current liability

Noncurrent liability

Deferred tax

Accumulated OCI

Before
Adoption

$ (59)

(520)

–

Adjustments

After
Adoption

$ –

(45)

(29)

$ (59)

(565)

(29)

At December 31, 2006, estimated total future post-
retirement benefit payments, net of participant con-
tributions and estimated future Medicare Part D
subsidy receipts are as follows:

Benefit obligation, December 31

$ 624

$ 703

In millions

Change in plan assets:

Fair value of plan assets, January 1

Company contributions

Participants' contributions

Benefits paid

Fair value of plan assets, December 31

Funded status

2007

2008

2009

2010

2011

2012 - 2016

–

(133)

(136)

–

$(624)

$(703)

Benefit
Payments

Subsidy
Receipts

$ 73

$13

281

Amount recognized in the consolidated balance sheet

NON-U.S. POSTRETIREMENT BENEFITS

under SFAS 158:

Current liability

Non-current liability

Amount recognized in accumulated other

comprehensive income under SFAS 158:

Net actuarial loss

Prior service credit

(59)

(565)

$(624)

227

(182)

$ 45

In 2005, excluding $238 million of unrecognized net
actuarial
losses and $167 million of unamortized
prior service costs, accrued benefit costs of $632 mil-
lion were included in Other liabilities in the accom-
panying consolidated balance sheet.

The estimated amount of net loss and prior service
credit that will be amortized from OCI into net post-
retirement benefit cost over the next fiscal year are
$21 million and $(43) million, respectively.

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 2006,
$3 million for 2005 and $2 million for 2004. The
benefit obligation for these plans was $17 million in
2006 and $21 million in 2005. The adoption of the
provisions of SFAS No. 158 on the balance sheet at
December 31, 2006 for the Company’s Non-U.S.
postretirement benefit plans was an increase in the
liability of $2 million and a
non-current benefit
charge to Accumulated other comprehensive income
of approximately $1 million.

NOTE 17 INCENTIVE PLANS

International Paper currently has a Long-Term
Incentive Compensation Plan (LTICP) that includes a
stock option program, a performance share pro-
gram, a service-based restricted stock award pro-
gram, and an executive continuity award program
that provides for tandem grants of restricted stock
and stock options. The LTICP is administered by the
and Compensation
Management Development
Committee 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 4,225 and 5,135 rights

outstanding at December 31, 2006 and 2005,
respectively. Additionally, restricted stock, which
may be deferred into restricted stock units (RSUs),
may be awarded under a Restricted Stock and
Deferred Compensation Plan for Non-Employee
Directors.

Effective January 1, 2006,
International Paper
adopted the provisions of SFAS No. 123(R), “Share-
Based Payment” using the modified prospective
method. As no unvested stock options were out-
standing at this date, the adoption did not have a
material impact on the consolidated financial state-
ments.

STOCK OPTION PROGRAM

vesting of all 14 million unvested 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 vest-
ing 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
estimated on the date of the grant using the Black-
Scholes option pricing model with the following
weighted average assumptions used for grants in
2006, 2005 and 2004, respectively:

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

2006

2005

2004

N/A

3.82% 3.23%

22.65% 24.41%

2.53% 2.53%

3.50

4.97% 2.99% 2.14%
19.70% 21.78% 22.83%
2.70% 2.42% 2.30%
0.32
2.00

1.60

(a) The average fair market values of initial option grants during

2005 and 2004 were $6.78 and $6.90, respectively.

(b) The average fair market values of replacement option grants

during 2006, 2005 and 2004 were $4.63, $2.05 and $4.76,

respectively.

123(R),

“Share-Based

International Paper accounts for stock options under
SFAS No.
Payment.”
Compensation expense is recorded over the related
service period based on the grant-date fair market
value. Since all outstanding options were vested as
of July 14, 2005, only replacement option grants
were expensed in 2006.

Under the program, upon exercise of an option, a
replacement option may be granted under certain
circumstances with an exercise price equal to the
market price at the time of exercise and with a term
extending to the expiration date of
the original
option.

The Company discontinued its stock option program
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
program 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 return (TSR). As part of this shift in
focus away from stock options to performance-
based restricted stock, the Company accelerated the

The following summarizes the status of the Stock
Option Program and the changes during the three
years ending December 31, 2006:

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life
(years)

Aggregate
Intrinsic
Value
(thousands)

Options
(a,b)

Outstanding at

December 31, 2003

42,805,828

$39.51

Granted

Exercised

Forfeited

Expired

Outstanding at

9,663,303

(4,726,957)

(1,059,215)

(1,248,052)

December 31, 2004

45,434,907

Granted

Exercised

Forfeited

Expired

Outstanding at

861,827

(602,746)

(1,607,979)

(2,504,411)

39.70

34.60

40.86

51.40

39.70

39.64

33.74

41.44

43.52

6.80

$1,804

December 31, 2005

41,581,598

$39.49

6.00

$1,642

Granted

Exercised

Forfeited

Expired

Outstanding at

997

(964,744)

(850,949)

(3,784,204)

37.06

32.67

44.21

39.90

December 31, 2006

35,982,698

$39.52

5.08

$1,422

(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.

PERFORMANCE-BASED RESTRICTED SHARES

Under the Performance Share Program (PSP), con-
tingent awards of International Paper common stock
are granted by the Committee. Under the PSP
approved during 2001 and amended in 2004, awards
vesting over a three-year period were granted in
2004. In 2005, the plan was amended to provide for
segmentation in which one-fourth of
the award
vested during each twelve-month period, with the
final one-fourth segment vesting over the full three-
year period. PSP awards are earned based on the
achievement of defined performance rankings of
return on investment (ROI) and total shareholder
return (TSR) compared to ROI and TSR peer groups
of companies. Awards are weighted 75% for ROI and
25% for TSR for all participants except for certain
members of senior management
for whom the
awards are weighted 50% for ROI and 50% for TSR.
The ROI component of the PSP awards is valued at
the closing stock price on the day prior to the grant

date. As the ROI component contains a performance
condition, compensation expense, net of estimated
forfeitures,
is recorded over the requisite service
period based on the most probable number of
awards expected to vest. The TSR component of the
PSP awards is valued using a Monte Carlo simu-
lation as the TSR component contains a market
condition. The Monte Carlo simulation estimates the
fair value of
the TSR component based on the
expected term of the award, risk-free rate, expected
dividends, and the expected volatility for the Com-
pany and its competitors. The expected term was
estimated based on the vesting period of the awards,
the risk-free rate was based on the yield on U.S.
Treasury securities matching the vesting period, the
expected dividends were assumed to be zero for all
companies, and the volatility was based on the
Company’s historical volatility over the expected
term.

PSP awards issued to the senior management group
are liability awards, which are remeasured at fair
value at each balance sheet date. The valuation of
these PSP liability awards is computed based on the
same methodology as the PSP equity awards.

The following table sets forth the assumptions used
to determine compensation cost for the market con-
dition component of the PSP plan:

Expected volatility

Risk-free interest rate

Twelve Months Ended
December 31, 2006

20.4% - 20.6%

4.30% - 5.30%

The following summarizes PSP activity for the
three years ending December 31, 2006:

Outstanding at December 31, 2003

Granted

Shares issued

Forfeited

Outstanding at December 31, 2004

Granted

Shares issued

Forfeited

Outstanding at December 31, 2005

Granted
Shares issued (a)

Forfeited

Weighted
Average
Grant Date
Fair Value

$38.16

42.95

40.88

41.01

40.90

41.56

40.68

41.81

41.29

33.58
37.78

38.97

1,184,455

1,581,442

(391,691)

(128,957)

2,245,249

2,831,566

(519,533)

(361,965)

4,195,317

2,320,858
(638,541)

(373,176)

Outstanding at December 31, 2006

5,504,458

$38.61

(a) Includes 267,467 shares held for payout at the end of the per-

formance period.

EXECUTIVE CONTINUITY AND RESTRICTED STOCK

AWARD PROGRAMS

The Executive 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 a specified age. The awarding of a
tandem stock option results in the cancellation of the
related restricted shares.

The service-based Restricted Stock Award program
(RSA), designed for recruitment, retention and spe-
cial recognition purposes, also provides for awards
of restricted stock to key employees.

The following summarizes the activity of the Execu-
tive Continuity Award program and RSA program for
the three years ending December 31, 2006:

Weighted
Average
Grant Date
Fair Value

Outstanding at December 31, 2003

304,160

$37.63

Granted

Shares issued

Forfeited (a)

Outstanding at December 31, 2004

Granted

Shares issued

Forfeited (a)

Outstanding at December 31, 2005

Granted

Shares issued

Forfeited (a)

31,500

(22,700)

(26,461)

286,499

8,000

(13,000)

(31,124)

250,375

78,000

(89,458)

(61,667)

43.20

39.46

30.60

38.75

43.10

43.05

40.19

38.49

34.43

38.80

36.59

Outstanding at December 31, 2006

177,250

$37.21

(a) Also includes restricted shares canceled when tandem stock

options were awarded. No participant elected to receive tan-

dem options in 2006, 2005 or 2004.

At December 31, 2006, 2005 and 2004, a total of 24.5
million, 21.1 million and 20.3 million shares,
respectively, were available for grant under the
LTICP. A total of 11.0 million shares, 12.5 million
shares and 14.9 million shares were available for the
granting of restricted stock as of December 31, 2006,
2005 and 2004, respectively.

Total stock-based compensation cost recognized in
Selling and administrative expense in the accom-
panying consolidated statement of operations for the
years ended December 31, 2006, 2005 and 2004 was
$106 million,
$53 million and $29 million,
respectively. The actual tax benefit realized for stock-
based compensation costs was $3 million for both of
the years ended December 31, 2006 and 2005, and
$40 million for the year ended December 31, 2004. At
December 31, 2006, $84 million, net of estimated
forfeitures, of compensation cost related to unvested
restricted performance shares and continuity awards
attributable to future performance had not yet been
recognized. This amount will be recognized in
expense over a weighted-average period of 1.5
years.

NOTE 18 SUBSEQUENT EVENTS

On February 1, 2007, the Company completed the
exchange of pulp and paper assets in Brazil with
Votorantim Celulose e Papel S.A. (VCP) that had
been announced in the fourth quarter of 2006. The
Company exchanged its in-progress pulp mill project
and approximately 100,000 hectares of surrounding
forestlands in Tres Lagoas, Brazil, for VCP’s Luiz
Antonio uncoated paper and pulp mill and approx-
imately 55,000 hectares of forestlands in the state of
Sao Paulo, Brazil. The net assets exchanged, consist-
ing principally of approximately $1.1 billion of
pre-funded project development costs and $134 mil-
lion of forestlands, are included as Assets held for
exchange in the accompanying consolidated balance
sheet at December 31, 2006.

INTERIM FINANCIAL RESULTS (UNAUDITED) (a)

INTERNATIONAL PAPER

In millions, except per share amounts and stock
prices

2 0 0 6
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

1st
Quarter

$5,526
1,359

2nd
Quarter

$5,716
1,480

3rd
Quarter

$5,429
1,494

4th
Quarter

Year

$5,324
1,414

$21,995
5,747

(1,222)(c)

134 (e)

565 (g)

3,711 (i)

3,188 (c,e,g,i)

(26)(d)

(1,237)(c,d)

28 (f)
114 (e,f)

(163)(h)
202 (g,h)

(71)(j)
1,971 (i,j)

(232)(d,f,h,j)

1,050 (c-j)

continuing operations

$(2.49)(c)

$0.18 (e)

$0.76 (g)

$4.55 (i)

$2.69 (c,e,g,i)

Earnings (loss) from

discontinued operations

Net earnings (loss)

Diluted earnings per share of

common stock
Earnings (loss) from

(0.05)(d)
(2.54)(c,d)

0.05 (f)
0.23 (e,f)

(0.34)(h)
0.42 (g,h)

(0.16)(j)
4.39 (i,j)

(0.48)(d,f,h,j)
2.21 (c-j)

continuing operations

$(2.49)(c)

$0.18 (e)

$0.75 (g)

$4.53 (i)

$2.65 (c,e,g,i)

Earnings (loss) from

discontinued operations

Net earnings (loss)
Dividends per share of

common stock

Common stock prices

High
Low

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 operations

Earnings (loss) from

discontinued operations

Net earnings (loss)

Diluted earnings per share of

common stock
Earnings (loss) from

continuing operations

Earnings (loss) from

discontinued operations

Net earnings (loss)

Dividends per share of common

stock

Common stock prices

High
Low

(0.05)(d)
(2.54)(c,d)

0.05 (f)
0.23 (e,f)

(0.33)(h)
0.42 (g,h)

(0.16)(j)
4.37 (i,j)

(0.47)(d,f,h,j)
2.18 (c-j)

0.25

1.00

$36.39
32.10

$37.98
30.69

$36.05
31.52

$35.63
31.85

$37.98
30.69

$5,454
1,412

$5,341
1,345

$5,402
1,342

$5,503
1,267

$21,700
5,366

48 (k)

13 (l)
77 (k,l)

170 (m)

280 (o)

(212)(r)

286 (k,m,o,r)

37 (l)
77 (l-n)

337 (l,p)
1,023 (l,p,q)

29 (l)
(77)(l,r,s)

416 (l,p)
1,100 (k-s)

$0.13 (k)

$0.08 (m)

$1.41 (o)

$(0.22)(r)

$1.41 (k,m,o,r)

0.03 (l)
0.16 (k,l)

0.08 (l)
0.16 (l-n)

0.70 (l,p)
2.11 (l,p,q)

0.06 (l)
(0.16)(l,r,s)

0.85 (l,p)
2.26 (k-s)

$0.13 (k)

$0.08 (m)

$1.36 (o)

$(0.22)(r)

$1.40 (k,m,o,r)

0.03 (l)
0.16 (k,l)

0.08 (l)
0.16 (l-n)

0.67 (l,p)
2.03 (l,p,q)

0.06 (l)
(0.16)(l,r,s)

0.81 (l,p)
2.21 (k-s)

0.25

$42.59
35.67

0.25

$37.92
30.16

0.25

$35.05
29.45

0.25

$34.90
26.97

1.00

$42.59
26.97

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 Kraft Papers business, Beverage
Packaging business, Wood Products business,
Brazilian Coated Papers business, Carter Holt
Harvey Limited business, and Weldwood of
Canada Limited business as Discontinued
operations.

(b) Gross margin represents net sales less cost of

products sold.

(c)

(d)

(e)

the net assets of

Includes a charge of $1.3 billion before taxes
($1.2 billion after taxes) to reduce the carrying
value of
the Coated and
Supercalendered Papers business to their
estimated fair value, an $18 million charge
before taxes ($11 million after taxes) for organ-
izational restructuring charges associated with
the Company’s previously announced Trans-
formation Plan, an $8 million charge before
taxes ($5 million after taxes) for losses on early
debt extinguishment, and an $18 million
charge before taxes ($11 million after taxes) for
legal reserves.

Includes a charge of $100 million before taxes
($61 million after taxes) to reduce the carrying
value of the net assets of the Kraft Papers
business to their estimated fair value, and the
operating results of the Kraft Paper, Brazilian
Coated Papers, Wood Products and Beverage
Packaging businesses.

forestlands

Includes a pre-tax credit of $62 million
($39 million after taxes) for gains on sales of
U.S.
included in the Trans-
formation Plan, a pre-tax charge of $85 million
($53 million after taxes) to adjust the carrying
value of the assets of the Company’s Coated
and Supercalendered Papers business to their
estimated fair value, a pre-tax charge of
$52 million ($37 million after taxes) to write
down the carrying value of certain assets in
Brazil to their estimated fair value, a pre-tax
charge of $48 million ($29 million after taxes)
for severance and other charges associated
with the Company’s Transformation Plan, and
a $4 million charge ($3 million after taxes) for a
legal settlement.

(f)

Includes a pre-tax charge of $16 million
($11 million after taxes) to reduce the carrying
value of the net assets of the Kraft Papers
business to their estimated fair value, and the

(g)

(h)

(i)

operating results of the Kraft Papers, Wood
Products, Beverage Packaging, and Brazilian
Coated Papers businesses.

Includes a pre-tax gain of $304 million
($185 million after taxes) from sales of U.S.
forestlands included in the Transformation
Plan, the recognition of a previously deferred
$110 million pre-tax gain ($68 million after
taxes) related to a 2004 sale of forestlands in
Maine, a pre-tax charge of $38 million
($23 million after taxes) to reflect the com-
pletion of the sales of the Company’s U.S.
Coated and Supercalendered Papers business,
a pre-tax charge of $57 million ($35 million
after taxes) for charges associated with the
Company’s Transformation Plan, a pre-tax
charge of $35 million ($21 million after taxes)
for legal reserves, and a net pre-tax gain of
$2 million (a loss of $5 million after taxes)
related to other smaller items.

to adjust

Includes a pre-tax credit of $101 million
($80 million after taxes) for the gain on the sale
of
the Company’s Brazilian Coated Papers
business, pre-tax losses of $115 million and
$165 million ($82 million and $165 million after
taxes)
the
Company’s Beverage Packaging and Wood
Products businesses to their estimated fair
values, a net pre-tax gain of $12 million
($3 million after taxes) related to smaller items,
and the operating results of the Kraft Papers,
Brazilian Coated Papers, Wood Products and
Beverage Packaging businesses.

the carrying values of

the fixed assets of

Includes a pre-tax gain of $4.4 billion ($2.7 bil-
lion after taxes) from sales of U.S. forestlands
included in the Company’s Transformation
Plan, a $759 million charge (before and after
taxes) for the impairment of goodwill in the
Company’s coated paperboard and Shore-
wood businesses, a $128 million pre-tax
charge ($84 million after taxes) to reduce the
carrying value of
the
Company’s Saillat mill in France to their esti-
mated fair value, a net $21 million pre-tax
charge (zero after taxes) relating to smaller
asset sales, a $34 million pre-tax charge
($21 million after taxes)
for severance and
other charges associated with the Company’s
Transformation Plan, a pre-tax gain of $115
million ($70 million after taxes) for payments
received relating to the Company’s partic-
ipation in the U.S. Coalition for Fair Lumber
Imports, a pre-tax charge of $157 million

(o)

($97 million after taxes) for losses on early
debt extinguishment, a $40 million pre-tax
charge ($25 million after taxes) for increases to
legal
reserves, a $6 million pre-tax credit
($4 million after taxes) for interest received
from the Canadian government on refunds of
prior-year softwood lumber duties, and a
$5 million pre-tax credit ($4 million after taxes)
for other items.

(j)

(k)

(l)

Includes pre-tax charges of $104 million
($69 million after taxes) for the Wood Products
business and $18 million ($11 million after
taxes) for the Beverage Packaging business to
adjust the carrying value of these businesses
based on the terms of the definitive agree-
ments to sell these businesses, a $38 million
for
pre-tax credit
refunds received from the Canadian govern-
ment of duties paid by the Company’s Weld-
wood of Canada Limited business, a pre-tax
charge of $1 million ($2 million after taxes) for
adjustments of prior discontinued operations
estimates, and the quarterly operating results
of the Company’s Kraft Papers, Wood Products
and Beverage Packaging businesses.

($23 million after

taxes)

Includes a $24 million charge before taxes
($15 million 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.

Includes net income of the Kraft Papers, Brazil-
ian Coated Papers, Wood Products, Beverage
Packaging businesses, and of CHH prior to its
sale in the third quarter of 2005.

taxes)

(m) Includes a $27 million charge before taxes
($17 million after
for organizational
taxes)
restructuring charges, a pre-tax credit of
$35 million ($21 million after
for
insurance recoveries related to the hardboard
siding and roofing litigation, a $19 million
pre-tax credit ($12 million after taxes) for net
adjustments of
losses on businesses pre-
viously 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.

(n)

provision,

Includes an $82 million increase in the income
tax
approximately
including
$79 million for deferred taxes related to earn-
ings repatriated during the quarter under the
American Jobs Creation Act of 2004.

Includes a $42 million charge before taxes
for organizational
taxes)
($30 million after
restructuring charges, a pre-tax charge of
$26 million ($16 million after taxes) for losses
on early extinguishment of debt, a pre-tax
credit of $188 million ($109 million after taxes)
for insurance recoveries related to the hard-
board siding and roofing litigation, a net
charge of $5 million before taxes ($3 million
after taxes) for adjustments of losses on busi-
nesses previously sold, a $3 million pre-tax
credit
the net
adjustment of previously provided reserves,
and interest income of $43 million before taxes
($26 million after taxes) relating to a tax audit
agreement.

($2 million after

taxes)

for

(p)

Includes a gain of $29 million before taxes
($361 million after taxes) from the sale of CHH.

(q)

(r)

Includes a $517 million net reduction of the
including a credit of
income tax provision,
$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 million related to cash
repatriations from non-U.S. subsidiaries, and a
charge of $15 million relating to a change in
Ohio state tax laws.

for

taxes)

previously

announced

Includes a $187 million charge before taxes
($115 million after taxes)
for organizational
restructuring charges associated with the
Trans-
Company’s
formation Plan, a $27 million charge before
taxes ($16 million after
legal
reserves, a $7 million charge before taxes
($4 million after taxes) for losses on early debt
extinguishment, a $35 million pre-tax credit
($21 million after taxes) for insurance recov-
eries related to the hardboard siding and roof-
ing 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.

(s)

Includes a $19 million tax benefit, reflecting a
$74 million favorable adjustment
from the
finalization of
the Company’s 1997 through
income tax audit, a
2000 U.S.
$43 million provision for deferred taxes related
to earnings being repatriated under
the
American Jobs Creation Act of 2004, and
$12 million of other tax charges.

federal

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, 2006, 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 of 1934
(the Exchange Act). Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer
have concluded that the Company’s disclosure con-
trols and procedures are effective to ensure that
information required to be disclosed by us in reports
we file under the Exchange Act is recorded, proc-
essed, summarized, and reported by the manage-
ment of the Company on a timely basis in order to
comply with the Company’s disclosure obligations
under the Exchange Act and the SEC rules there-
under.

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Our management is responsible for establishing and
maintaining adequate internal controls over our
financial reporting,
including the safeguarding of
assets against unauthorized acquisition, use or dis-
position. These controls are designed to provide
reasonable assurance to management and the Board
of Directors regarding preparation of reliable pub-
asset
statements
lished
safeguarding, and the preparation of our con-
solidated financial statements in accordance with
accounting principles generally accepted in the
United States (GAAP). Our internal control over
financial
reporting includes those policies and
procedures that:

financial

such

and

•

pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets;

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 author-
izations of our management and directors;

•

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 consolidated
financial statements; and

provide
detection of fraud.

reasonable

assurance

to the

internal control systems have inherent

limi-
All
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 supported by written policies and proce-
dures, contains self-monitoring mechanisms, and is
audited by the internal audit function. Appropriate
to correct
actions are taken by management
deficiencies as they are identified.

As of December 31, 2006, management has assessed
the effectiveness of the Company’s internal control
over financial reporting.
In a report included on
pages 45 and 46, management concluded that,
based on its assessment, the Company’s internal
control over financial reporting is effective as of
December 31, 2006.

In making this assessment, we used the criteria
described in “Internal Control – Integrated Frame-
work” 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 audited 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
reporting has been audited by
Deloitte & Touche LLP, as stated in their report
included herein.

financial

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 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 our business, which have
been distributed to all employees; a toll-free tele-
phone helpline whereby any employee may report
suspected 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 supervisory and management personnel,
appropriate delegation of authority and division of
responsibility, dissemination of accounting and
business policies throughout the Company, and an
extensive program of internal audits with manage-
ment 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 performance of our
internal audit function and independent auditors,
forth in its charter. The
and other matters set
Committee, which currently
five
consists of
independent directors, meets regularly with repre-
sentatives
the
independent auditors and the Internal Auditor, with
and without management representatives in attend-
ance, to review their activities.

of management,

and with

CHANGES IN INTERNAL CONTROL OVER FINANCIAL

REPORTING

The Company has ongoing initiatives to standardize
and upgrade its financial, operating and supply chain
systems. The system upgrades will be implemented
in stages, by business, over the next several years.
Management believes the necessary procedures are
in place to maintain effective internal controls over
financial reporting as these initiatives continue.

There have been no changes in our internal control
over financial reporting during the quarter ended
December 31, 2006 that have materially affected, or
are reasonably likely to materially affect, our internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE

Information concerning our directors is hereby
incorporated by reference to our definitive proxy
statement 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 financial 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 incorporated by reference
to our definitive proxy statement that will be filed
with the SEC within 120 days of the close of our fis-
cal year. Information with respect to our executive
officers is set forth on pages 4 and 5 in Part I of this
Form 10-K under the caption, “Executive Officers of
the Registrant.”

Executive officers of International Paper are elected
to hold office until the next annual meeting of the
Board of Directors following the annual meeting of
shareholders and until 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, includ-
ing the chief executive officer and senior financial
officers, as well as the Board of Directors. No
amendments or waivers of the Code have occurred.
We intend to disclose any amendments to our Code
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 Busi-
ness Ethics and the Charters of our Audit and
Finance Committee, Management Development and
Compensation Committee, Governance Committee
and Public Policy and Environment Committee.
Requests for copies may be directed to the corporate
secretary at our corporate headquarters.

Information with respect to compliance with Sec-
tion 16(a) of the Securities Exchange Act of 1934 and
our corporate governance 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.

should be read in conjunction with the
financial statements in Item 8. Sched-
ules not included 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
2006, 2005 and 2004

Report of
Independent Registered Public
Accounting Firm on Financial Statement
Schedule for 2006, 2005 and 2004
Consolidated Schedule: II-Valuation and Qual-
ifying Accounts

100

(3)

(3.1)

(3.2)

(4.1)

(4.2)

(4.3)

Exhibits:

Composite copy of Restated Certifi-
cate of Incorporation of International
Paper Company.*

amended

By-laws of International Paper Com-
pany,
through
October 10, 2006 (incorporated by
reference to Exhibit 3.1 to Company’s
Current Report on Form 8-K dated
October 16, 2006, File No. 1-3157).

Specimen Common Stock Certificate
(incorporated by reference to Exhibit
2-A to the Company’s registration
statement on Form S-7, No. 2-56588,
dated June 10, 1976).

Indenture, dated as of April 12, 1999,
between International Paper and The
Bank of New York, as Trustee
to
by
(incorporated
Exhibit 4.1 to the Company’s Current
Report on Form 8-K dated June 16,
2000, File No. 1-3157).

reference

with

accordance

In
Item 601
(b) (4) (iii) (A) of Regulation S-K, cer-
tain instruments respecting long-term
debt of the Company have been omit-
ted but will be furnished to the Com-
mission upon request.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to the compensation of
executives and directors of the Company is hereby
incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120
days of the close of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

A description of the security ownership of certain
beneficial owners and management and equity
compensation
hereby
incorporated by reference to our definitive proxy
statement that will be filed with the SEC within 120
days of the close of our fiscal year.

information

plan

ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

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 services
rendered by, our principal accountant, and our poli-
cies and procedures for pre-approving those serv-
ices,
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 Statements and Supple-
mentary Data.

(2)

Financial Statement Schedules – The
following additional financial data

(10.1)

(10.2)

(10.3)

(10.4)

(10.5)

Amended and Restated Purchase
Agreement dated as of May 26, 2006,
Among Red Mountain Timberlands
LLC, Forest Investment Associates L.P,
Red Mountain Investments LLC, FIA
Investments LLC, RMS Texas Timber-
lands I LP, Red Mountain Operations
LLC,
International Paper Company,
and The Other Selling Parties Listed
on Schedule A (incorporated herein by
reference to Exhibit 10.1 of
the
Company’s Quarterly Report on Form
10-Q for the quarter ended June 30,
2006, File No. 1-3157.

3,
Amendment, dated November
2006, to Amended and Restated Pur-
chase Agreement, dated as of May 26,
2006, among Red Mountain Timber-
lands LLC, Forest Investment Asso-
ciates L.P., Red Mountain Investments
LLC, FIA Investments LLC, RMS Tim-
berlands LLC, RMS Texas Timber-
lands I LP, Red Mountain Operations
LLC, International Paper Company and
the other selling parties listed on
Schedule A thereto (incorporated by
reference to Exhibit 10.4 to Company’s
Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006,
File No. 1-3157).

Purchase Agreement dated as of
April 4, 2006, among TimberStar
Southwest Parent LLC, TimberStar
Southwest LLC,
International Paper
Company and other selling parties
named therein (incorporated by refer-
ence to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006, File
No. 1-3157).

First Amendment, dated October 30,
2006, to Purchase Agreement, dated
as of April 4, 2006, among TimberStar
Southwest Parent LLC, TimberStar
Southwest LLC,
International Paper
Company and the other selling parties
listed
Schedule A thereto
(incorporated by reference to Exhibit
10.3 to Company’s Quarterly Report
on Form 10-Q for the quarter ended
September 30, 2006, File No. 1-3157).

Agreement of Purchase and Sale by
and between International Paper
Company, CMP Investments LP and
CMP Holdings, LLC, dated as of
June 4, 2006 (incorporated by refer-
ence to Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated
June 6, 2006, File No. 1-3157).

(10.6)

(10.7)

(10.8)

(10.9)

(10.10)

(10.11)

(10.12)

(10.13)

Amendment No.1 to Agreement of
Purchase and Sale by and among
International Paper Company, CMP
Investments L.P. and CMP Holdings
LLC, dated and effective as of
August 1, 2006 (incorporated herein
by reference to Exhibit 10.2 of the
Company’s Quarterly Report on Form
10-Q for the quarter ended June 30,
2006, File No. 1-3157).

Exchange Agreement dated Sep-
tember 19, 2006, by and between
Votorantim Celulose E Papel S.A. and
Investments
Paper
International
(Holland) B.V. (incorporated by refer-
ence to Exhibit 2.1 to Company’s
Current Report on Form 8-K dated
September 25, 2006, File No. 1-3157).

Closing Memorandum, dated Febru-
ary 1, 2007, entered into between
International
Investments
Paper
(Holland) B.V. and Votorantim Celu-
lose E Papel S.A.*

Agreement,

Purchase
dated
December 7, 2006, by and between
Sustainable Forests L.L.C. and RBIP,
(incorporated by reference to
Inc.
Exhibit 10.1 to Company’s Current
Report
dated
December 13, 2006, File No. 1-3157).

Form 8-K

IP Debt Security, dated December 7,
2006,
issued by International Paper
Company to Basswood Forests LLC
(incorporated by reference to Exhibit
4.1 to Company’s Current Report on
Form 8-K dated December 13, 2006,
File No. 1-3157).

IP Hickory Note, dated December 7,
2006,
issued by International Paper
Company to Hickory Forests LLC
(incorporated by reference to Exhibit
4.2 to Company’s Current Report on
Form 8-K dated December 13, 2006,
File No. 1-3157).

Lock-in agreement in relation to a full
takeover offer for Carter Holt Harvey
Limited dated August
2005
(incorporated by reference to Exhibit
99.2 to Company’s Current Report on
Form 8-K dated August 22, 2005, File
No. 1-3157).

17,

Incentive Plan,
2006 Management
amended and restated as of Jan-
uary 1, 2006 (incorporated by refer-
ence to Exhibit 10.1 of the Company’s
Current Report on Form 8-K dated
February 16, 2007, File No. 1-3157).†

(10.14)

(10.15)

(10.16)

Amended and Restated Long-Term
Incentive Compensation Plan, as of
February 7, 2005 (incorporated by
reference to Exhibit 99.1 of
the
Company’s Current Report on Form
8-K dated February 11, 2005, File
No. 1-3157).†

Form of individual non-qualified stock
option agreement under the Compa-
ny’s Long-Term Incentive Compensa-
tion Plan (incorporated by reference to
Exhibit 10.6 to the Company’s Annual
Report on Form 10-K for the fiscal year
File
ended December
No. 1-3157).†

2001,

31,

individual executive con-
Form of
the Company
tinuity award under
Long-Term Incentive Compensation
Plan (incorporated by reference to
Exhibit 10.9 to the Company’s Annual
Report on Form 10-K for the fiscal year
File
ended December
No. 1-3157).†

1999,

31,

(10.17)

Form of Restricted Stock Award.*†

(10.18)

(10.19)

(10.20)

(10.21)

Savings

International Paper Company Deferred
Compensation
Plan
(unfunded savings plan) (incorporated
by reference to Exhibit 10.11 to the
Company’s Annual Report on Form
10-K for the year fiscal year ended
December 31, 2000, File No. 1-3157).†

International Paper Company Pension
Restoration Plan for Salaried Employ-
ees (incorporated by reference to
Exhibit
to the Company’s
Annual Report on Form 10-K for the
fiscal year ended December 31, 2000,
File No. 1-3157).†

10.12

for

Senior Managers,

Unfunded Supplemental Retirement
Plan
as
amended and restated (incorporated
by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended June 30,
2005, File No. 1-3157).†

Amendment
to Unfunded Supple-
mental Retirement Plan for Senior
Managers, as amended and restated
(incorporated by reference to Exhibit
10.1 to the Company’s Current Report
on Form 8-K filed on February 17,
2006, File No. 1-3157).†

(10.22)

(10.23)

(10.24)

(10.25)

(10.26)

(10.27)

(10.28)

(10.29)

Amendment No. 2, effective Jan-
uary 1, 2007, to Unfunded Supple-
mental Retirement Plan for Senior
Managers,
and
restated.*†

amended

Paper

International
Company
Restricted Stock and Deferred Com-
pensation Plan for Non-Employee
Directors, effective January 1, 2007.*†

awards

officers) who may

Form of Non-Competition Agreement
entered into by certain Company
employees (including named execu-
tive
receive
or
share
performance
restricted stock awards pursuant to
the Long-Term Incentive Compensa-
tion
Company
(incorporated by reference to Exhibit
10.4 to the Company’s Quarterly
Report on Form 10-Q for the quarter
ended
2006,
File No. 1-3157).†

March

Plan

the

31,

awards

officers) who may

Form of Non-Solicitation Agreement
entered into by certain Company
employees (including named execu-
receive
tive
performance
or
share
restricted stock awards pursuant to
the Long-Term Incentive Compensa-
Company
tion
(incorporated by reference to Exhibit
10.5 to the Company’s Quarterly
Report on Form 10-Q for the quarter
File
ended March
No. 1-3157).†

2006,

Plan

the

31,

Form of Change of Control Agree-
ment—Tier I (incorporated by refer-
ence to Exhibit 10.3 to the Company’s
Current Report on Form 8-K dated
October 17, 2005, File No. 1-3157).†

Form of Change of Control Agree-
ment—Tier II (incorporated by refer-
ence to Exhibit 10.4 to the Company’s
Current Report on Form 8-K dated
October 17, 2005, File No. 1-3157).†

Indemnification Agreement
Form of
for Directors (incorporated by refer-
ence to Exhibit 10.13 to the Compa-
ny’s Annual Report on Form 10-K for
the fiscal year ended December 31,
2003, File No. 1-3157).†

Agreement

Retirement
dated
March 21, 2006, between Robert M.
Amen and International Paper Com-
pany (incorporated by reference to

(10.36)

(10.37)

(10.38)

(10.30)

(10.31)

(10.32)

(10.33)

(10.34)

(10.35)

Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated January 5,
2007, File No. 1-3157).†

Senior

Board Policy on Severance Agree-
Executives
ments with
(incorporated by reference to Exhibit
10.1 to the Company’s Current Report
on Form 8-K dated October 17, 2005,
File No. 1-3157).†

Board Policy on Change of Control
Agreements (incorporated by refer-
ence to Exhibit 10.2 to the Company’s
Current Report on Form 8-K dated
October 17, 2005, File No. 1-3157).†

364-Day Credit Agreement, dated as of
March 31, 2006, among the Company,
the lenders, party thereto, Citibank,
N.A., as Syndication Agent, Banc of
America Securities LLC, BNP Paribas
and Deutsche Bank Securities Inc., as
Documentation Agents, J.P. Morgan
Securities Inc. and Citicorp Global
Markets, Inc. as Lead Arrangers and
Joint Bookrunners, and JP Morgan
Chase Bank, N.A., as Administrative
Agent (incorporated by reference to
Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated April 3,
2006, File No. 1-3157).

Consent dated as of December 7,
2006, to the 364-Day Credit Agree-
ment, among the Company, the lend-
ers party thereto, and JP Morgan
Chase Bank, N.A., as Administrative
Agent.*

5-Year Credit Agreement, dated as of
March 31, 2006, among the Company,
the lenders party thereto, Citibank,
N.A., as Syndication Agent, Banc of
America Securities LLC, BNP Paribas
and Deutsche Bank Securities Inc., as
Documentation Agents, J.P. Morgan
Securities Inc. and Citibank Global
Markets, Inc. as Lead Arrangers and
Joint Bookrunners, and JPMorgan
Chase Bank, N.A., as Administrative
Agent (incorporated by reference to
Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated April 3,
2006, File No. 1-3157).

Consent dated as of December 7,
2006, to the 5-year Credit Agreement,
among the Company,
the lenders
party thereto, and JP Morgan Chase
Bank, N.A., as Administrative Agent.*

Inc.,

Amended and Restated Credit and
Security Agreement dated as of
November 17, 2004, among Red Bird
Receivables,
Borrower,
International Paper Financial Services,
Inc., as Servicer,
International Paper
Company, as Performance Guarantor,
The Conduits from Time to Time Party
thereto, The Bank of Tokyo-Mitsubishi,
Ltd., New York Branch, as Gotham
Agent, JP Morgan Chase Bank, N.A.,
as Prefco Agent, BNP Paribas, Acting
through its New York Branch, as
StarBird Agent, Citicorp North Amer-
ica,
Inc., as CAFCO Agent and
Wachovia Bank, National Association
as Blue Ridge Agent and as Admin-
istrative Agent (incorporated by refer-
ence
the
Company’s Current Report on Form
8-K/A dated December 9, 2004, File
No. 1-3157).

Exhibit

10.01

Inc.,

dated

First Amendment,
of
December 30, 2005, to the Amended
and Restated Credit and Security
Agreement, by and among Red Bird
Receivables,
Borrower,
International Paper Financial Services,
Inc., as Servicer,
International Paper
Company, as Performance Guarantor,
The Bank of Tokyo-Mitsubishi, Ltd.,
New York Branch, as a Co-Agent, JP
Morgan Chase Bank, N.A., as a
Acting
Co-Agent,
through its New York Branch, as a
Co-Agent, StarBird Funding Corpo-
ration, Citicorp North America, Inc., as
a Co-Agent, and Wachovia Bank,
National Association as Co-Agent and
as Administrative Agent.*

Paribas,

BNP

Inc.,

Second Amendment, dated as of
October 25, 2006, to the Amended and
Restated Credit and Security Agree-
ment, by and among Red Bird
Receivables,
Borrower,
International Paper Financial Services,
Inc., as Servicer,
International Paper
Company, as Performance Guarantor,
The Bank of Tokyo—Mitsubishi UFJ
Ltd., New York Branch (formerly
known as The Bank of Tokyo—
Mitsubishi Ltd., New York Branch), as
a Co-Agent, JP Morgan Chase Bank,
N.A., as a Co-Agent, BNP Paribas,
New York Branch, as a Co-Agent,

(10.39)

(10.40)

(10.41)

(10.42)

(10.43)

Bank,

StarBird Funding Corporation, Citicorp
Inc., as a Co-Agent
North America,
and Wachovia
National
Association, as a Co-Agent and as
Administrative Agent (incorporated by
reference to Exhibit 10.2 to Company’s
Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006,
File No. 1-3157).

Inc.,

Third Amendment, dated as of
December 15, 2006, to the Amended
and Restated Credit and Security
Agreement, by and among Red Bird
Receivables,
Borrower,
International Paper Financial Services,
Inc., as Servicer,
International Paper
Company, as Performance Guarantor,
The Bank of Tokyo—Mitsubishi UFJ
Ltd., New York Branch (formerly
known as The Bank of Tokyo—
Mitsubishi Ltd., New York Branch), as
a Co-Agent, JP Morgan Chase Bank,
N.A., as a Co-Agent, BNP Paribas,
New York Branch, as a Co-Agent,
Starbird Funding Corporation, Citicorp
Inc., as a Co-Agent
North America,
and Wachovia
National
Association, as a Co-Agent and as
Administrative Agent.*

Bank,

and

International

Receivables Sale Agreement dated as
of December 26, 2001, between Inter-
national Paper Company, as origi-
nator,
Paper
Inc., as buyer
Financial Services,
(incorporated by reference to Exhibit
(b)(2) of the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

First Amendment to Receivables Sale
Agreement
19,
2003.*

dated November

Second Amendment
to Receivables
Sale Agreement dated November 17,
2004.*

Receivables Sale and Contribution
Agreement dated as of December 26,
2001, between International Paper
Financial Services, Inc., and Red Bird
Buyer
Inc.,
Receivables,
(incorporated by reference to Exhibit
(b)(3) of the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

(10.44)

(10.45)

(10.46)

(10.47)

(10.48)

(11)

(12)

(21)

(23)

(24)

(31.1)

(31.2)

(32)

First Amendment to Receivables Sale
and Contribution Agreement dated
February 28, 2002.*

Second Amendment
to Receivables
Sale and Contribution Agreement
dated December 23, 2002.*

Third Amendment to Receivables Sale
and Contribution Agreement dated
December 3, 2003.*

Fourth Amendment
to Receivables
Sale and Contribution Agreement
dated November 17, 2004.*

Contribution

Omnibus Amendment
[Amendment
No. 3 to Receivables Sale Agreement,
Amendment No. 5 to Receivables Sale
Agreement
and
Amendment No. 2 to Amended and
Restated
Security
Agreement] dated August 7, 2006
(incorporated by reference to Exhibit
(b)(4) of the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

Credit

and

Statement of Computation of Per
Share Earnings.*

Computation of Ratio of Earnings to
Fixed Charges and Preferred Stock
Dividends.*

List of Subsidiaries of Registrant.*

Consent of
Public Accounting Firm.*

Independent Registered

Power of Attorney (contained on the
signature page to the Form 10-K filed
on February 28, 2007, File No. 1-3157).

Certification by John V. Faraci, Chair-
man and Chief Executive Officer,
pursuant
the
Sarbanes-Oxley Act of 2002.*

to Section 302 of

Certification by Marianne M. Parrs,
Chief Financial Officer, pursuant
to
Section 302 of the Sarbanes-Oxley Act
of 2002.*

Certification Pursuant
to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.*

† Management contract or compensatory plan or arrangement

* filed herewith

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE

To the Shareholders of International Paper Company:

We have audited the consolidated financial statements of International Paper Company and subsidiaries (the
“Company”) as of December 31, 2006 and 2005, and for each of the three years in the period ended December 31,
2006, management’s assessment of the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2006, and the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006, and have issued our reports thereon dated February 26, 2007 (which report on the con-
solidated financial statements expresses an unqualified opinion and includes an explanatory paragraph regarding
the Company’s adoption of new accounting standards); such reports are included elsewhere in this Form 10-K.
Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This
consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

Memphis, Tennessee
February 26, 2007

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

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

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts – current
Restructuring reserves

For the Year Ended December 31, 2006

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance
at End of
Period

94 $
33

19 $

125

– $
–

(28)(a) $

(102)(b)

85
56

For the Year Ended December 31, 2005

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance
at End of
Period

108 $
–

17 $
90

– $
–

(31)(a) $
(57)(b)

94
33

For the Year Ended December 31, 2004

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance
at End of
Period

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts – current
Restructuring reserves

110 $

18 $
62

– $
–

(20)(a) $

(137)(b)

108
–

(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.

100

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTERNATIONAL PAPER COMPANY

By:

/S/ MAURA ABELN SMITH

Maura Abeln Smith
Senior Vice President, General Counsel
and Corporate Secretary

POWER OF ATTORNEY

February 28, 2007

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Maura Abeln Smith 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 sub-
stitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/S/ JOHN V. FARACI

John V. Faraci

/S/ DAVID J. BRONCZEK

David J. Bronczek

Chairman of the Board, Chief
Executive Officer and Director

February 28, 2007

Director

February 28, 2007

/S/ MARTHA FINN BROOKS

Director

February 28, 2007

Martha Finn Brooks

/S/ SAMIR G. GIBARA

Samir G. Gibara

Director

February 28, 2007

/S/ DONALD F. MCHENRY

Director

February 28, 2007

Donald F. McHenry

/S/ JOHN L. TOWNSEND III

Director

February 28, 2007

John L. Townsend III

/S/ JOHN F. TURNER

John F. Turner

/S/ WILLIAM G. WALTER

William G. Walter

/S/ ALBERTO WEISSER

Alberto Weisser

/S/ MARIANNE M. PARRS

Marianne M. Parrs

/S/ ROBERT J. GRILLET

Robert J. Grillet

Director

February 28, 2007

Executive Vice President and Chief
Financial Officer

February 28, 2007

Vice President – Finance and
Controller

February 28, 2007

101

2006 Listing of Facilities
(all facilities are owned except noted otherwise)

PRINTING PAPERS

Corrugated Container

U.S.:

Uncoated Papers and Pulp

U.S.:

Courtland, Alabama
Selma, Alabama
(Riverdale Mill)

Ontario, California leased

(C & D Center)
Cantonment, Florida
(Pensacola Mill)
Augusta, Georgia
Bastrop, Louisiana
(Louisiana Mill)
Springhill, Louisiana
(C & D Center)
Sturgis, Michigan
(C & D Center)

Ticonderoga, New York
Riegelwood, North Carolina
Hazleton, Pennsylvania

(C & D Center)

Eastover, South Carolina
Georgetown, South Carolina
Sumter, South Carolina

(C & D Center)
McKinney, Texas
(C & D Center)

Franklin, Virginia (2 locations)

International:

Mogi Guacu, São Paulo, Brazil
Saillat, France
Kwidzyn, Poland
Svetogorsk, Russia
Inverurie, Scotland

INDUSTRIAL AND CONSUMER

PACKAGING

INDUSTRIAL PACKAGING

Containerboard

U.S.:

Prattville, Alabama
Savannah, Georgia

Terre Haute, Indiana

Mansfield, Louisiana

Pineville, Louisiana

Vicksburg, Mississippi

International:

Yanzhou City, China

Arles, France

Kenitra, Morocco

Bay Minette, Alabama
Decatur, Alabama
Dothan, Alabama leased
Conway, Arkansas
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
Auburn, Maine
Brownstown, Michigan (3 locations)
Howell, Michigan

Kalamazoo, Michigan
Arden Hills, Minnesota
Minneapolis, Minnesota

Houston, Mississippi leased
Kansas City, Missouri

North Kansas City, Missouri leased
Geneva, New York
Statesville, North Carolina
Byesville, Ohio

Cincinnati, Ohio

Newark, Ohio

Solon, Ohio

Wooster, Ohio

Eighty-four, Pennsylvania

Lancaster, Pennsylvania

Mount Carmel, Pennsylvania

Georgetown, South Carolina

A-1

Appendix I

Laurens, South Carolina
Spartanburg, South Carolina

Lavergne, Tennessee leased
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
Dongguan, China
Guangzhou, China
Shenyang, China
Tianjin, China
Wuxi, China
Arles, France
Chalon-sur-Saone, France
Creil, France
LePuy, France
Mortagne, France
Guadeloupe, French West Indies
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

Kraft Paper

Courtland, Alabama

Bastrop, Louisiana

Franklin, Virginia

Appendix I

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

SPECIALTY BUSINESSES AND OTHER

Chemicals
U.S.:

Panama City, Florida
Pensacola, Florida
Port St. Joe, Florida
Savannah, Georgia
Valdosta, Georgia
Dover, Ohio
International:

Oulu, Finland
Niort, France
Sandarne, Sweden
Bedlington, United Kingdom
Chester-le-Street, United Kingdom

IP Mineral Resources

Houston, Texas leased

CONSUMER PACKAGING

Coated Paperboard

Ontario, California leased

(C & D Center)
Augusta, Georgia
Springhill, Louisiana
(C & D Center)
Sturgis, Michigan
(C & D Center)

Riegelwood, North Carolina
Hazleton, Pennsylvania

(C & D Center)

Prosperity, South Carolina
Texarkana, Texas
Franklin, Virginia

Beverage Packaging

U.S.:

Pine Bluff, Arkansas
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
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 leased
D.N. Ashrat, Israel
Mexico City, Mexico leased

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

International:

Brockville, Ontario, Canada
Smiths Falls, Ontario, Canada
Toronto, Ontario, Canada
Guangzhou, China
Sacheon, South Korea
Ebbw Vale, Wales, United Kingdom

DISTRIBUTION

xpedx

U.S.:

Stores Group

Chicago, Illinois
135 locations nationwide

127 leased

South Central Region

Greensboro, North Carolina
42 branches in the Southeast
States and Mid-western
States

29 leased

West Region

Denver, Colorado
35 branches in the Rocky

Mountain, Northwest, and
Pacific States
22 leased

North Central Region

Hartford, Connecticut
30 branches in New England,
Upper Mid-west and Middle
Atlantic States
22 leased

National Group

Loveland, Ohio
6 locations in Georgia, Kansas,

Ohio, New York, and
Missouri

all leased

International:

Mexico (20 locations)

all leased

FOREST PRODUCTS

Forest Resources

U.S.:

Approximately 0.5 million acres
in the South and North

International:

Approximately 0.37 million
acres in Brazil

A-2

2006 CAPACITY INFORMATION
CONTINUING OPERATIONS

(in thousands of short tons)

Printing Papers
Uncoated Freesheet

Bristols

Uncoated Papers and Bristols

Dried Pulp

Newsprint

Total Printing Papers

Industrial Packaging
Containerboard

Bleached Kraft Paper

Consumer Packaging
Coated Paperboard

Total Packaging

Forest Resources
We own, manage or have an interest in more than 1.4 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

DISCONTINUED OPERATIONS

(in thousands of short tons)

Kraft Paper (Unbleached)

Beverage Packaging Board

Total Packaging

U.S. Wood Business
21 Lumber mills (board ft.)

5 Plywood mills (sq. ft. 3/8” basis)

1 Laminated Veneer Lumber mill (cubic ft.)

1 Pole plant (cubic ft.)

Appendix II

U.S.

Europe

Americas,
other
than U.S.

Asia

Total

3,600

360

3,960

1,075

–

5,035

4,748

4,843

1,859

6,702

1,351

–

1,351

167

125

1,643

180

–

180

331

511

435

–

435

–

435

–

430

5,386

360

5,746

1,242

125

7,113

4,928

5,023

2,190

7,213

(M Acres)
520

526
370

896

516

1,412

U.S.

Europe

405

445

850

–

Americas,
other
than U.S.

–

Asia

Total

–

405

445

850

(Units – MM)

2,576

1,596

A-3

SENIOR LEADERSHIP

John V. Faraci

Carol Roberts

Jeffrey A. Hearn

Larry Norton

Chairman and
Chief Executive Officer

Senior Vice President
IP Packaging Solutions

Vice President
Project Topaz

Newland A. Lesko

Maura Abeln Smith

Peter Heist

Executive Vice President
Manufacturing and Technology

Marianne M. Parrs

Executive Vice President and
Chief Financial Officer

John Balboni

Senior Vice President
Chief Information Officer

Michael J. Balduino

Senior Vice President
President, Shorewood Packaging
Foodservice

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
Business Development

Senior Vice President
General Counsel,
Corporate Secretary and
Public Affairs

W. Michael Amick Jr.

Vice President
Supply Chain –
North America

Vice President
Coated Paperboard

William Hoel

Vice President
Container The Americas

Robert M. Hunkeler

Vice President
Trusts & Investments

David A. Bailey

Tommy S. Joseph

Vice President
International Paper Europe

Vice President
Technology

Paul J. Karre

Vice President
Human Resources

Tim Kelly

Vice President
European Papers

Aleesa L. Blum

Vice President
Communications

Paul Brown

Vice President
European Container

Dennis J. Colley

Vice President
Containerboard

Jim Connelly

Vice President
xpedx

Vice President,
Manufacturing
Printing & Communications
Papers

Jean-Michel Ribieras

Vice President
Converting Papers and Pulp

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

Austin E. Lance

Robert W. Wenker

Vice President and
Chief Technology Officer
Information Technology

Ann Wrobleski

Vice President
Public Affairs

Vice President
Foodservice

David A. Liebetreu

Vice President
Forest Resources

Richard B. Lowe

Vice President
xpedx

Brian McDonald

Vice President
Investor Relations

Kevin McWilliams

Vice President
Tax

William A. Merrigan

Vice President
Global Supply Chain, Deliver

Ted R. Niederriter

Vice President and
Deputy General Counsel
Legal

Timothy S. Nicholls

Vice President, Finance
International Paper Europe

Thomas E. Gestrich

William P. Crawford

Senior Vice President
President, International
Paper Asia

Paul Herbert

Senior Vice President
Strategic Initiatives
CEO-Designate, IP-Ilim
Pulp Joint Venture

Thomas G. Kadien

Senior Vice President
President, xpedx

Mary Laschinger

Senior Vice President
President
International Paper Europe

Andrew R. Lessin

Senior Vice President
Internal Audit

Maximo Pacheco

Senior Vice President
President, International Paper
do Brasil

Vice President
Global Sourcing

Arthur J. Douville

Vice President
xpedx

Michael P. Exner

Vice President,
Manufacturing
Containerboard

Greg Gibson

Vice President
Commercial Printing &
Imaging Papers

Robert Grillet

Vice President and Controller
Finance

Errol Harris

Vice President
Treasury

DIRECTORS

John V. Faraci

Chairman and Chief Executive Officer
International Paper Company

David J. Bronczek

President and Chief Executive Officer
FedEx Express

Martha F. Brooks

Chief Operating Officer
Novelis Inc.

Samir G. Gibara

Former Chairman and Chief Executive Officer
The Goodyear Tire & Rubber Company

Donald F. McHenry

Former U.S. Ambassador to the United Nations
and Distinguished Professor of Diplomacy
Georgetown University

John L. Townsend III

Former Managing Director
Goldman Sachs & Co.

John F. Turner

Former Assistant Secretary of State
Oceans and International and Scientific Affairs

William G. Walter

Chairman, President and
Chief Executive Officer
FMC Corporation

Alberto Weisser

Chairman and Chief Executive Officer
Bunge Limited

Papers used in this report:
Accent® Opaque, White,
Smooth, 50 lb. text

Accent® Opaque, White,
Smooth, 100 lb. cover

Printed in the U.S. by RR Donnelley
Design: Perdue Creative, Memphis, Tenn.

Board of Directors Photograph:
Wayne Crook, Memphis, Tenn.

SHAREHOLDER INFORMATION

Corporate Headquarters
International Paper Company
6400 Poplar Avenue
Memphis, Tennessee 38197
(901) 419-9000

Annual Meeting
The next annual meeting of shareholders will be held at 8:30 am local time,
Monday, May 7, 2007 at the Doral Arrowwood Conference Resort, Rye Brook,
New York.

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
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
Telephone Number: (800) 678-8715
Foreign Shareholders: (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
100 Peabody Place
Memphis, Tennessee 38103

Reports and Publications
Copies of this annual report, SEC filings and other publications may be
obtained by visiting our Web site, http://www.internationalpaper.com, by
calling (800) 332-8146 or by writing to our investor relations department at the
corporate headquarters address listed above. Copies of our most recent
environment, health and safety report are available by calling (901) 419-3945.

Investor Relations
Investors desiring further information about International Paper should contact
the investor relations department at corporate headquarters, (901) 419-4957 or
(901) 419-4967.

CEO/CFO Certifications
The most recent certifications by our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are
filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006. We have also filed with the New York Stock Exchange the
most recent Annual CEO Certification as required by Section 303A.12(a) of the
New York Stock Exchange Listed Company Manual.

International Paper Company Board of Directors

Seated, from left: Martha F. Brooks, chief operating officer, Novelis Inc.; John V. Faraci, chairman and chief executive officer,
International Paper Company; Samir G. Gibara, former chairman and chief executive officer, The Goodyear Tire & Rubber
Company; and Donald F. McHenry, former U.S. ambassador to the United Nations and distinguished professor of diplomacy,
Georgetown University.

Standing, from left: John L. Townsend III, former managing director, Goldman Sachs & Co.; David J. Bronczek, president
and chief executive officer, FedEx Express; John F. Turner, former assistant secretary of state, Oceans and International and
Scientific Affairs; Alberto Weisser, chairman and chief executive officer, Bunge Limited; and William G. Walter, chairman,
president and chief executive officer, FMC Corporation.

Global Headquarters
6400 Poplar Avenue
Memphis, Tennessee 38197
901-419-9000

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

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

International Paper Asia
30th Floor, K. Wah Center
1010 Huaihai Zhong Road
Shanghai, 200031
P. R. China
86-21-6113-3200

www.internationalpaper.com

Listed on the New York Stock Exchange

Equal Opportunity Employer
(M/F/D/V)