International Paper Company Annual Report 2007

FY2007 Annual Report · International Paper Company

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www.internationalpaper.com

Listed on the New York Stock Exchange

Equal Opportunity Employer
(M/F/D/V)

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In 2007, International Paper made significant progress toward its transformation
goal of becoming a more competitive and profitable company. We strengthened
our global paper, packaging and distribution businesses, improved earnings from
continuing operations and before special items by 52 percent and returned value
to shareowners through significant share repurchases. Across our businesses, we
continue to manage all elements of our cost structure – from input costs, to
energy consumption, to supply chain – to ensure we are globally cost competitive.
We are capitalizing on our capabilities in terms of product offerings, channel and
market access, and innovative product development. We are building on our
strong positions in the marketplace by continuing to strategically align ourselves
with our global customers. We also have been selectively reinvesting in Brazil,
China and Russia. We see a world of opportunities and we will continue to
capitalize on them to improve our global earnings and create shareowner value.

North America
Operating profits in our uncoated papers, pulp, packaging
and distribution businesses grew by 29 percent in the
United States. Capital investment was selective and
focused. Excluding the $145 million spent to convert our
Pensacola, Fla., uncoated paper machine to produce
lightweight linerboard, capital spending was about equal
to depreciation in our North American businesses. Costs
were up sharply in 2007, but importantly, through a
combination of cost control and price improvement, we
were able to expand margins by 140 basis points.

South America
We became the largest producer of uncoated freesheet
in South America with the addition of the world-class
Luiz Antonio Mill in Sao Paulo State in Brazil. In 2007,
we successfully integrated this facility into our existing
system and made significant progress on the construction
of a new uncoated paper machine at Tres Lagoas. 2007
was a record profit year in our Brazil paper business.

Asia
As part of our joint ventures with Sun Paper in Shandong
Province in China, we began construction of a third
coated paperboard machine that will be up and running
in the second half of 2008. This project will allow us to
continue meeting the growing needs of our global
packaging customers and the growing domestic pack-
aging market in China.

Europe, Russia, Africa and Middle East
2007 was a record profit year for this region. We
completed a joint venture with Ilim Holding S.A. that
strengthened our market pulp and packaging board
capabilities in the region. The venture is the leading
pulp, paper and packaging board producer in Russia
and is uniquely positioned to serve growing demand in
both Russia and China. We also completed construction
of a BCTMP project at our Svetogorsk Mill in Russia. In
Morocco, we bought the remaining 35 percent of our
joint venture corrugated packaging business and in
Turkey, opened two corrugated box facilities.

These achievements and global opportunities will enable us to achieve our goals of producing the #1
return versus our peer companies and generating profits that exceed our cost of capital. As we execute
Year 3 of our transformation plan, we will continue to improve our global competitiveness as we build a
stronger, more valuable International Paper.

International Paper Board of Directors

Seated, from left: Donald F. McHenry, former U.S. ambassador to the United Nations and distinguished
professor of diplomacy, Georgetown University; 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 Martha F. Brooks, president and chief operating officer, Novelis Inc.

Standing, from left: Lynn Laverty Elsenhans, executive vice president, global manufacturing, Shell
Downstream Inc.; David J. Bronczek, president and chief executive officer, FedEx Express; William G.
Walter, chairman, president and chief executive officer, FMC Corporation; John L. Townsend III, former
managing director, Goldman Sachs & Co.; John F. Turner, former assistant secretary of state, Oceans
and International and Scientific Affairs; and J. Steven Whisler, retired chairman and chief executive
officer, Phelps Dodge Corporation.

Unavailable for group photo (right): Alberto Weisser, chairman and chief executive officer, Bunge Limited.

Global Headquarters
6400 Poplar Avenue
Memphis, TN 38197
1-901-419-9000

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

International Paper do Brasil
Avenida Paulista, 37 - 14º andar
01311-902 São Paulo SP, Brazil
55-11-3797-5797

International Paper Asia
Room 3006, K. Wah Center
1010 Huaihai Zhong Road
Shanghai, 200031
P. R. China
86-21-6113-3200

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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, 2007

‘ 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, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting com-
pany” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer È

Accelerated filer ‘

Non-accelerated filer ‘

Smaller reporting company ‘

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, 2007) was approximately $16,605,617,548.

The number of shares outstanding of the Company’s common stock, as of February 26, 2008 was 427,760,669.

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 2008 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, 2007

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 U.S. 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
2
3
3
3
3
4
5

7
7
7

14
16
16
23
24
29
34
34
35
37
37
39
41
41
41

INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2007

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

RISK.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial Information by Industry Segment and Geographic Area
Report of Management on Financial Statements, Internal Controls over
Financial Reporting and Internal Control Environment and Board of
Directors Oversight

Reports of Deloitte & Touche LLP, Independent Registered Public Accounting

Firm

Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Common Shareholders’ Equity
Notes to Consolidated Financial Statements
Interim Financial Results (Unaudited)

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE.

ITEM 9A.

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 ACCOUNTANT FEES AND SERVICES.

PART IV.

ITEM 15.

EXHIBITS AND 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 2007 LISTING OF FACILITIES

APPENDIX II 2007 CAPACITY INFORMATION

47
49
50
51
52
53
89

100
101

102

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
North America, Europe, Latin America, Russia, Asia
and North Africa. 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
is
www.internationalpaper.com. You can learn more
about us by visiting that site.

Internet

In the United States at December 31, 2007, the
Company operated 16 pulp, paper and packaging
mills, 85 converting and packaging plants and 4
wood products facilities. Production facilities at
December 31, 2007 in Europe, Asia, Latin America
and South America included 7 pulp, paper and
packaging mills and 46 converting and packaging
plants. We distribute printing, packaging, graphic
arts, maintenance and industrial products principally
through over 273 distribution branches located
primarily in the United States. At December 31, 2007,
we owned or managed approximately 300,000 acres
of forestlands in the United States, approximately
250,000 acres in Brazil and had, through licenses and
forest management agreements, harvesting rights
on government-owned forestlands in Russia. Sub-
stantially all of our businesses have experienced, and
are likely to continue to experience, cycles relating to
industry capacity and general economic conditions.

For management and financial reporting purposes,
our businesses are separated into six segments:
Industrial Packaging; Consumer
Printing Papers;
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
(the Transformation Plan) to concentrate on two key
global platform businesses, Uncoated Papers
(including Distribution) and Packaging, can be found
on page 34 of Item 7.

From 2003 through 2007, International Paper’s capi-
tal expenditures approximated $5.5 billion, excluding

mergers and acquisitions. These expenditures reflect
our continuing efforts to improve product quality
and environmental performance, lower costs, main-
tain reliability of operations and improve forestlands.
Capital spending for continuing operations in 2007
was approximately $1.3 billion and is expected to be
approximately $1.1 billion in 2008. You can find
more information about capital expenditures on
pages 29 and 30 of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.

Discussions of acquisitions, exchanges and joint
ventures can be found on pages 30 and 31 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 19 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 U.S. OPERATIONS

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

COMPETITION AND COSTS

MARKETING AND DISTRIBUTION

The Company sells paper, packaging products 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 Interna-
tional Paper and by other companies making paper,
paperboard, packaging and graphic arts supplies.
the United
Sales offices are located throughout
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.

Despite the size of the Company’s manufacturing
capacity for paper, packaging and pulp products, the
markets in all of the cited product lines are large and
fragmented. The major markets, both U.S. and
non-U.S., in which the Company sells its principal
products are very competitive. Our products are in
competition with similar products produced by other
in
forest products companies. We also compete,
some instances, with companies in other industries
and against substitutes for wood and wood-fiber
products.

Many factors influence the Company’s competitive
position, including price, cost, product quality and
services. You can find more information about the
impact of price and cost 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 in
Appendix II on page A-3.

SALES VOLUMES BY PRODUCT

Sales volumes of major products for 2007, 2006 and 2005 were as follows:

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

Printing Papers (In thousands of tons)
U.S. Uncoated Papers and Bristols
Europe & Russia Uncoated Papers and Bristols
Brazil Uncoated Papers
Asia Uncoated Papers

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.

2007

2006

2005

3,788
1,448
794
24

6,054
–
1,402

3,578
1,173
641

5,392
1,776
2,010
408

240

3,973
1,455
477
18

5,923
1,168
1,124

3,628
1,267
525

3,837
1,419
447
13

5,716
1,996
1,291

3,578
1,073
421

5,072
5,420
1,816
1,937
1,503(5) 1,264
411

410

232

242

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

(5) Includes two months of sales for International Paper & Sun Cartonboard Co., Ltd. in which International Paper acquired a 50% interest in

the fourth quarter of 2006.

RESEARCH AND DEVELOPMENT

The Company operates its primary research and
development center at Loveland, Ohio, with smaller
facilities in Savannah, Georgia, and several product
laboratories. Additionally, the Company has a 1/3
interest in ArborGen, LLC, a joint venture with certain
other forest products and biotechnology companies.
We direct research and development activities to
short-term, long-term and technical assistance needs
of customers and operating divisions, and to proc-
ess, 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 manufacturing operations;
innovations and improvement of products; and
various new products. Our
development of
development efforts specifically address product
safety as well as the minimization of solid waste. The
cost to the Company of its research and develop-
ment operations was $24 million in 2007, $45 million
in 2006, and $63 million in 2005.

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 39 and 40 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

EMPLOYEES

the United States. Of the U.S. employees, approx-
imately 20,600 are hourly, with unions representing
approximately 12,800 employees. Approximately
10,500 of the union employees are represented by
the United Steel Workers under individual location
contracts.

During 2007,
the Company reached a four-year
agreement (the USW Agreement) with the United
Steelworkers of America that lays a new framework
for bargaining future local labor contracts at 14 of
our U.S. pulp, paper and packaging mills. The USW
Agreement provides for the renewal of labor agree-
ments at pulp, paper and packaging mill locations
throughout the four-year period. Pursuant to the
USW Agreement, labor agreements at the George-
town, South Carolina; Vicksburg, Mississippi; and
Riverdale, Alabama paper mills were renewed in
2007. During 2008, labor agreements are scheduled
to expire and renew, under the terms of the USW
the Texarkana, Texas; Courtland,
Agreement, at
Alabama;
Prattville,
Alabama mill locations.

Louisiana;

Pineville,

and

During 2007, 17 labor agreements were settled in
non-paper mill operations. Settlements included
paper converting, distribution, consumer packaging
and wood products operations. During 2008, 18
non-mill
labor agreements are scheduled to be
negotiated in 18 non-paper mill operations, plus
eight non-mill contracts are carrying over from 2007.

EXECUTIVE OFFICERS OF THE
REGISTRANT

John V. Faraci, 58, chairman and chief executive offi-
cer since 2003. Mr. Faraci previously served as
president during 2003, and executive vice president
and chief
from 2000 to 2003.
Mr. Faraci joined International Paper in 1974.

financial officer

Newland A. Lesko, 62, 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.

John N. Balboni, 59, senior vice president and chief
information officer since 2005. Mr. Balboni pre-
viously
and chief
information officer from 2003 to 2005, and vice
president-ebusiness from 2000 to 2003. Mr. Balboni
joined International Paper in 1978.

vice president

served as

As of December 31, 2007, we had approximately
51,500 employees, 33,100 of whom were located in

Michael J. Balduino, 57, senior vice president since
2000, responsible for consumer products converting
businesses and president-Shorewood Packaging

Corp. since 2004. Mr. Balduino previously served as
the Company’s senior vice president-sales and
marketing from 2000 to 2003. Mr. Balduino joined
International Paper in 1992.

Europe from 2005 to 2007, and as president of the
Company’s former Canadian pulp and wood prod-
ucts business from 2002 to 2005. Mr. Nicholls joined
International Paper in 1991.

H. Wayne Brafford, 56, senior vice president-printing
and communications papers since 2005. Mr. Brafford
previously 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, 59, 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 1980.

C. Cato Ealy, 51, senior vice president-corporate
development since 2003. Mr. Ealy previously served
as vice president-corporate development from 1996
to 2003. Mr. Ealy is a director of Ilim Holding S.A., a
Swiss holding company in which International Paper
holds a 50% interest, and of its subsidiary,
Ilim
Group. Mr. Ealy joined International Paper in 1992.

Thomas E. Gestrich, 61, senior vice president and
president-IP Asia since 2005. Mr. Gestrich previously
served as senior vice president-consumer packaging
from 2001 to 2005. Mr. Gestrich joined International
Paper in 1990.

Thomas G. Kadien, 51, senior vice president and
president-xpedx since 2005. Mr. Kadien previously
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.

Mary A. Laschinger, 47, senior vice president since
2007 and president-IP Europe, Middle East, Africa
and Russia since 2005. Ms. Laschinger previously
served as vice president-wood products from 2004 to
2005, and as vice president-pulp from 2001 to 2004.
Ms. Laschinger is a director of Ilim Holding S.A., a
Swiss holding company in which International Paper
holds a 50% interest, and of its subsidiary,
Ilim
Group. Ms. Laschinger joined International Paper in
1992.

Tim S. Nicholls, 46, senior vice president and chief
financial officer since December 2007. Mr. Nicholls
previously served as vice president and executive
project leader of IP Europe during 2007. Mr. Nicholls
served as vice president and chief financial officer-IP

Maximo Pacheco, 55, senior vice president since
2005 and president-IP do Brasil since 2004. Pre-
viously, Mr. Pacheco served as
senior vice
president-IP do Brasil from 2003 to 2004 and as
president-IP Latin America from 2000 to 2003.
Mr. Pacheco joined International Paper in 1994.

Carol L. Roberts, 48, senior vice president-IP pack-
aging solutions since 2005. She previously served as
vice president-container of the Americas from 2000
to 2005. Ms. Roberts joined International Paper in
1981.

Maura A. Smith, 52, senior vice president, general
counsel, corporate secretary and global government
relations. From 1998 to 2003, she served as senior
vice president, general counsel and corporate secre-
tary of Owens Corning and in addition, from 2000 to
2003, as chief restructuring officer and a member of
its board of directors. Ms. Smith joined International
Paper in 2003.

Robert J. Grillet, 52, vice president-finance and con-
troller since 2003. Mr. Grillet previously served as
group senior vice president-xpedx from 2000 to
2003. Mr. Grillet joined International Paper in 1976.

Terri L. Herrington, 52, vice president-internal audit
since November 2007. Ms. Herrington previously
served as director of audit for finance and financial
control for BP p.l.c. from 2003 to 2007, and as group
development leader in internal audit for BP p.l.c.
from 2000 to 2003. Ms. Herrington joined Interna-
tional Paper in 2007.

Mark S. Sutton, 46, vice president-supply chain since
June 2007. Mr. Sutton previously served as vice
president-strategic planning from 2005 to 2007, and
as vice president and general manager-European
Corrugated Packaging Operations from 2002 to 2005.
Mr. Sutton joined International Paper in 1984.

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

and energy

and polyethylene)

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 A N D E N E R G Y . We rely heavily on
certain raw materials (principally wood fiber, caustic
sources
soda
(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, productivity improvements or cost reduc-
tion 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 in the
United States and internationally.
In the United
States, an increase in transportation rates or fuel
surcharges could negatively impact our financial
results, 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 trans-
portation availability, 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 operate in a competitive
environment, both in the United States and interna-
tionally, 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 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
financial results could be negatively 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
increases would negatively impact our financial
results. 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, Russia, Latin America,
Asia and North Africa. Changes in industrial
non-durable goods production, consumer spending,
commercial printing and advertising activity, white-
collar employment levels, interest 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

C O U L D

A D V E R S E L Y

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

A N A D V E R S E E F F E C T O N T H E M A R K E T P R I C E
O F O U R S E C U R I T I E S . Credit rating agencies rate
our debt securities on factors that
include our
operating results, actions that we take, their view of

the general outlook for our industry and their view of
the general outlook for the economy. Actions taken
by the rating agencies can include maintaining,
upgrading, or downgrading the current rating or
placing the company on a watch list for possible
future downgrading. Downgrading the credit rating
of our debt securities or placing us on a watch list for
possible future downgrading would likely increase
our cost of financing and have an adverse effect on
the market price of our securities.

A V A I L A B I L I T Y O F C R E D I T . The recent turmoil in
the credit markets and the limited availability of
credit may have a negative financial impact on some
of our customers and potential buyers of our
remaining forestlands. This may affect the timing
and amount of sales of our products and the timing
of sales of our remaining forestlands.

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.

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 financial results could be substantially affected
by foreign market risks in the countries outside the
United States in which we have manufacturing facili-
ties or sell our products. Specifically, Brazil, Russia,
Poland and China, where we have substantial manu-
facturing facilities, are countries that are exposed to
economic and political instability in their respective
regions of the world. Downturns in economic activ-
ity, 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 be no assurance, however, that we will be
able to fully protect ourselves against substantial
foreign currency fluctuations.

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 U.S. and
international
laws and regulations relating to the
environment, health and safety. There can be no
assurance that the costs of compliance with existing
and new regulations, including costs associated with
global climate change regulation, will not require
that existing
significant capital expenditures, or
if regulations
reserves for specific matters will,
change, be adequate to cover future unanticipated
costs.

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 view that the out-
come of any pending or threatened lawsuits or
claims, or all of them combined, will not have a
material adverse effect on our consolidated financial
statements, there can be no assurance that the out-
come of any lawsuit or claim will be as expected.

RISKS RELATING TO THE COMPANY’S
OPERATIONS

M A T E R I A L D I S R U P T I O N S O F M A N U F A C T U R I N G .
We operate our facilities in compliance with appli-
cable rules and regulations and take measures to
minimize the risks of disruption at our facilities. A
material disruption at one of our manufacturing
facilities could prevent us from meeting customer
demand, reduce our sales and/or negatively impact
our financial results. Any of our manufacturing facili-
ties, or any of our machines within an otherwise
operations
could
operational
unexpectedly due to a number of events, including:

facility,

cease

unscheduled maintenance outages

prolonged power failures

an equipment failure

a chemical spill or release

explosion of a boiler

the effect of a drought or reduced rainfall on its
water supply

labor difficulties

disruptions in the transportation infrastructure,
including roads, bridges, railroad tracks and
tunnels

(cid:129)

fires, floods, earthquakes, hurricanes or other
catastrophes

terrorism or threats of terrorism

domestic and international laws and regulations
applicable to our Company and our business
partners,
including joint venture partners,
around the world

(cid:129)

other operational problems

require us

Any such downtime or facility damage could prevent
us from meeting customer demand for our products
and/or
to make unplanned capital
expenditures. If one of these machines or facilities
were to incur significant downtime, our ability to meet
our production targets and satisfy customer require-
ments could be impaired, resulting in lower sales and
have a negative effect on our financial results.

T O

R E A L I Z E

N O N - P R I C E

A B I L I T Y
P R O F I T
I M P R O V E M E N T . The Company has made a
commitment to deliver on profit improvement ini-
including ongoing manufacturing, supply
tiatives,
chain and overhead cost reduction initiatives, as well
as volume/mix improvements. There can be no
assurance that any or all of these profit improve-
ments will be achieved.

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

As of December 31, 2007, the Company owned or
managed approximately 300,000 acres of forestlands
in the United States, approximately 250,000 acres in
through licenses and forest
Brazil, and had,
management agreements, harvesting rights on
government-owned forestlands in Russia. All owned
lands are independently third-party certified for sus-
tainable forestry (under operating standards of the
Sustainable Forestry Initiative (SFI™) in the United
States and ISO 14001 and CERFLOR in Brazil). During
2006,
in conjunction with the Company’s Trans-
formation Plan, approximately 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 transactions can be found on pages 20
and 21 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations and on page 65 of Item 8. Financial State-
ments and Supplementary Data. Our remaining
forestlands are being marketed to optimize the
economic value to our shareholders. Most of these
forestlands consist of properties that are likely to be
sold to investors and other buyers for various uses
or held for real estate development.

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 alter-
natives, including possible acquisitions and sales or
other dispositions of properties. You can find a dis-
cussion about the level of planned capital investments
for 2008 on page 30, and dispositions and restructur-
ing activities as of December 31, 2007, on pages 17
through 22 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations, and on pages 60 through 67 of Item 8. Finan-
cial Statements and Supplementary Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal pro-
ceedings is set forth on pages 39 through 41 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and
on pages 70 through 74 of Item 8. Financial State-
ments 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, 2007.

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 2007 and 2006 are set forth on page 89 of
Item 8. Financial Statements and Supplementary

Data. At December 31, 2007, 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 26, 2008,
there were
approximately 22,350 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 (a)

Average Price
Paid per
Share

January 1, 2007 - January 31, 2007

1,597,549

$33.55

February 1, 2007 - February 28, 2007

March 1, 2007 - March 31, 2007

April 1, 2007 - April 30, 2007

May 1, 2007 - May 31, 2007

June 1, 2007 - June 30, 2007

July 1, 2007 - July 31, 2007

August 1, 2007 - August 31, 2007

2,639,944

7,614,929

8,624,581

7,198,033

2,042,466

15,384

1,476,200

September 1, 2007 - September 30, 2007

6,000

November 1, 2007 - November 30, 2007

3,008,933

Total

34,224,019

36.20

35.63

36.87

38.52

39.21

38.72

33.98

33.96

33.27

(a) Principally open-market repurchases, including 33,582,751 shares purchased as part of the Company’s Transformation Plan, 641,098 shares

acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs, and a stock swap

for 170 shares.

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
to the liabilities of Section 18 of the Exchange Act of
1934, as amended.

The following graph compares a $100 investment in
Company stock on December 31, 2002 with a $100
investment in each of our Industry Peer Group and
the S&P 500 also made on December 31, 2002. The
graph portrays total return, 2002–2007, assuming
reinvestment of dividends.

Return on $100 Investment at YE 2002

s
r
a

l
l

o
D

200

180

160

140

120

100

2002

2003

2004

2005

2006

2007

S&P 500 Index

Industry Peer Group

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

ration 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

2007

2006

2005

2004

2003

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
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 (c)
Cumulative effect of accounting changes
Net earnings (loss)

DILUTED PER SHARE OF COMMON STOCK
Earnings from continuing operations
Discontinued operations (c)
Cumulative effect of accounting changes
Net earnings (loss)
Cash dividends
Common shareholders’ equity

COMMON STOCK PRICES
High
Low
Year-end

$21,890
19,939

$21,995
18,286

$21,700
20,819

$20,721
19,633

$19,883
19,075

1,654(b)
24
(47)(c)
–
1,168(b-d)
1,168(b-d)

3,188(e)
17
(232)(f)
–
1,050(e-f)
1,050(e-f)

286(g)
9
416(h)
–
1,100(g-i)
1,100(g-i)

376(j)
24
(273)(k)
–
(35)(j-l)
(35)(j-l)

89(m)
79
186
(13)(n)
302(m-o)
302(m-o)

$ 2,893
10,141
770
24,159

267
6,353
8,672

$ 2.83
(0.11)
–
2.72

$ 2.81
(0.11)
–
2.70
1.00
20.40

$ 3,996
8,993
259
24,034

$ 6,804
9,073
2,127
28,771

$ 9,506
9,402
2,099
34,217

$ 9,143
9,348
2,279
35,525

692
6,531
7,963

1,178
11,019
8,351

209
13,626
8,254

1,770
13,127
8,237

$ 2.69
(0.48)
–
2.21

$ 1.41
0.85
–
2.26

$ 0.49
(0.56)
–
(0.07)

$ 0.27
0.39
(0.03)
0.63

$ 2.65
(0.47)
–
2.18
1.00
17.56

$ 1.40
0.81
–
2.21
1.00
17.03

$ 0.49
(0.56)
–
(0.07)
1.00
16.93

$ 0.27
0.39
(0.03)
0.63
1.00
16.97

$ 41.57
31.05
32.38

$ 37.98
30.69
34.10

$ 42.59
26.97
33.61

$ 45.01
37.12
42.00

$ 43.32
33.09
43.11

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

CAPITAL EXPENDITURES

NUMBER OF EMPLOYEES

1.7
0.43
14.8(b-d)
7.2(b-d)

1.9
0.47
14.6(e-f)
8.1(e-f)

2.4
0.59
13.2(g-i)
5.2(g-i)

2.3
0.62
(0.4)(j-l)
3.1(j-l)

2.0
0.63

3.9(m-o)
2.5(m-o)

$ 1,292

$ 1,073

$ 1,095

$ 1,119

935

51,500

60,600

68,700

79,400

82,800

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.

(c)

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.

2007:

(b)

Includes restructuring and other charges of $95
million before taxes ($59 million after taxes),
including a $30 million charge before taxes
($19 million after
for organizational
taxes)
restructuring and other charges principally
associated with the Company’s Transformation
Plan, a charge of $60 million before taxes ($38
million after taxes) of accelerated depreciation
charges, a $10 million charge before taxes ($6
million after taxes)
for environmental costs
associated with a mill closure, and a pre-tax
gain of $5 million ($4 million after taxes) for
other items. Also included are a $9 million
pre-tax gain ($5 million after taxes) to reduce
estimated transaction costs accrued in con-
nection with the 2006 sale of U.S. forestlands
included in the Company’s Transformation
Plan; and a $327 million gain before taxes
($267 million after taxes) for net gains on sales
and impairments of businesses including a

pre-tax gain of $113 million ($102 million after
taxes) on the sale of the Arizona Chemical
business, a gain of $205 million before taxes
($159 million after taxes) related to the asset
exchange for the Luiz Antonio mill in Brazil,
and a pre-tax gain of $9 million ($6 million
after taxes) for other items.

Includes a pre-tax gain of $20 million ($8 mil-
lion after taxes) relating to the sale of the
Wood Products business, a pre-tax loss of $30
million ($48 million after taxes)
for adjust-
ments to the loss on the sale of the Beverage
Packaging business, a pre-tax gain of $6 mil-
lion ($4 million after taxes) for adjustments to
the loss on the sale of the Kraft Papers busi-
ness, and a net $6 million pre-tax credit ($4
for payments received
million after
relating to the Company’s Weldwood of
Canada Limited business, and the year-to-date
operating results of the Beverage Packaging
and Wood Products businesses.

taxes)

(d)

Includes a $41 million tax benefit relating to
the effective settlement of certain income tax
audit issues.

2006:

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-
Company’s
pally
Transformation Plan, a charge of $165 million
before taxes ($102 million after taxes)
for
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 pre-tax charge ($1.4
billion after taxes) for net losses on sales and
impairments of businesses including $1.4 bil-
lion before taxes ($1.3 billion after taxes) for
the U.S. Coated and Supercalendered Papers

(e)

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 million 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.

(f)

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, and
the 2006 operating results of the Kraft Paper,
Brazilian Coated Papers, Wood Products and
Beverage Packaging businesses.

2005:

(g)

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

(h)

(i)

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, as well as, the 2005 operating results of
the Carter Holt Harvey Limited, Kraft Papers,
Brazilian Coated Papers, Wood Products and
Beverage Packaging businesses.

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:

(j)

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.

(k)

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, and the 2004 operating results
of the Carter Holt Harvey Limited, Weldwood
of Canada Limited, Kraft Papers, Brazilian
Coated Papers, Wood Products and Beverage
Packaging businesses.

(l)

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

2003:

(m) 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
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)

taxes)

for

for the net reversal of restructuring reserves no
longer required.

(n)

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.”

(o)

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

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

EXECUTIVE SUMMARY

International Paper’s operating results in 2007 bene-
fited from significantly higher paper and packaging
price realizations. Sales volumes were slightly high-
er, with growth in overseas markets partially offset
by lower volumes in North America as we continued
to balance our production with our customers’
demand. Operationally, our pulp and paper and
containerboard mills ran very well in 2007. However,
input costs for wood, energy and transportation
costs were all well above 2006 levels. In our Forest
Products business, earnings decreased 31% reflect-
ing a sharp decline in harvest income and a smaller
drop in forestland and real estate sales, both reflect-
ing our forestland divestitures in 2006.
Interest
expense decreased over 40%, principally due to
lower debt balances and interest rates from debt
repayments and refinancings.

Looking forward to the first quarter of 2008, we
expect demand for North American printing papers
and packaging to remain steady. However,
if the
economic downturn in 2008 is greater than expected,
this could have a negative impact on sales volumes
and earnings. Some slight increases in paper and
packaging price realizations are expected as we
implement our announced price increases. However,
first quarter earnings will reflect increased planned
maintenance expenses and continued escalation of
wood, energy and transportation costs. As a result,
excluding the impact of projected reduced earnings
from land sales and the addition of equity earnings
contributions from our recent investment in Ilim
Holding S.A. in Russia, we expect 2008 first-quarter
earnings to be lower than in the 2007 fourth quarter.

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,
Industry segment operating
prices and volumes.
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 earn-
ings 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 for each of the last three years:

In millions

2007

2006

2005

Industry segment operating profits

$2,423

$ 2,074

$1,622

Corporate items, net

Corporate special items*

Interest expense, net

Minority interest

Income tax benefit (provision)

Discontinued operations

(732)

241

(297)

(5)

(415)

(47)

(746)

2,373

(521)

(9)

(1,889)

(232)

(607)

(134)

(595)

(9)

407

416

Net earnings

$1,168

$ 1,050

$1,100

* Corporate special items include restructuring and other charg-

es, net (gains) losses on sales and impairments of businesses,

gains on Transformation Plan forestland sales, goodwill

impairment charges,

insurance recoveries and reversals of

reserves no longer required.

Industry segment operating profits of $2.4 billion
were $349 million higher in 2007 than in 2006 due
principally to the benefits from higher average price
realizations ($461 million), the net impact of cost
reduction initiatives,
improved operating perform-
ance and a more favorable mix of products sold
($304 million), higher sales volumes ($17 million),
lower special
item costs ($115 million) and other
items ($4 million). These benefits more than offset
the impacts of higher energy, raw material and
freight costs ($205 million), higher costs for planned
mill maintenance outages ($48 million), lower earn-
ings from land sales ($101 million), costs at the
Pensacola mill associated with the conversion of a
machine to the production of linerboard ($52 million)
and reduced earnings due to net acquisitions and
divestitures ($146 million).

Segment Operating Profit
(in millions)

$461

$17

$2,074

$304

($48)

($205)

($101)

($52)

$98

($244)

$115

$2,423

$3,000

$2,500

$2,000

$1,500

$1,000

$500

Pric

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7
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2

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6
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2

The principal changes in 2007 operating profit by
segment were as follows:

(cid:129)

Printing Papers’ profits of $1.1 billion were $465
million higher as the benefits of higher average
sales price realizations and improved manu-
facturing operating costs more than offset the
impacts of higher raw material and energy costs,
higher freight costs, and slightly lower sales
volumes. Additionally, 2006 results included a
$128 million charge to write down the assets of
the Saillat, France mill to their estimated fair
value.

Industrial Packaging’s profits of $501 million
were up $102 million as the impacts of higher
sales price realizations, increased sales volumes,
a more favorable mix of products sold, and
strong mill and converting production perform-
ance were only partially offset by higher raw
material and freight costs and costs associated
with the conversion of the paper machine at the
Pensacola mill to lightweight linerboard pro-
duction.

Consumer Packaging’s profits of $198 million
were $26 million higher reflecting improved
average sales price realizations, slightly higher
sales volumes, favorable mill operations, and
the full-year earnings impact of International
Paper & Sun Cartonboard Co., Ltd. which was
acquired in the fourth quarter of 2006. These
benefits were partially offset by higher raw
material and freight costs and an unfavorable
mix of products sold.

Distribution’s profits of $146 million were $18
million higher in 2007 due to the impact of
record sales volumes and slightly better average
sales margins.

Forest Products’ profits of $471 million were
down $207 million. This reflects lower forestland
and real estate sales and harvest and recrea-
tional income due to the 5.6 million acres of
forestland sold in 2006 as part of the Company’s
Transformation Plan that significantly reduced
the Company’s forestland acreage.

Specialty Businesses and Other’s profits of $6
million were $55 million lower reflecting the
divestiture of the Arizona Chemical business in
the first quarter of 2007.

Corporate items, net, of $732 million of expense in
2007 were lower than the $746 million of expense in

2006 as lower pension expenses more than offset
higher medical, supply chain initiative and LIFO
inventory costs. The increase in 2006 versus $607
million of expense in 2005 reflects higher pension,
benefit-related and supply chain initiative costs,
partially offset by lower LIFO inventory costs.

Corporate special items, including restructuring and
other charges and net (gains) losses on sales and
impairments of businesses, were a gain of $241 mil-
lion in 2007 compared with a gain of $2.4 billion in
2006 and an expense of $134 million in 2005. The
large gain in 2006 includes $4.8 billion from the sales
of forestlands included in our Transformation Plan,
partially offset by $1.4 billion of net charges related
to the divestiture of certain operations and $759 mil-
lion of goodwill impairment charges.

Interest expense, net, of $297 million in 2007
decreased from $521 million in 2006 and $595 mil-
lion in 2005 reflecting lower average debt balances
and lower interest rates from debt refinancings and
repayments made under
the Company’s Trans-
formation Plan.

The 2007 income tax provision of $415 million
includes a $41 million benefit related to 2007 spe-
cial tax adjustment items. The 2006 income tax
provision of $1.9 billion consists 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, and
includes an $11 million charge related to 2006 spe-
cial tax adjustment items. The $407 million benefit
in 2005 includes a $454 million tax benefit related to
2005 special tax adjustment items. Excluding spe-
cial items, taxes as a percent of pre-tax earnings
increased to 30% in 2007 and 29% in 2006 from 20%
in 2005 reflecting a higher proportion of earnings in
higher tax rate jurisdictions.

Discontinued Operations

During 2007, the Company completed the sale of
its Wood Products, Beverage Packaging and Kraft
Papers operations.

In the third quarter of 2006, International Paper
completed the sale of its Brazilian Coated Papers
business.

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.

Liquidity and Capital Resources

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 2008.

For the year ended December 31, 2007, International
Paper generated $1.9 billion of cash flow from con-
tinuing operations, compared with $1.0 billion in
2006. The 2006 amount is net of a $1.0 billion volun-
tary pension plan cash contribution. Capital spend-
ing from continuing operations for 2007 totaled $1.3
billion, or 119% of depreciation and amortization
expense. Cash proceeds from divestitures totaled
$1.7 billion, with $300 million used for acquisitions
and $600 million invested in a 50% equity interest in
Ilim Holding S.A. in Russia. We repaid approximately
$900 million of debt during the year. Our liquidity
position remains strong, supported by approx-
imately $2.5 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 2008 will be to continue to maximize
our financial flexibility to facilitate access to capital
markets on favorable terms.

Capital spending for 2008 is targeted at $1.1 billion,
or about equal to depreciation and amortization.

Critical Accounting Policies and Significant
Accounting Estimates

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

Pension expenses for our U.S. plans decreased to
$210 million in 2007 from $377 million in 2006
reflecting a full year of earnings on a $1.0 billion
contribution made to the plan during the fourth
quarter of 2006, lower amortization of unrecognized
actuarial
losses, and an increase in the assumed
discount rate to 5.75% in 2007 from 5.50% in 2006.
An additional decrease to approximately $114 mil-
lion is expected in 2008, reflecting an increase in the
assumed discount rate to 6.20% and a further reduc-
tion of amortization of unrecognized actuarial losses.
Our pension funding policy continues to be, at a

Legal

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; freight costs; sal-
including pensions; and
ary and benefits costs,
manufacturing conversion costs.

The following is a discussion of International Paper’s
ended
results
December 31, 2007, and the major factors affecting
these results compared to 2006 and 2005.

operations

year

the

for

RESULTS OF OPERATIONS

For the year ended December 31, 2007, International
Paper reported net sales of $21.9 billion, compared
with $22.0 billion in 2006 and $21.7 billion in 2005.
International net sales (including U.S. exports)
totaled $6.3 billion or 29% of total sales in 2007. This
compares to international net sales of $5.6 billion in
2006 and $5.3 billion in 2005.

Full year 2007 net earnings totaled $1.2 billion ($2.70
per share), compared with net earnings of $1.1 bil-
lion ($2.18 per share) in 2006 and $1.1 billion ($2.21
per share) in 2005. Amounts include the results of
discontinued operations.

Earnings from continuing operations after taxes in
2007 were $1.2 billion, compared with $1.3 billion in
2006 and $684 million in 2005. Compared with 2006,
the benefits of higher average sales price realiza-
tions, improved sales volumes, favorable operating
performance, cost reduction initiatives, an improved
mix of products sold,
lower corporate expenses
(including pensions) and lower net interest expense
were offset by the impacts of higher costs for plan-
ned mill maintenance outages, higher average raw
material and freight costs, lower earnings from land
sales, costs associated with the conversion of a
machine to the production of linerboard at Pensaco-
la, reduced earnings due to net acquisitions and
divestitures, higher tax expense, and reduced gains
from special items.

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)

$214

($34) ($144)

($71)

($37)

$165

$69

($172)

($8)

($395)

$325

$12

$1,282

$2,100

$1,800

$1,500

$1,200

$900

$600

$300

6
0
0
2

Pric

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$1,215

Reserve adjustments

7
0
0
2

Industry Segment Operating Profit
Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other

Intere

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

In millions

Net Earnings
Deduct - Discontinued operations:

Loss (earnings) from operations

Loss (gain) on sales or impairment

Earnings From Continuing Operations
Add back (deduct):

Income tax provision (benefit)

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 (gains) losses on sales and

impairments of businesses

2007

2006

2005

$1,168

$ 1,050

$1,100

(85)

317

1,215

1,282

415

1,889

1,654

297

(19)

732

–

(9)

–

3,188

521

(8)

746

300

(19)

(4,788)

759

(327)

1,381

–

(6)

(55)

(361)

684

(407)

286

595

–

607

285

(258)

–

111

(4)

$2,423

$ 2,074

$1,622

$1,101

$ 636

$ 434

501

198

146

471

399

172

128

678

219

160

721

Total Industry Segment Operating Profit

$2,423

$ 2,074

$1,622

Discontinued Operations

2 0 0 7 : In 2007, after tax charges totaling $36 million
were recorded for adjustments of net (gains) losses
on sales and impairments of businesses reported as
Discontinued operations.

During the fourth quarter of 2007, the Company
recorded a pre-tax charge of $9 million ($6 million
after taxes) and a pre-tax credit of $4 million ($3 mil-
lion after taxes) for adjustments to estimated losses
on the sales of its Beverage Packaging and Wood
Products businesses, respectively.

During the third quarter of 2007, the Company com-
pleted the sale of the remainder of its non-U.S.
Beverage Packaging business.

During the second quarter of 2007, the Company
recorded pre-tax charges of $6 million ($4 million
after taxes) and $5 million ($3 million after taxes)
relating to adjustments to estimated losses on the
sales of its Wood Products and Beverage Packaging
businesses, respectively.

During the first quarter of 2007,
the Company
recorded pre-tax credits of $21 million ($9 million
after taxes) and $6 million ($4 million after taxes)
relating to the sales of its Wood Products and Kraft
Papers businesses, respectively. In addition, a $15
million pre-tax charge ($39 million after taxes) was
recorded for adjustments to the loss on the com-
pletion of the sale of most of the Beverage Packaging
business. Finally, a pre-tax credit of approximately
$10 million ($6 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.

Additionally, a $4 million pre-tax charge ($3 million
after taxes) was recorded for additional taxes asso-
ciated with the Company’s former Weldwood of
Canada Limited business.

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 closing later in 2007. Also dur-
ing 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 subject to various
adjustments at closing. Based on the commitments
to sell these businesses, management determined
that the accounting requirements for treatment as
discontinued operations were met. As a result, net
pre-tax charges of $18 million ($11 million after tax-
es) for the Beverage Packaging business and $104
million ($69 million after taxes) for the Wood Prod-
ucts business (including $58 million for pension and
termination benefits) were
postretirement benefit
recorded in the fourth quarter as discontinued oper-
ations charges to adjust the carrying value of these
businesses to their estimated fair values less costs to
sell.

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 during the 2006 third
quarter, International Paper completed 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 to Stora Enso Oyj
for approx-
imately $420 million, subject to certain post-closing
adjustments. 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 additional payments totaling up to $60 million
payable five years from the date of closing, con-
tingent upon business performance. A $16 million
taxes) was
pre-tax charge ($11 million after
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 defini-
tive agreement. The sale of this business was sub-
sequently completed on January 2, 2007.

Additionally during the fourth quarter, a $38 million
pre-tax credit ($22 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 from discontinued operations.

Discontinued operations also includes the operating
results for these businesses for all periods presented.

Income Taxes

In 2007, a net income tax provision of $415 million
was recorded,
including a $41 million tax benefit
relating to the effective settlement of certain income
tax audit issues and other special tax adjustment
items. Excluding the impact of special items, the tax
provision was $424 million, or 30% of pre-tax earn-
ings before minority interest.

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 $0.3 billion 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 higher income tax rates in 2007 and 2006 reflect
a higher proportion of earnings in higher tax rate
jurisdictions.

Corporate Items and Interest Expense

Minority interest expense, net of taxes, was $24 mil-
lion in 2007 compared with $17 million in 2006 and
$9 million in 2005. The increases in 2007 and 2006
reflect the formation of the International Paper & Sun
Cartonboard Co., Ltd. joint ventures in the fourth
quarter of 2006, and the Company’s acquisition of
the Moroccan box plants in the fourth quarter of
2005.

Net interest expense totaled $297 million in 2007,
including a pre-tax credit of $2 million for interest
received from the Canadian government on refunds
of prior-year softwood lumber duties.
Interest
expense, net, for 2006 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
the Company’s 1997 through 2000 U.S.
federal
income tax audits, and a pre-tax credit of $11 million
related to the collection of a note receivable from the
2001 sale of the Flexible Packaging business. Exclud-
ing these special items, interest expense, net, of $299
million in 2007 decreased from $527 million in 2006
and $649 million in 2005 reflecting lower average
debt balances and lower interest rates from debt
refinancings and repayments.

For the 12 months ended December 31, 2007, corpo-
rate items totaled $732 million of expense compared
with $746 million in 2006 and $607 million in 2005.
The decrease in 2007 principally reflects the benefit
of lower pension expenses, largely offset by higher
medical, supply chain initiative, and LIFO inventory
costs. The increase in 2006 compared with 2005 was
due to higher pension, benefit-related, and supply
chain initiative costs, partially offset by lower LIFO
inventory 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 can 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 7 : During 2007, total restructuring and other
charges of $95 million before taxes ($59 million after
taxes) were recorded. These charges included:

(cid:129)

taxes)

a $30 million charge before taxes ($19 million
restructuring
for organizational
after
programs, principally
associated with the
Company’s Transformation Plan,

a $27 million pre-tax charge ($17 million after
taxes) for the accelerated depreciation of long-
lived assets being removed from service,

a $33 million charge before taxes ($21 million
after taxes) for accelerated depreciation charges
for the Terre Haute mill that was shut down as
part of the Transformation Plan,

a $10 million charge before taxes ($6 million
after taxes) for environmental costs associated
with the Terre Haute mill,

a $4 million charge before taxes ($2 million after
taxes)
the
Company’s Brazilian operations, and

related to the restructuring of

a pre-tax gain of $9 million ($6 million after
taxes)
for an Ohio Commercial Activity tax
adjustment.

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:

(cid:129)

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
litigation settlements and
after
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.

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.

2 0 0 5 : During 2005, corporate restructuring and
other charges before taxes of $285 million ($175 mil-
lion after taxes) were recorded.
Included in this
charge were:

(cid:129)

a pre-tax charge of $201 million ($124 million
after taxes) for organizational restructuring pro-
grams, 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.

restructuring, business
A further discussion of
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

2 0 0 7 : During the third quarter of 2007, a pre-tax gain
of $9 million ($5 million after taxes) was recorded to
reduce estimated transaction costs accrued in con-
nection with the 2006 Transformation Plan forestland
sales.

2 0 0 6 : During 2006, in connection with the previously
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. The first of these transactions in the
second quarter included approximately 76,000 acres

in the fourth quarter,

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 in 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.

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 (Gains) Losses on Sales and Impairments
of Businesses

Net (gains) losses on sales and impairments of busi-
nesses held for sale included in Corporate special
items totaled a pre-tax gain of $327 million ($267
million after taxes) in 2007 and pre-tax losses of $1.5
billion ($1.4 billion after taxes) and $111 million ($73
million after taxes) in 2006 and 2005, respectively.
The principal components of
these gains/losses
were:

2 0 0 7 : During the fourth quarter of 2007, a $13 mil-
lion net pre-tax credit ($9 million after taxes) was
recorded to adjust estimated gains/losses of busi-
nesses previously sold, including a $7 million pre-tax
credit ($5 million after taxes) to adjust the estimated
loss on the sale of box plants in the United Kingdom
and Ireland, and a $5 million pre-tax credit ($3 mil-
lion after taxes) to adjust the estimated loss on the
sale of the Maresquel mill in France.

During the third quarter of 2007, a pre-tax charge of
$1 million ($1 million credit after taxes) was recorded
to adjust previously estimated losses on businesses
previously sold.

During the second quarter of 2007, a $1 million net
pre-tax credit (a $7 million charge after taxes, includ-
ing a $5 million tax charge in Brazil) was recorded to
adjust previously estimated gains/losses of busi-
nesses previously sold.

During the first quarter of 2007, a $103 million
pre-tax gain ($96 million after taxes) was recorded
upon the completion of the sale of the Company’s
Arizona Chemical business. As part of the trans-
action, International Paper acquired a minority inter-
est of approximately 10% in the resulting new entity.
Since the interest acquired represents significant
the
continuing involvement
business under accounting principles generally
accepted in the United States, the operating results
for Arizona Chemical have been included in continu-
ing operations in the accompanying consolidated
statement of operations through the date of sale.

in the operations of

In addition, during the first quarter of 2007, a $6 mil-
lion pre-tax credit
taxes) was
recorded to adjust previously estimated gains/losses
of businesses previously sold.

($4 million after

These gains are included, along with the $205 million
taxes) on the
pre-tax gain ($164 million after
exchange for the Luiz Antonio mill in Brazil (see Note
5), in Net (gains) losses on sales and impairments of
businesses
in the accompanying consolidated
statement of operations.

2 0 0 6 : During the fourth quarter of 2006, a net 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
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
$61 million ($38 million after taxes) was recorded for
gains on sales and impairments of businesses. 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 forestlands 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 net 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
was considered more likely than not at June 30, 2006
which was completed in the third quarter, 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.

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.

During the first quarter of 2005, International Paper
had announced an agreement to sell its Fine Papers
Inc. of Cohoes,
business to Mohawk Paper Mills,
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.

Industry Segment Operating Profits

Industry segment operating profits of $2.4 billion in
2007 improved from both $2.1 billion in 2006 and
$1.6 billion in 2005. The benefits of significantly
higher average price realizations ($461 million), cost
reduction initiatives,
improved operating perform-
ance and a more favorable mix of products sold
($304 million), and slightly higher sales volumes ($17
million) were partially offset by higher energy, wood,
other raw material and freight costs ($205 million),
higher costs for planned maintenance outages ($48
lower earnings from land sales ($101
million),

million), costs at the Pensacola mill associated with
the conversion of a machine to the production of
linerboard ($52 million), reduced earnings due to net
acquisitions and divestitures ($146 million), and
other items ($9 million). In addition, 2006 includes a
$128 million charge to write down the assets of the
Saillat, France mill to their estimated fair value.

Lack-of-order downtime in 2007 decreased sig-
nificantly to approximately 50,000 tons, compared
with 155,000 tons in 2006 and 830,000 tons in 2005,
as the Company adjusted production in line with
customer demand. The 2005 total included approx-
imately 290,000 tons related to uncoated paper
machines at our mills in Pensacola, Florida; Jay,
Maine; and Bastrop, Louisiana; that were perma-
nently closed in the fourth quarter of 2005.

Looking forward to the first quarter of 2008, exclud-
ing the impact of reduced land sales, industry seg-
ment operating profits for the first quarter of 2008
are expected to be lower than fourth-quarter 2007
earnings. Sales volumes are expected to be stable
for our paper and packaging businesses. Average
sales price realizations for U.S. uncoated paper
should improve as a roll-stock price increase
is
announced in the
implemented. Containerboard and box average sales
price realizations should also improve slightly with a
full-quarter benefit from previously announced price
increases. However, earnings are expected to be
negatively impacted by significantly higher
raw
material costs for wood and energy, and higher costs
for planned mill maintenance outages, compared
with the fourth quarter of 2007, particularly in North
American Industrial Packaging.

first quarter of

2008

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 copiers, desktop and laser printers
imaging. End use applications include
and digital

advertising and promotional materials such as bro-
chures, pamphlets, greeting cards, books, annual
reports and direct mail. 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, Rey and
Chamex. The mills producing uncoated papers are
located in the United States, Scotland, France,
Poland, Brazil and Russia. These mills have uncoated
paper
approximately
capacity
5.7 million tons annually.

production

C O A T E D P A P E R S : This business that produces
coated one sided products that are used in bag,
label, packaging and other specialty applications 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,
southern softwood pulp, as well as southern and
birch hardwood paper pulps. These products are
produced in the United States, France, Poland and
Russia, and are sold around the world. International
Paper facilities have annual dried pulp capacity of
about 1.2 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 250,000 acres of
forestlands in Brazil. Our annual production capacity
in Brazil is approximately 882,000 tons of uncoated
papers.

Industrial Packaging

P A C K A G I N G : With

production
I N D U S T R I A L
capacity of about 4.8 million tons annually, Interna-
tional Paper is the third largest manufacturer of
containerboard in the United States. Our products
include linerboard, medium, whitetop and saturating
kraft. About 70% of our production is converted
domestically into corrugated boxes and other pack-
aging by our 65 U.S. container plants. In Europe, our
operations include two recycled containerboard mills
in France and Morocco and 22 container plants in
France, Italy, Spain, Turkey and Morocco. In Asia, our
operations include nine container 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.

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®, andStarcote ®
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 its 17 facilities in the United States,
Canada and Asia to produce world-class packaging
with high-impact graphics for a variety of markets,
including home entertainment, tobacco, cosmetics,
general consumer and pharmaceuticals.

Our Foodservice business offers cups,
lids, food
containers and plates through three domestic plants
and five 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 125 warehouse locations and 148 retail
stores in the U.S., Mexico and Canada.

Forest Products

F O R E S T R E S O U R C E S : International Paper owns or
manages approximately 300,000 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 : This business was sold in the first
quarter of 2007.

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

INDUSTRY SEGMENT RESULTS

Printing Papers

Demand for Printing Papers products is closely 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, raw material and energy
costs, and freight costs.

P R I N T I N G P A P E R S net sales for 2007 decreased 3%
from 2006 and 6% from 2005 due principally to the
sale of the U.S. coated papers business in the third
quarter of 2006. However, operating profits in 2007
were 73% higher than in 2006 and more than double
profits in 2005. Compared with 2006, earnings
improved for all businesses in the segment. Benefits
from higher average sales price realizations in the
United States, Europe and Brazil
($353 million),
improved manufacturing operations ($92 million),
higher sales volumes in Brazil, Europe and U.S.
market pulp ($30 million) and the net impact of
divestitures and acquisitions ($19 million), were
partially offset by higher raw material and energy
costs ($95 million), higher freight costs ($10 million),
lower sales volumes in U.S. uncoated papers ($40
million) and other items ($12 million). Additionally,
2006 results included an impairment charge to
reduce the carrying value of the fixed assets at the
Saillat, France mill ($128 million). Compared with
2005, earnings in 2007 were also higher in all busi-
nesses. The printing papers segment took 325,000
tons of downtime in 2007 including 30,000 tons of
lack-of-order downtime to align production with

customer demand. This compared with 555,000 tons
of total downtime in 2006 of which 150,000 tons
related to lack-of-orders.

Printing Papers

In millions

Sales

Operating Profit

2007

$6,530

$1,101

2006

$6,700

$ 636

2005

$6,980

$ 434

Papers

business). Sales

NORTH AMERICAN PRINTING PAPERS net sales in 2007
were $3.5 billion compared with $4.4 billion in 2006
($3.5 billion excluding the Coated and Super-
calendered Papers business) and $4.8 billion in 2005
($3.2 billion excluding the Coated and Super-
calendered
volumes
decreased in 2007 versus 2006 partially due to
reduced production capacity resulting from the
conversion of the paper machine at the Pensacola
mill to the production of lightweight linerboard for
our Industrial Packaging segment. Average sales
price realizations increased significantly, reflecting
benefits from price increases announced throughout
2007. Lack-of-order downtime declined to 27,000
tons in 2007 from 40,000 tons in 2006. Operating
earnings of $537 million in 2007 increased from $482
million in 2006 ($407 million excluding the Coated
and Supercalendered Papers business) and $175
million in 2005 ($74 million excluding the Coated and
Supercalendered Papers business). The benefits
from improved average sales price realizations more
than offset the effects of higher input costs for wood,
energy, and freight. Mill operations were favorable
compared with the prior year due to current-year
improvements in machine performance and energy
conservation efforts.

Sales volumes for the first quarter of 2008 are
expected to increase slightly, and the mix of prod-
ucts sold to improve. Demand for printing papers in
North America was steady as the quarter began.
Price increases for cut-size paper and roll stock have
been announced that are expected to be effective
principally late in the first quarter. Planned mill
maintenance outage costs should be about the same
as in the fourth quarter; however, raw material costs
are expected to continue to increase, primarily for
wood and energy.

B R A Z I L I A N P A P E R S net sales for 2007 of $850 mil-
lion were higher than the $495 million in 2006 and
the $465 million in 2005. Compared with 2006, aver-
age sales price realizations improved reflecting price
increases for uncoated freesheet paper realized dur-
ing the second half of 2006 and the first half of 2007.
Excluding the impact of the Luiz Antonio acquisition,

sales volumes increased primarily for cut size and
offset paper. Operating profits for 2007 of $246 mil-
lion were up from $122 million in 2006 and $134 mil-
lion in 2005 as the benefits from higher sales prices
and favorable manufacturing costs were only parti-
ally offset by higher input costs. Contributions from
the Luiz Antonio acquisition increased net sales by
approximately $350 million and earnings by approx-
imately $80 million in 2007.

Entering 2008, sales volumes for uncoated freesheet
paper and pulp should be seasonally lower. Average
price realizations should be essentially flat, but mar-
gins are expected to reflect a less favorable product
mix. Energy costs, primarily for hydroelectric power,
are expected to increase significantly reflecting a lack
of rainfall in Brazil in the latter part of 2007.

E U R O P E A N P A P E R S net sales in 2007 were $1.5 bil-
lion compared with $1.3 billion in 2006 and $1.2 bil-
lion in 2005. Sales volumes in 2007 were higher than
in 2006 at our Eastern European mills reflecting
stronger market demand and improved efficiencies,
but lower in Western Europe reflecting the closure of
the Marasquel mill in 2006. Average sales price real-
izations increased significantly in 2007 in both East-
ern and Western European markets. Operating
profits of $214 million in 2007 increased from a loss
of $16 million in 2006 and earnings of $88 million in
2005. The loss in 2006 reflects the impact of a $128
million impairment charge to reduce the carrying
value of the fixed assets at the Saillat, France mill.
Excluding this charge,
in 2007
compared with 2006 reflects the contribution from
higher net sales, partially offset by higher input costs
for wood, energy and freight.

the improvement

Looking ahead to the first quarter of 2008, sales
volumes are expected to be stable in Western
Europe, but seasonally weaker in Eastern Europe and
Russia. Average price realizations are expected to
remain about
flat. Wood costs are expected to
increase, especially in Russia due to strong demand
ahead of
increases, and energy costs are
anticipated to be seasonally higher.

tariff

A S I A N P R I N T I N G P A P E R S net sales were approx-
imately $20 million in 2007, compared with $15 mil-
lion in 2006 and $10 million in 2005. Operating
earnings increased slightly in 2007, but were close to
breakeven in all periods.

U . S . M A R K E T P U L P sales in 2007 totaled $655 mil-
lion compared with $510 million and $525 million in
2006 and 2005, respectively. Sales volumes in 2007
were up from 2006 levels, primarily for paper and

tissue pulp due to strong market demand, partic-
ularly from Asia. Average sales price realizations
improved significantly in 2007, principally reflecting
higher average prices for softwood, hardwood and
fluff pulp. Operating earnings in 2007 were $104 mil-
lion compared with $48 million in 2006 and $37 mil-
lion in 2005. The benefits from higher sales price
realizations were partially offset by increased input
costs for energy, chemicals and freight.

Entering the first quarter of 2008, demand for market
pulp remains strong, and average sales price realiza-
tions should increase slightly. However, input costs
for energy, chemicals and freight are expected to be
higher, and increased spending is anticipated for
planned mill maintenance outages.

Industrial Packaging

Demand for Industrial Packaging products is closely
correlated with non-durable industrial goods pro-
duction, 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 Packaging are raw material
and energy costs, freight costs, manufacturing effi-
ciency and product mix.

I N D U S T R I A L P A C K A G I N G net sales for 2007
increased 6% to $5.2 billion compared with $4.9 bil-
lion in 2006, and 13% compared with $4.6 billion in
2005. Operating profits in 2007 were 26% higher than
in 2006 and more than double 2005 earnings. Bene-
fits from improved price realizations ($147 million),
sales volume increases net of increased lack of order
downtime ($3 million), a more favorable mix ($31
million), strong mill and converting operations ($33
million) and other costs ($47 million) were partially
offset by the effects of higher raw material costs ($76
million) and higher freight costs ($18 million).
In
addition, a gain of $13 million was recognized in
2006 related to a sale of property in Spain and costs
of $52 million were incurred in 2007 related to the
conversion of the paper machine at Pensacola to
production of lightweight linerboard. The segment
took 165,000 tons of downtime in 2007 which
included 16,000 tons of market-related downtime
compared with 135,000 tons of downtime in 2006 of
which none was market-related.

Industrial Packaging

In millions

Sales

Operating Profit

2007

$5,245

$ 501

2006

$4,925

$ 399

2005

$4,625

$ 219

N O R T H A M E R I C A N I N D U S T R I A L P A C K A G I N G net
sales for 2007 were $3.9 billion, compared with $3.7
billion in 2006 and $3.6 billion in 2005. Operating
profits in 2007 were $407 million, up from $327 mil-
lion in 2006 and $170 million in 2005.

Containerboard shipments were higher
in 2007
compared with 2006, including production from the
paper machine at Pensacola that was converted to
lightweight linerboard during 2007. Average sales
price realizations were significantly higher than in
2006 reflecting price increases announced early in
2006 and in the third quarter of 2007. Margins
improved reflecting stronger export demand. Manu-
facturing performance was strong, although costs
associated with planned mill maintenance outages
were higher due to timing of outages. Raw material
costs for wood, energy, chemicals and recycled fiber
increased significantly. Operating results for 2007
were also unfavorably impacted by $52 million of
costs associated with the conversion and startup of
the Pensacola paper machine.

U.S. Converting sales volumes were slightly lower in
2007 compared with 2006 reflecting softer customer
box demand. Earnings improvement in 2007 bene-
fited from the realization of box price increases
announced in early 2006 and late 2007. Favorable
manufacturing operations and higher sales prices for
waste fiber more than offset significantly higher raw
material and freight costs.

Looking ahead to the first quarter of 2008, sales
volumes are expected to increase slightly, and
results should benefit from a full-quarter impact of
the price increases announced in the third quarter of
2007. However, additional mill maintenance outages
are planned for the first quarter, and freight and
input costs are expected to rise, particularly for wood
and energy. Manufacturing operations should be
favorable compared with the fourth quarter.

E U R O P E A N I N D U S T R I A L P A C K A G I N G net sales
for 2007 were $1.1 billion, up from $1.0 billion in
2006 and $880 million in 2005. Sales volumes were
about flat as early stronger demand in the industrial
segment weakened in the second half of the year.
Operating profits in 2007 were $88 million compared
with $69 million in 2006 and $53 million in 2005.
Sales margins improved reflecting increased sales
prices for boxes. Conversion costs were favorable as
the result of manufacturing improvement programs.

Entering the first quarter of 2008, sales volumes
should be strong seasonally across all regions as the
winter fruit and vegetable season continues. Profit
margins, however, are expected to be somewhat
lower.

A S I A N I N D U S T R I A L P A C K A G I N G net sales for
2007 were $265 million compared with $180 million
in 2006. In 2005, net sales were $105 million sub-
sequent
to International Paper’s acquisition of a
majority interest in this business in August 2005.
Operating profits totaled $6 million in 2007 and $3
million in 2006, compared with a loss of $4 million in
2005.

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, freight 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 12%
compared with 2006 and 24% compared with 2005.
Operating profits rose 15% from 2006 and 24% from
2005 levels. Benefits from improved average sales
price realizations ($52 million), higher sales volumes
for U.S. and European coated paperboard ($9
million), favorable mill operations ($14 million) and
contributions from International Paper & Sun
Cartonboard Co., Ltd. acquired in 2006 ($16 million),
were partially offset by higher raw material and
energy costs ($53 million), an unfavorable mix of
products sold ($4 million), increased freight costs ($5
million) and other costs ($3 million).

Consumer Packaging

In millions

Sales

Operating Profit

2007

$3,015

$ 198

2006

$2,685

$ 172

2005

$2,435

$ 160

N O R T H A M E R I C A N C O N S U M E R P A C K A G I N G net
sales were $2.4 billion in both 2007 and 2006 com-
pared with $2.2 billion in 2005. Operating earnings of
$143 million in 2007 improved from $129 million in
2006 and $121 million in 2005.

Coated paperboard sales volumes increased in 2007
compared with 2006, particularly for folding carton
board, reflecting improved demand. Average sales
price realizations substantially improved in 2007 for
both folding carton board and cup stock. The impact
of the higher sales prices combined with improved
manufacturing performance at our mills more than
the negative effects of higher wood and
offset
energy costs.

Foodservice sales volumes were slightly higher in
2007 than in 2006. Average sales prices were also
higher reflecting the realization of price increases

implemented to recover raw material cost increases.
In addition, a more favorable mix of hot cups and
food containers led to higher average margins. Raw
material costs for bleached board and polystyrene
were higher than in 2006, but these increases were
partially offset by improved manufacturing costs
reflecting increased productivity and reduced waste.

Shorewood sales volumes in 2007 declined from
2006 levels due to weak demand in the home enter-
tainment, tobacco and display markets, although
demand was stronger in the consumer products
segment. Sales margins declined from 2006 reflect-
ing a less favorable mix of products sold. Raw
material costs were higher for bleached board, but
this impact was more than offset by improved
manufacturing operations and lower operating costs.
Charges to restructure operations also impacted
2007 results.

Entering 2008, coated paperboard sales volumes are
expected to be about even with the fourth quarter of
2007, while average sales price realizations are
expected to slightly improve. Earnings should bene-
fit from fewer planned mill maintenance outages
compared with the 2007 fourth quarter. However,
costs for wood, polyethylene and energy are
expected to be higher. Foodservice results are
expected to benefit from increased sales volumes
and higher sales price realizations. Shorewood sales
volumes for the first quarter 2008 are expected to
seasonally decline, but this negative impact should
be partially offset by benefits from cost improve-
ments associated with prior-year
restructuring
actions.

E U R O P E A N C O N S U M E R P A C K A G I N G net sales in
2007 were $280 million compared with $230 million
in 2006 and $190 million in 2005. Sales volumes in
2007 were higher than in 2006 reflecting stronger
market demand and improved productivity at our
Kwidzyn mill. Average sales price realizations also
improved in 2007. Operating earnings in 2007 of $37
million declined from $41 million in 2006 and $39
million in 2005. The additional contribution from
higher net sales was more than offset by higher
input costs for wood, energy and freight.

Entering 2008, sales volumes and prices are
expected to be comparable to the fourth quarter.
Machine performance and sales mix are expected to
improve; however, wood costs are expected to be
higher, especially in Russia due to strong demand
ahead of
increases, and energy costs are
anticipated to be seasonally higher.

tariff

A S I A N C O N S U M E R P A C K A G I N G net sales were
$330 million in 2007 compared with $50 million in
2006, which reflects the acquisition of a 50% owner-
ship interest in International Paper & Sun Carton-
board Co., Ltd. during the fourth quarter of 2006.
Operating earnings in 2007 were $18 million and $2
million in 2006.

Distribution

Our Distribution business, represented by our xpedx
business, markets a diverse array of products and
supply chain services to customers in many business
segments. Customer demand is generally sensitive
to changes in general economic conditions, although
the commercial printing segment is also dependent
on corporate advertising and promotional spending.
Distribution earnings and cash flows are typically
stable. Providing customers with the best choice and
value in both products and supply chain services is a
efficient
key
and
customer
focused working capital management are key factors
in this segment’s profitability.

factor. Additionally,

cost-effective

competitive

logistics,

service,

Distribution

In millions

Sales

Operating Profit

2007

$7,320

$ 146

2006

$6,785

$ 128

2005

$6,380

D I S T R I B U T I O N ’ S 2007 annual sales (including
acquisitions) increased 8% from 2006 and 15% from
2005 while operating profits in 2007 increased 14%
and 74% compared with 2006 and 2005, respectively.

Annual sales of printing papers and graphic arts
supplies and equipment totaled $4.7 billion in 2007
compared with $4.3 billion in 2006 and $4.1 billion in
2005 reflecting an increased focus on the publication
and catalogue markets. Revenues for mill direct sales
were up 19% from 2006 and 25% from 2005. Stock
sales were up 3% from 2006 and 10% from 2005.
Trade margins for printing papers decreased from
2006 and 2005 reflecting an increase in lower margin
direct sales. The sales increases also reflect con-
tributions from the August 2007 Central Lewmar
acquisition. Revenue from packaging products was
$1.5 billion for 2007, substantially unchanged from
2006 revenues and up from $1.4 billion in 2005.
Trade margins for packaging products increased in
2007 compared with 2006 and 2005, reflecting a
more favorable product mix. Facility supplies annual
revenue was $1.1 billion in 2007 compared to $1.0
billion in 2006 and $941 million in 2005 principally
reflecting increased sales volume. Trade margins for
2007 decreased compared with 2006 and 2005 as a

result of a less favorable mix of products sold. Oper-
ating profit was $146 million in 2007 compared to
$128 million in 2006 and $84 million in 2005. Higher
revenues were the primary factor in the operating
profit improvement.

Looking ahead to the first quarter 2008, sales vol-
umes are expected to be seasonally lower. However,
reductions in operating expenses should partially
offset the effect of this decline on operating profits.

Forest Products

Forest Products currently manages approximately
300,000 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. However, with the significant decline
in forestland acreage due to sales of forestlands
under the Company’s Transformation Plan in 2006,
future operations will be largely driven by pricing
and demand for real estate and forestland sales.

Forest Products

In millions

Sales

Operating Profit:

Forest Resources -

Sales of Forestlands

Harvest & Recreational Income

Forestland Expenses

Real Estate Operations

Operating Profit

2007

$485

2006

2005

$ 765

$ 995

$437

$ 447

$ 400

(23)

222

(115)

124

269

(146)

198

$471

$ 678

$ 721

Sales in 2007 decreased 37% from 2006 and 51%
from 2005. Operating profits were down 31% from
2006 and 35% from 2005. As part of the Company’s
announced Transformation 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 oper-
ations on maximizing the value from the sale of its
remaining forestland and real estate properties.

Operating profits from stumpage sales and recrea-
tional income were $25 million in 2007, compared
with $222 million in 2006 and $269 million in 2005,
reflecting the significant
reduction in forestland
acreage. Operating profits from forestland sales
were $437 million in 2007 compared with $447 mil-
lion in 2006 and $400 million in 2005. Operating

expenses decreased to $23 million from $115 million
in 2006 and $146 million in 2005, reflecting the
reduced level of operations. Operating profits for the
Real Estate division, which principally
sells
higher-and-better-use properties, were $32 million,
$124 million and $198 million in 2007, 2006 and 2005,
respectively.

Looking forward to 2008, operating profits are
reflecting the
expected to decline significantly,
reduced level of forestland holdings. Operating earn-
ings will primarily reflect
the periodic sales of
remaining acreage, and can be expected to vary
from quarter to quarter depending on the timing of
sale transactions.

Specialty Businesses and Other

The Specialty Businesses and Other segment princi-
pally includes the operating results of the Arizona
Chemical business as well as certain smaller busi-
nesses. The Arizona Chemical business was sold in
February 2007. Thus, operating results in 2007 reflect
only two months of activity.

Specialty Businesses and Other

In millions

Sales

Operating Profit

2007

$135

$ 6

2006

$935

$ 61

2005

$915

$ 4

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, raw material and transportation 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 operat-
ing cycle.

As part of our 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.

Financing activities in 2007 continued the focus on
the Transformation Plan objectives of returning
value
additional
repurchases of common stock and strengthening
the balance sheet through further reductions of
debt.

shareholders

through

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, 2007, the Com-
pany held long-term credit ratings of BBB (stable
outlook) and Baa3 (stable outlook) by Standard &
Poor’s
Investor Services
(Moody’s), respectively.

(S&P) and Moody’s

Cash Provided by Operations

Cash provided by continuing operations totaled $1.9
billion, compared with $1.0 billion for 2006 and $1.2
billion for 2005. The 2006 amount is net of a $1.0 bil-
lion voluntary cash pension plan contribution made
in the fourth quarter of 2006. The major components
of cash provided by continuing operations are earn-
from continuing operations adjusted for
ings
non-cash income and expense items and changes in
working capital. Earnings from continuing oper-
ations, adjusted for non-cash items and excluding
the pension contribution in 2006, increased by $123
million in 2007 versus 2006. This compared with an
increase of $584 million for 2006 over 2005.

International Paper’s investments in accounts receiv-
able and inventory less accounts payable and accrued
liabilities, totaled $1.7 billion at December 31, 2007.
Cash used for these working capital components
increased by $539 million in 2007, compared with a
$354 million increase in 2006 and a $558 million
increase in 2005.

Investment Activities

Investment activities in 2007 included the receipt of
$1.7 billion of additional cash proceeds from divest-
itures, and the use of $239 million for acquisitions
and $578 million for an investment in a 50% equity
interest in Ilim Holding S.A. in Russia.

Capital spending from continuing operations was
$1.3 billion in 2007, or 119% of depreciation and
amortization, comparable to $1.0 billion, or 87% of
depreciation and amortization in 2006, and $992 mil-
lion, or 78% of depreciation and amortization in 2005.
The increase in 2007 reflects spending for the con-
version of the Pensacola paper machine to the pro-
duction of linerboard, a fluff pulp project at our
Riegelwood mill, and a specialty pulp production
project at our Svetogorsk mill in Russia, all of which
were part of the Company’s Transformation Plan.

The following table presents capital spending from
continuing operations by each of our business
segments for the years ended December 31, 2007,
2006 and 2005.

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Subtotal

Corporate and other

2007

2006

$ 556

$ 523

405

276

1,265

257

130

988

2005

$536

180

182

973

Total from continuing operations

$1,288

$1,009

$992

We expect capital expenditures in 2008 to be about
to depreciation and
$1.1 billion, or about equal
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

On August 24, 2007, International Paper completed
the acquisition of Central Lewmar LLC, a large pri-
vately held paper and packaging distributor in the
United States, for $189 million. International Paper’s
distribution business, xpedx, now operates Central
Lewmar as a business unit within its multiple brand
strategy. Central Lewmar’s financial position and
results of operations have been included in Interna-
tional Paper’s consolidated financial statements
since its acquisition on August 24, 2007.

In October 2005, International Paper had acquired
approximately 65% of Compagnie Marocaine des
in Morocco for
Cartons et des Papiers (CMCP)
approximately $80 million in cash plus assumed debt
of approximately $40 million. On July 31, 2007, the
Company purchased the remaining shares of CMCP
for approximately $40 million. The Moroccan pack-
aging company is now wholly owned by Interna-
tional Paper and fully managed as part of
the
Company’s European Container business.

In May 2006, the Company purchased the remaining
25% third-party interest in International Paper Dis-
tribution Limited for $21 million. The financial posi-
tion and results of operations of this acquisition have
been included in International Paper’s consolidated
financial statements from the date of acquisition in
2005.

Exchanges

On February 1, 2007, the Company completed the
non-cash exchange of certain 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 certain forestland operations includ-
ing 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 exchange improved the
Company’s competitive position by adding a globally
cost-competitive paper mill, thereby expanding the
Company’s uncoated freesheet capacity in Latin
America and providing additional growth oppor-
tunities in the region. The exchange was accounted
for based on the fair value of assets exchanged,
resulting in the recognition in the 2007 first quarter
of a pre-tax gain of $205 million ($159 million after
taxes) representing the difference between the fair
value and book value of the assets exchanged. This
gain is included in Net (gains) losses on sales and
impairments of businesses in the accompanying
consolidated statement of operations. The net assets
exchanged were included as Assets held for
exchange in the accompanying consolidated balance
sheet at December 31, 2006.

Joint Ventures

On October 5, 2007,
International Paper and Ilim
Holding S.A. announced the completion of the for-
mation of a 50:50 joint venture to operate in Russia
as Ilim Group. To form the joint venture, Interna-
tional Paper purchased 50% of Ilim Holding S.A.
(Ilim) for approximately $620 million, including $545
million in cash and $75 million of notes payable (see
Note 12). A key element of the proposed joint ven-
ture strategy is a long-term investment program in
which the joint venture will
invest, through cash
from operations and additional borrowings by the
joint venture, approximately $1.5 billion in Ilim’s four
mills over approximately five years. This planned
investment in the Russian pulp and paper industry
will be used to upgrade equipment, increase pro-
duction capacity and allow for new high-value
uncoated paper, pulp and corrugated packaging
product development.

International Paper is accounting for its investment
in Ilim using the equity method of accounting. Due to
the complex organization structure of Ilim’s oper-
ations, and the extended time required to prepare
information in accordance
consolidated financial

with accounting principles generally accepted in the
United States, the Company is reporting its share of
Ilim’s results of operations on a one-quarter lag
basis. Accordingly, the accompanying consolidated
financial statements do not include any operating
results for Ilim for any period presented, while the
consolidated balance sheet as of December 31, 2007
includes this $620 million investment in Ilim in the
caption Investments.

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
second joint venture, the Shandong International
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 ventures
did not have a material effect on the Company’s
consolidated results of operations in either 2007 or
2006.

With the exception of Ilim, the above acquisitions,
exchanges and joint ventures were accounted for
using the purchase method with their operating
results included in the consolidated statement of
operations from the dates of acquisition.

Financing Activities

2 0 0 7 : Financing activities during 2007 included debt
issuances of $78 million and retirements of $875 mil-
lion, for a net reduction of $797 million.

In December 2007, International Paper repurchased
$96 million of 6.65% notes with an original maturity
date of December 2037. Other reductions in the
fourth quarter of 2007 included the repayment of
$147 million of 6.5% debentures that matured and
the payment of $42 million for various environ-
mental and industrial development bonds with
coupon rates ranging from 4.25% to 5.75% that also
matured within the quarter.

In October 2007,
International Paper Investments
(Luxembourg) S.ar.l, a wholly-owned subsidiary of
International Paper, issued $75 million of long-term
notes with an initial interest rate of LIBOR plus 100
basis points and a maturity date in April 2009, in
connection with its investment in the Ilim Holding
S.A. joint venture.

In the second quarter of 2007, International Paper
repurchased $35 million of 5.85% notes with an
original maturity in October 2012.

In March 2007, Luxembourg repaid $143 million of
long-term debt with an interest rate of LIBOR plus 40
basis points and a maturity date in November 2010.
Other debt activity in the first quarter included the
repayment of $198 million of 7.625% notes that
matured within the quarter.

International Paper utilizes interest rate swaps to
change the mix between fixed and variable rate debt
and manage interest expense. At December 31, 2007,
International Paper had interest rate swaps with a
total notional amount of $1.7 billion with maturities
ranging from one to nine years. During 2007, exist-
ing swaps increased the weighted average cost of
debt from 6.51% to an effective rate of 6.62%. The
inclusion of
income from
the offsetting interest
short-term investments reduced this effective rate to
4.36%.

Other
financing activity in 2007 included the
repurchase of 33.6 million shares of International
Paper common stock for approximately $1.2 billion,
and the issuance of 5.2 million shares under various
incentive plans, including stock option exercises that
generated $128 million of cash.

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,
Luxembourg 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 repayment of $143 million of 7.875%
notes and $96 million of 7% debentures, all maturing
within the quarter.

receivables securitization program. At December 31,
2006, International Paper had repaid all of its com-
mercial paper borrowed under
receivable
securitization program.

its

In February 2006, International Paper repurchased
$195 million 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.

At December 31, 2006, International Paper had inter-
est 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 inclusion of the offsetting interest income from
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, Luxembourg
issued $700 million of long-term debt with an initial
interest rate of LIBOR plus 40 basis points that can
vary depending upon the credit rating of the Com-
pany, and a maturity date in November 2010. Addi-
tionally, 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
the Company, and a
upon the credit rating of
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.

International Paper repaid approx-
In June 2005,
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.

Dividend payments totaled $436 million in 2007,
$485 million in 2006 and $490 million in 2005. The
dividend
International
remained at $1.00 per share during the three-year
period.

common

Paper

stock

Common shareholders’ equity increased by approx-
imately $700 million during 2007, principally reflect-
ing net earnings for the year ($1.2 billion), changes in
cumulative foreign currency translation adjustment
($591 million), and changes in minimum pension
by
liabilities
repurchases of common stock ($1.2 billion) and
payments of dividends ($436 million).

($491 million),

partially

offset

Cash and temporary investments totaled $905 mil-
lion and $1.6 billion at December 31, 2007 and 2006,
respectively.

Off-Balance Sheet Variable Interest Entities

During 2006 in connection with the sale of approx-
imately 5.6 million acres of forestlands under the
the Company
Company’s Transformation Plan,

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 should not
consolidate its investments in these entities. During
2006, these entities acquired an additional $4.8 bil-
lion of International Paper debt securities for cash,
resulting in a total of approximately $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 International Paper debt obligations
held by the entities as of December 31, 2007.

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 2008

International Paper expects to be able to meet pro-
jected capital expenditures, service existing debt and
meet working capital and dividend requirements
during 2008 through current cash balances and cash
from operations, supplemented as required by its
various existing credit facilities. International Paper
has approximately $2.5 billion of committed bank
credit agreements, which management believes is
adequate to cover expected operating cash flow
variability during our industry’s economic cycles.
The agreements generally provide for interest rates
at a floating rate index plus a pre-determined margin
dependent upon International Paper’s credit rating.
The agreements include a $1.5 billion fully commit-
ted revolving bank credit agreement that expires in
March 2011 and has a facility fee of 0.10% payable
quarterly. These agreements also include up to $1.0
billion of available commercial paper-based financ-
ings under a receivables securitization program that
expires in October 2009 with a facility fee of 0.10%.
At December 31, 2007, there were no borrowings
under either the bank credit agreements or receiv-
ables securitization program.

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
flows. Funding decisions will be guided by our capi-
tal structure planning objectives. 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, 2007. 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. At December 31, 2007, the Company held
long-term credit ratings of BBB (stable outlook) and
Baa3 (stable outlook) by Standard & Poor’s (S&P)
and Moody’s
(Moody’s),
respectively. The Company currently has short-term
credit ratings by S&P and Moody’s of A-2 and P-3,
respectively.

Services

Investor

Contractual obligations for future payments under
existing debt and lease commitments and purchase
obligations at December 31, 2007, were as follows:

In millions

2008

2009

2010 2011 2012 Thereafter

Maturities of long-term

debt (a)

$ 267 $1,300 $1,069 $396 $532

$3,056

Debt obligations with right

of offset (b)

Lease obligations
Purchase obligations (c)

–

136
1,953

–

116
294

–

67
84
101
261 235 212

5,000

92
1,480

Total (d)

$2,356 $1,710 $1,431 $715 $811

$9,628

(a) Total debt includes scheduled principal payments only.

(b) Represents debt obligations borrowed from non-consolidated

variable interest entities for which International Paper has, and

intends to affect, a legal right to offset these obligations with

investments held in the entities. Accordingly,

in its con-

solidated balance sheet at December 31, 2007,

International

Paper has offset approximately $5.0 billion of interests in the

entities against this $5.0 billion of debt obligations held by the

entities (see Note 8 in the accompanying consolidated financial

statements).

into at the time of the Transformation Plan forestland sales.

(d) Not included in the above table are unrecognized tax benefits

of approximately $280 million.

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.

During 2007, the Company completed the sales of its
Beverage Packaging operations,
its Kraft Papers
business, its Arizona Chemical business, and most of
its Wood Products business. This substantially com-
pleted divestitures under the Company’s Trans-
formation Plan. Since the announcement of the plan,
divestiture proceeds have been used: (1) to reduce
long-term debt and fund a voluntary contribution to
the Company’s U.S. qualified pension plan, (2) to
return value to shareholders through the purchase of
its common stock, and (3) for identified selective
the Company pur-
reinvestments. Also in 2007,
chased an additional 33.6 million shares of
its
common stock for approximately $1.2 billion. Addi-
tionally, the Company is continuing to make prog-
ress on improving its key businesses. Excluding
Forest Products and divested businesses, operating
profits as a percent of sales has improved by 470
basis points since 2005. Going forward, the Com-
pany intends to continue to focus on all factors
affecting margin expansion, including price.

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.

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 their application, include SFAS No. 5,
“Accounting for Contingencies,” SFAS No. 144,
“Accounting for the Impairment or Disposal of
Long-Lived Assets,” SFAS No. 142, “Goodwill and
Other Intangible Assets,” SFAS No. 87, “Employers’
106,
Accounting

Pensions,” SFAS No.

for

“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 Bene-
fit Pension and Other Postretirement Plans,” and
SFAS No. 109, “Accounting for Income Taxes.” The
following is a discussion of the impact of these
accounting policies on International Paper:

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 the Company’s
former Masonite business
judgments
regarding projections of
future claims rates and
amounts. International Paper utilizes a third party
consultant to assist in developing these estimates.
Liabilities for environmental matters require evalua-
tions of relevant environmental regulations and
future remediation alternatives and
estimates of
costs.
International Paper determines these esti-
mates after a detailed evaluation of each site.

require

L O N G - L I V E D A S S E T S A N D
I M P A I R M E N T O F
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
goodwill
impairment exists when the carrying
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

P E N S I O N
B E N E F I T
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-

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

2008

2007

2006

2005

Discount rate

6.20% 5.75% 5.50% 5.75%

Expected long-term return on plan

assets

Rate of compensation increase

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

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

2008

2007

2006

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

2018

2017

2011

International Paper determines
these actuarial
assumptions, after consultation with our actuaries,
on December 31 of each year to calculate liability
information as of that date and pension and 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.

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) 2008
pension expense by approximately $20 million, while
a (decrease) increase of 0.25% in the discount rate
would (increase) decrease pension expense by
approximately $29 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.

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.

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-
ates. Where the Company believes that a tax position
is supportable for income tax purposes, the item is
included in its income tax returns. Where treatment
of a position is uncertain, a liability is recorded based
upon the expected most likely outcome taking into
consideration the technical merits of the position
based on specific tax regulations and facts of each
matter. Changes to recorded liabilities are only made
when an identifiable event occurs that changes the
likely outcome, such as settlement with the relevant
tax authority, the expiration of statutes of limitation
for the subject tax year, change in tax laws, or a
recent court case that addresses the matter.

While International Paper believes that these judg-
ments and estimates are appropriate and reasonable
under the circumstances, actual resolution of these
from recorded estimated
matters may differ
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, 2007, 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

$8,476

$8,540

307

632

180

–

162

–

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

Year

2007
2006

2005

2004

2003

Return

9.6%
14.9%

11.7%

14.1%

26.0%

Year

2002

2001

2000

1999

1998

Return

(6.7)%

(2.4)%

(1.4)%

21.4%

10.0%

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 for the U.S. pension plans over the next
fiscal year are $119 million and $28 million,
respectively.

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

In millions

Pension expense

2007

2006

2005

2004

2003

U.S. plans (non-cash)

$210

Non-U.S. plans

Postretirement expense

U.S. plans

Non-U.S. plans

$377

$243

$111

$ 60

Net expense

$238

$404

$281

$181

$129

The decrease in 2007 U.S. pension expense princi-
pally reflects lower amortization of unrecognized
actuarial losses, an increase in the assumed discount
rate to 5.75% in 2007 from 5.50% in 2006, the earn-
ings on the $1.0 billion contribution made to the plan
during the fourth quarter of 2006, and a decrease in
active participants due to divestitures. The increase
in 2006 U.S. pension expense was principally due to
a change in the mortality assumption to use the
Retirement Protection Act 2000 Tables and the use of
a lower assumed 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 2007, 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

2009 (a)

2008 (a)

$ 63

$114

$100

$149

(a) Based on 12/31/07 assumptions.

The Company estimates that it will record net pen-
sion expense of approximately $114 million for its
U.S. defined benefit plans in 2008, with the decrease
from expense of $210 million in 2007 principally
reflecting an increase in the assumed discount rate
to 6.20% in 2008 from 5.75% in 2007 and lower
amortization of unrecognized actuarial losses. Net
postretirement benefit costs in 2008 will
increase
primarily as a result of increased amortization due to
2007 sales and divestiture activity which accelerated
recognition of amortization credits, demographic
assumption changes which reflected the results of an
experience study including the use of earlier
assumed retirement ages, and a change to a higher
medical trend assumption.

The market value of plan assets for International
Paper’s U.S. qualified pension plan at December 31,
2007 totaled approximately $8.5 billion, consisting of
approximately 59% equity securities, 31% debt secu-
rities, and 10% real estate and other assets. Plan
assets did not include International Paper common
stock.

International Paper makes contributions that are
to fully fund its actuarially determined
sufficient
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. No con-
tributions were made in 2007, nor are any con-
tributions anticipated in 2008. The nonqualified plan
is only funded to the extent of benefits paid, which
are expected to be $27 million in 2008.

Interna-
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 .
tional 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 prospective method. Under this method,
expense for stock options is recorded over the
related service period based on the grant-date fair
market value.

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, 2007, 28 million options were out-
standing with exercise prices ranging from $29.31 to
$66.81 per share. At December 31, 2006, 36 million
options were outstanding with exercise prices rang-
ing 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 25%, 59% and (142%) for 2007, 2006 and 2005,
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 2007 was 30% of pre-tax earnings
compared with 29% in 2006 and 20% in 2005. The
increase in the rate in 2007 reflects a higher pro-
portion of earnings in higher tax rate jurisdictions.
We estimate that the 2008 effective income tax rate
will be 32-33% based on expected earnings and
business conditions, which are subject to change.

RECENT ACCOUNTING DEVELOPMENTS

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

B U S I N E S S C O M B I N A T I O N S . In December 2007, the
Financial Accounting Standards Board (FASB) issued
SFAS No. 141(R), “Business Combinations.” State-
ment 141(R) establishes principles and requirements
for how an acquiring entity in a business combina-

tion recognizes and measures the assets acquired
and liabilities assumed in the transaction; establishes
the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to
investors and other users all of the information
needed to evaluate and understand the nature and
financial effect of the business combination.

This statement will be effective prospectively for
business combinations for which the acquisition date
is on or after the beginning of the first annual report-
ing period beginning on or after December 15, 2008
(calendar year 2009).

I N

I N T E R E S T S

F I N A N C I A L

S T A T E M E N T S .

N O N C O N T R O L L I N G

C O N-
In
S O L I D A T E D
December 2007, the FASB also issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51.” This state-
ment clarifies that a noncontrolling (minority) inter-
est in a subsidiary is an ownership interest in the
entity that should be reported as equity in the con-
solidated financial statements. It also requires con-
solidated net
income to include the amounts
attributable to both the parent and noncontrolling
interest, with disclosure on the face of the con-
solidated income statement of the amounts attrib-
uted to the parent and to the noncontrolling interest.
This statement will be effective prospectively for
fiscal years beginning after December 15, 2008
(calendar year 2009), with presentation and dis-
closure requirements applied retrospectively to
comparative financial statements. The Company is
currently evaluating the provisions of this statement.

F A I R V A L U E O P T I O N F O R F I N A N C I A L A S S E T S
A N D F I N A N C I A L L I A B I L I T I E S . In February 2007,
the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement
No. 115.” This statement permits an entity to meas-
ure certain financial assets and financial liabilities at
fair value, which would result in the reporting of
unrealized gains and losses in earnings at each
subsequent reporting date. The fair value option may
be elected on an instrument-by-instrument basis,
with few exceptions, as long as it is applied to the
instrument in its entirety. The statement establishes
presentation and disclosure requirements to help
financial statement users understand the effect of an
entity’s election on its earnings, but does not elimi-
nate the disclosure requirements of other accounting
standards. This statement will be effective as of the
beginning of the first fiscal year that begins after
November 15, 2007 (January 1, 2008), and is to be

applied prospectively as of the beginning of the year
in which it is initially applied. The Company elected
not to apply the fair value option to any of its finan-
cial assets or liabilities.

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-
M E N T P L A N S . 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 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 year-end balance sheet. It also requires a com-
pany to measure its plan assets and benefit obliga-
tions as of its year-end balance sheet date beginning
with fiscal years ending after December 15, 2008.
The Company adopted the provisions of this stan-
dard as of December 31, 2006, recording an addi-
tional liability of $492 million and an after-tax charge
to Accumulated other comprehensive income of
$350 million in 2006 for its defined benefit and post-
retirement 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 issued SFAS No. 157, “Fair Value
Measurements,” which provides a single definition
of fair value, together with a framework for measur-
ing 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
level being quoted prices in active markets. This
statement is initially effective for financial statements
issued for fiscal years beginning after November 15,
2007 (calendar year 2008), 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. For all nonrecurring fair value measure-
the
ments of nonfinancial assets and liabilities,
statement is effective for fiscal years beginning after
November 15, 2008 (calendar year 2009). The Com-
pany 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 FASB Staff Position (FSP) No. AUG
AIR-1, “Accounting for Planned Major Maintenance
Activities,” which permits the application of three
alternative methods of accounting for planned
major maintenance activities: the direct expense,
built-in-overhaul, and deferral methods. The FSP

was effective for the first fiscal year beginning after
December 15, 2006. International Paper adopted the
direct expense method of accounting for these
costs in the first quarter of 2007 with no impact on
its annual consolidated financial statements.

the

financial

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. 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
recognition and
statement
measurement of a tax position taken or expected to
be taken in tax returns. Specifically, the financial
statement effects of a tax position may be recog-
nized only when it is determined that it is “more
likely than not” that, based on its technical merits,
the tax position will be sustained upon examination
by the relevant tax authority. The amount recog-
nized shall be measured as the largest amount of
tax benefits that exceed a 50% probability of being
interpretation also expands
recognized. This
income tax disclosure requirements. International
Paper applied the provisions of this interpretation
beginning in the first quarter of 2007. The adoption
of this interpretation resulted in a charge to the
beginning balance of retained earnings of $94 mil-
lion at the date of adoption.

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
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 was
financial
effective for International Paper for all
instruments acquired,
to a
remeasurement event occurring after January 1,
2007. The adoption of SFAS No. 155 in 2007 did not
impact on the Company’s con-
have a material
solidated financial statements.

issued, or subject

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 State-
ment No. 143 refers to the fact that a legal obligation
to perform an asset retirement activity is uncondi-
tional even though uncertainty exists about the tim-
ing and (or) method of settlement. Uncertainty about
the timing and (or) method of settlement of a condi-
tional 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 obligation. International Paper
adopted the provisions of this interpretation in the
fourth quarter of 2005 with no material effect on its
consolidated financial statements.

The Company’s principal conditional asset 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
record a liability for such
Company does not
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 FSP FIN 46(R)-5, “Implicit Variable
Interests Under FASB Interpretation No. 46(R), Con-
solidation of Variable Interest 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 is a matter of judgment that depends on the
relevant facts and circumstances. International Paper
adopted the provisions of FSP FIN 46(R)-5 in the
second quarter of 2005, with no material effect on its
consolidated financial statements.

LEGAL PROCEEDINGS

Environmental Matters

performance,

International Paper is subject to extensive federal
and state environmental regulation as well as similar
regulations in all other jurisdictions in which we
operate. Our continuing objectives are to: (1) control
emissions and discharges from our facilities into the
air, water and groundwater to avoid adverse impacts
improve-
on the environment, (2) make continual
ments
and
environmental
(3) maintain 100% compliance with applicable laws
and regulations. A total of $59 million was spent in
2007 for capital projects to control environmental
releases into the air and water, and to assure
environmentally sound management and disposal of
waste including the costs to comply with the
Environmental Protection Agency’s (EPA) Cluster
Rule and Industrial Boiler MACT regulations. We
expect to spend approximately $27 million in 2008
for similar capital projects. Amounts to be spent for
environmental control projects in future years will
depend on new laws and regulations and changes in
legal
requirements and environmental concerns.
Taking these uncertainties into account, our prelimi-
nary
environmental
appropriations during the year 2009 is approximately
$26 million, and during the year 2010 is approx-
imately $31 million. This reduced capital forecast for
2008, 2009 and 2010 reflects the reduction in Cluster
Rule spending and completion of significant interna-
tional environmental improvement projects, which
accounted for $15 million of the 2007 spending.

additional

estimate

for

intake

allocations, water

The EPA is continuing the development of new pro-
grams and standards such as additional wastewater
structure
discharge
requirements and national ambient air quality stan-
dards. When regulatory requirements for new and
changing standards are finalized, we will add any
resulting future cost requirements to our expenditure
forecast. International Paper has been named as a
potentially responsible party in environmental
remediation actions under various federal and state
laws,
including the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA).

Most of these proceedings involve the cleanup of
hazardous substances at large commercial landfills
that received waste from many different sources.
While joint and several liability is authorized under
CERCLA and equivalent state laws, as a practical
liability for CERCLA cleanups is allocated
matter,
among the many potential
responsible parties.
Based upon previous experience with respect to
cleanup of hazardous substances and on presently
International Paper believes
available information,
that its liability is not likely to be significant at 45
such sites and that its liability at 47 sites is likely to
be significant, but not material
to International
Paper’s consolidated financial statements. Related
costs are recorded in the financial statements when
they are probable and reasonably estimable.
International Paper believes that
the probable
liability associated with these 92 matters is approx-
imately $38 million.

In addition to the above proceedings, other
typically associated with the
remediation costs,
cleanup of hazardous substances at International
Paper current or former facilities, are recorded as
liabilities in the balance sheet, totaled approximately
these actions is not
$46 million. Completion of
expected to have a material adverse effect on our
consolidated financial statements.

As of January 31, 2008, 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.

Climate Change Regulation

Since 1997, when an international conference on
global warming concluded an agreement known as
the Kyoto Protocol, which called for reductions of
certain emissions that may contribute to increases in
atmospheric greenhouse gas concentrations, there
have been a range of national, sub-national and
international regulations proposed or implemented
focusing on greenhouse gas reduction. These actual
or proposed regulations do or will apply in countries
where we currently have interests, or may in the
future have, manufacturing facilities or investments.

In the United States, the U.S. Congress is actively
considering legislation to reduce emissions of
greenhouse gases. In addition, several states have

gas

greenhouse

already taken legal measures to require the reduc-
tion of emissions of greenhouse gases by companies
and public utilities, primarily through the planned
development
emission
inventories and/or regional greenhouse gas cap and
trade programs. Also, the U.S. Supreme Court’s
decision on April 2, 2007 in Massachusetts, et al. v.
EPA , that greenhouse gases fall under the federal
Clean Air Act’s definition of “air pollutant,” may
result in future regulation of greenhouse gas emis-
sions from stationary sources under certain Clean Air
Act programs or other potential regulations. Passage
of climate control legislation or other regulatory ini-
tiatives by Congress or various states of the U.S., or
the adoption of regulations by the Environmental
Protection Agency or analogous state agencies that
restrict emissions of greenhouse gases in areas in
which we conduct business, may have a material
effect on our operations in the United States. We
expect that we will not be disproportionately affected
by these measures as compared to typical owners of
comparable properties in the United States.

The European Union, under the Kyoto Protocol, has
committed to greenhouse gas reductions. We
believe that these measures will not have a material
effect on our European operations in 2008, although
they may have a material effect in the future. We
expect that we will not be disproportionately affected
by these measures as compared to typical owners of
comparable properties in the European Union.

The framework of the Kyoto Protocol does not apply
to “underdeveloped nations.” Brazil and China, two
countries where we have operations, are considered
underdeveloped nations by the Kyoto Protocol.
Although not subject to the Kyoto Protocol, Brazil
and China may adopt greenhouse gas regulation in
the future that may have a material effect on our
operations in these countries.

Regulation of greenhouse gases continues to evolve
in all countries in which we do business. While it is
likely that there will be increased regulation relating
to greenhouse gases and climate change, at this
stage it is not possible to estimate either a timetable
for implementation of any new regulations or our
costs of compliance.

Other Legal Matters

The Company is involved in various inquiries, admin-
istrative proceedings and litigation relating to con-
tracts, sales of property, environmental permits,
taxes, personal injury, labor and employment 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, will not have a
material adverse effect on its consolidated financial
statements.

EFFECT OF INFLATION

While inflationary increases in certain input costs,
such as energy, wood fiber and chemical costs, have
an impact on the Company’s operating results,
changes in general
inflation have had minimal
impact on our operating results in 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 also
export to, and compete with imports from, other
regions. As such, currency movements can have a
impacts on the
number of direct and indirect
Company’s financial statements. Direct
impacts
include the translation of international operations’
local currency financial statements into U.S. dollars.
Indirect impacts include the change in competitive-
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.

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, 2007 are
stated at cost, which approximates market due to
their short-term nature. Our
rate risk
exposure related to these investments was immate-
rial.

interest

We issue fixed and floating rate debt in a proportion
consistent with International Paper’s targeted 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 this capital
structure. At December 31, 2007 and 2006, the net
fair value liability of
instruments with
exposure to interest rate risk was approximately $3.4
billion and $3.8 billion, respectively. The potential
loss in fair value resulting from a 10% adverse shift
in quoted interest rates would have been approx-
imately
at
December 31, 2007 and 2006, respectively.

$150 million

$133 million

financial

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 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-
age risks associated with market
fluctuations in
energy prices. The net fair value of such outstanding
energy hedge contracts at December 31, 2007 and
2006 was approximately a $5 million and a $12 mil-
lion liability, respectively. At December 31, 2005, the
net fair value of such outstanding 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 $19 million and $10 million at
December 31, 2007 and 2006, respectively.

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, 2007 and
2006, the net fair value of financial instruments with
exposure to foreign currency risk was approximately
a $111 million asset and a $95 million asset,
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 $91 million and $43 million at
December 31, 2007 and 2006, 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 pages 41 and 42, and under
Item 8. Financial Statements and Supplementary
Data in Note 13 of the Notes to Consolidated Finan-
cial Statements on pages 77 through 79.

ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

FINANCIAL 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 are 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 reflect the reclassification of the European
coated paperboard business from Printing Papers to
Consumer Packaging.

INFORMATION BY INDUSTRY SEGMENT

NET SALES

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate and Intersegment Sales

2007

2006

2005

$ 6,530

$ 6,700

$ 6,980

5,245

3,015

7,320

485

135

(840)

4,925

2,685

6,785

765

935

(800)

4,625

2,435

6,380

995

915

(630)

Net Sales

$21,890

$21,995

$21,700

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 gains (losses) on sales and

2007

2006

2005

$1,101

$ 636

$ 434

501

198

146

471

2,423

(297)

(732)

(95)

–

399

172

128

678

2,074

(521)

(746)

(300)

4,788

(759)

219

160

721

1,622

(595)

–

(607)

(285)

258

–

impairments of businesses

327

(1,381)

(111)

Reversals of reserves no longer

required

–

Earnings From Continuing Operations

Before Income Taxes and Minority

Interest

$1,654

$ 3,188

$ 286

RESTRUCTURING AND OTHER CHARGES

EXTERNAL SALES BY MAJOR PRODUCT

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

2007

$41

–

2006

$ 54

2005

$184

–

Corporate

(3)

205

111

Restructuring and Other Charges

$95

$300

$340

ASSETS

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate and other (c)

2007

2006

2005

$ 8,650

$ 7,699

$ 7,893

4,486

3,285

1,875

984

4,867

4,244

2,840

1,596

274

498

6,883

4,042

2,673

1,624

2,234

652

9,653

Assets

$24,159

$24,034

$28,771

CAPITAL SPENDING

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Subtotal

Corporate and other

2007

2006

$ 556

$ 523

405

276

1,265

257

130

988

2005

$536

180

182

973

Total from Continuing Operations

$1,288

$1,009

$992

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Other (e)

Net Sales

2007

2006

2005

$ 6,216

$ 6,060

$ 6,435

5,240

2,659

7,286

354

135

5,111

2,638

6,743

676

767

4,591

2,379

6,389

1,205

701

$21,890

$21,995

$21,700

INFORMATION BY GEOGRAPHIC AREA

NET SALES (f)

In millions

United States (g)

Europe

Pacific Rim

Americas, other than U.S.

Net Sales

2007

2006

2005

$17,096

$17,811

$17,934

2,986

678

1,130

3,030

308

846

2,809

169

788

$21,890

$21,995

$21,700

EUROPEAN SALES BY INDUSTRY SEGMENT

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Specialty Businesses and Other (a)

2007

$1,500

1,078

297

2006

2005

$1,212

1,001

246

570

$1,175

851

210

572

European Sales

$2,986

$3,030

$2,809

LONG-LIVED ASSETS (h)

In millions

United States

Europe

Pacific Rim

Americas, other than U.S.

Corporate

2007

2006

2005

$ 6,905

1,540

244

1,981

241

$6,837

1,481

$ 8,776

1,408

214

574

146

644

282

DEPRECIATION AND AMORTIZATION (d)

Long-Lived Assets

$10,911

$9,252

$11,200

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate

2007

2006

2005

$ 470

$ 484

$ 664

240

211

–

137

233

228

126

218

165

126

(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 and minority interest.

Depreciation and Amortization

$1,086

$1,158

$1,274

(d) Includes cost of timber harvested.

(e) Includes sales of products not included in our major product lines.

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

(g) Export sales to unaffiliated customers were $1.5 billion in 2007,

$1.4 billion in 2006 and $1.5 billion in 2005.

(h) 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.

and asset safeguarding. The Company’s internal
control system is supported by written policies and
procedures, contains self-monitoring mechanisms,
and is audited by the internal audit function. Appro-
priate actions are taken by management to correct
deficiencies as they are identified.

financial

The Company has assessed the effectiveness of its
internal control over
reporting as of
December 31, 2007. In making this assessment, it
used the criteria described in “Internal Control –
Integrated Framework” issued by the Committee of
Sponsoring Organizations
Treadway
Commission (COSO). Based on this assessment,
management believes that, as of December 31, 2007,
the Company’s internal control over financial report-
ing is effective.

the

Paper

completed

International
non-cash
exchange of assets for the Luiz Antonio mill in Brazil
on February 1, 2007. In addition, the Company com-
pleted the acquisition of Central Lewmar LLC on
August 24, 2007. Due to the timing of these trans-
actions, we have excluded Luiz Antonio and Central
Lewmar from our evaluation of the effectiveness of
internal controls over financial reporting. For the
period ended December 31, 2007, sales and assets of
Luiz Antonio and Central Lewmar represented 3% of
total revenues and 4% of total assets.

The accompanying consolidated financial statements
have been audited by the independent registered
public accounting firm, Deloitte & Touche LLP. Dur-
ing its 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

registered public
independent
The Company’s
accounting firm, Deloitte & Touche LLP, has issued
its report on the effectiveness of the Company’s
internal controls 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 with
management follow-up.

audit

internal

function

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
and
the Company’s
independent auditors, and other matters set forth in
its charter. The Committee, which currently consists
of five independent directors, meets regularly with
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
the New York Stock
Charter takes into account
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, 2007,
including critical accounting policies and significant
management judgments, with management and the
independent auditors. The Committee’s
report
recommending the inclusion of such financial
statements in this Annual Report on Form 10-K will
be set forth in our Proxy Statement.

JOHN V. FARACI
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

TIM S. NICHOLLS
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
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, 2007, 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,
2007 and 2006, and the related consolidated state-
ments of operations, changes in common share-
holders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007. 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 the
standards of the Public Company Accounting Over-
sight 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 assess-
ing the accounting principles used and significant
estimates made by management, as well as evaluat-
ing 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, 2007 and 2006,
and the results of their operations and their cash

As discussed in Notes 4 and 9 to the consolidated
financial statements, the Company adopted Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109, effective
January 1, 2007. As discussed in Notes 4, 15 and 16
to the consolidated financial statements, the Com-
pany 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 123(R), effective December 31, 2006. As
discussed in Notes 1 and 17 to the consolidated
financial statements, the Company adopted State-
ment of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective January 1, 2006.

We have also audited, in accordance with the stan-
dards of the Public Company Accounting Oversight
Board (United States), the Company’s internal con-
trol over financial reporting as of December 31, 2007,
based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of
Sponsoring Organizations
Treadway
Commission and our report dated February 28, 2008
expressed an unqualified opinion on the Company’s
internal control over financial reporting.

the

Memphis, Tennessee
February 28, 2008

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

To the Shareholders of International Paper Company:

the

We have audited the internal control over financial
reporting of International Paper Company and sub-
sidiaries (the “Company”) as of December 31, 2007,
based on criteria established in Internal Control –
Integrated Framework issued by the Committee of
Sponsoring Organizations
Treadway
Commission. As described in the Report of
Management on Internal Controls Over Financial
Reporting, management excluded from its assess-
ment the internal control over financial reporting for
the Central Lewmar and the Luiz Antonio businesses,
which were acquired on August 24, 2007 and Febru-
ary 1, 2007, respectively, and whose financial state-
ments constitute 8% and 4% of net and total assets,
respectively, 3% of revenues, and 4% of net income
of the consolidated financial statement amounts as
of and for the year ended December 31, 2007.
Accordingly, our audit did not include the internal
control over
the Central
Lewmar and Luiz Antonio businesses. The Compa-
ny’s management
is responsible for maintaining
effective internal control over financial reporting and
for its assessment of the effectiveness of internal
included in the
control over financial reporting,
accompanying Report of Management on Internal
Controls Over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal
control over financial reporting based on our audit.

reporting for

financial

We conducted our audit in accordance with the
standards of the Public Company Accounting Over-
sight Board (United States). Those standards require
that we plan and perform the audit
to obtain
reasonable assurance about whether effective
internal control over financial reporting was main-
tained in all material respects. Our audit included
obtaining an understanding of internal control over
financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design
and operating effectiveness of internal control based
on the assessed risk, and performing such other
procedures as we considered necessary in the cir-
cumstances. We believe that our audit provides a
reasonable basis for our opinion.

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 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, the Company maintained, in all mate-
rial respects, effective internal control over financial
reporting as of December 31, 2007, 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, 2007 of the Company and our report
dated February 28, 2008 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 28, 2008

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 (gains) 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

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

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

2007
$21,890

2006
$21,995

2005
$21,700

16,060
1,831
1,086
1,034
169
95
–
(9)
–
(327)
–
297

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

1,654
415
24
1,215
(47)
$ 1,168

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

286
(407)
9
684
416
$ 1,100

$ 2.83
(0.11)
$ 2.72

$ 2.69
(0.48)
$ 2.21

$ 1.41
0.85
$ 2.26

$ 2.81
(0.11)
$ 2.70

$ 2.65
(0.47)
$ 2.18

$ 1.40
0.81
$ 2.21

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

CONSOLIDATED BALANCE SHEET

In millions, except per share amounts at December 31

A S S E T S
Current Assets

Cash and temporary investments
Accounts and notes receivable, less allowances of $95 in 2007 and $85 in 2006
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 5)
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, 2007-493.6 shares and 2006-493.3 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less: Common stock held in treasury, at cost, 2007-68.4 shares and 2006-39.8 shares

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

International Paper

2007

2006

905
3,152
2,071
24
213
370
6,735
10,141
770
1,276
3,650
–
1,587
$24,159

267
2,145
400
4
1,026
3,842
6,353
2,919
2,145
228

$ 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

494
6,755
4,375
(471)
11,153
2,481
8,672
$24,159

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

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
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
Net (gains) losses on sales and impairments of businesses
Gain on sale of forestlands (Note 7)
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 (used for) 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
Proceeds from divestitures
Equity investment in Ilim
Proceeds from sale of forestlands
Cash deposit for asset exchange
Other

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

Cash used for investment activities – discontinued operations

Cash (Used for) 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
Repurchase of common stock
Issuance of debt
Reduction of debt
Issuance of debt in connection with Timber Note Monetization (Note 8)
Change in book overdrafts
Dividends paid
Other

Cash used for financing activities – continuing operations

2007

2006

2005

$ 1,168
47

$ 1,050
232

$ 1,100
(416)

1,215
1,086
–
232
95
–
(78)
–
210
(327)
(9)
–
63
–

(141)
(82)
(90)
(226)

1,948

(61)

1,887

(1,288)
(4)
(239)
1,675
(578)
–
–
–

(434)

(12)

(446)

128
(1,224)
78
(875)
–
77
(436)
–

(2,252)

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)

(174)

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

(2,252)

(2,304)

(2,377)

–

(719)

(17)

(90)

(5)

(955)

1,624

1,641

2,596

905

$ 1,624

$ 1,641

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)

Treasury Stock

Shares Amount

Total
Common
Shareholders’
Equity

487,495
3,006
–

$ 487
4
–

$ 6,562 $ 2,562
–
(490)

65
–

$ (1,357)
–
–

16 $
96
–

In millions, except shares in thousands and per share
amounts

BALANCE, JANUARY 1, 2005
Issuance of stock for various plans, net
Cash dividends – Common stock ($1.00 per share)
Comprehensive income (loss):

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

–

–
–

–

–
–

–

–
–

–

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):

2,839
–
–

Net earnings
Minimum pension liability adjustment:

U.S. plans (less tax of $75)
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

Adoption of SFAS No. 158

(less tax of $252) (Note 4)

–

–
–

–

2
–
–

–

–
–

–

108
–
–

–

–
–

–

–
–
(485)

1,050

–
–

–

BALANCE, DECEMBER 31, 2006

493,340

493

6,735

3,737

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

Net earnings
Pension and postretirement divestitures, amortization

of prior service costs and net loss:
U.S. plans (less tax of $300)
Non-U.S. plans (less tax of $7)

Change in cumulative foreign currency translation

adjustment (less tax of $0)

Net gains on cash flow hedging derivatives:

Net gain arising during the period (less tax of $5)
Less: Reclassification adjustment for gains
included in net income (less tax of $3)

Total comprehensive income

Adoption of FIN 48 (Note 4)

216
–
–

–

–
–

–

1
–
–

–

–
–

–

20
–
–

–

–
–

–

–
–
(436)

1,168

–
–

–

(94)

–
–
–

–

496
15

220

(12)

(350)

(1,564)

–
–
–

–

465
26

591

(22)

–

–
4
–

–

–
–

–

1
1,433
–

–

–
–

–

–
–

–

112

46
39,686
–

–

–
–

–

39,844

1,438

(4,991)
33,583
–

(181)
1,224
–

–

–
–

–

–
–

–

$ 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

202
(1,224)
(436)

1,168

465
26

591

(22)

2,261
(94)

BALANCE, DECEMBER 31, 2007

493,556 $494 $6,755 $4,375

$ (471)

68,436 $2,481

$ 8,672

(1) The cumulative foreign currency translation adjustment (in millions) was $531, $(60) and $(280) at December 31, 2007,
2006 and 2005, 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 paper
and packaging company that is complemented by an
extensive North American merchant distribution
system, with primary markets and manufacturing
operations in North America, Europe, Latin America,
Russia, Asia and North Africa. Substantially all of our
businesses have experienced, and are likely to con-
tinue 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.

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.

CONSOLIDATION

ANNUAL MAINTENANCE COSTS

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
(losses) totaled $1 million, $12 million and $(1) mil-
lion in 2007, 2006 and 2005, 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
targeting non-price
improving profitability by
improvements over a three-year period. Actions
taken in 2007, 2006 and 2005 to implement the
Transformation Plan are discussed in these Notes to
Consolidated Financial Statements.

value

Effective January 1, 2007,
International Paper
adopted FASB Staff Position (FSP) No. AUG AIR-1,
“Accounting for Planned Major Maintenance
International
Activities.” Prior to January 1, 2007,
Paper accounted for the cost of planned major main-
tenance by expensing the costs ratably throughout
the year. Effective January 1, 2007,
International
Paper adopted the direct expense method of
accounting whereby all costs for repair and main-
tenance activities are expensed in the month that the
related activity is performed. See Note 4 for details
related to the adoption of this FSP.

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, 2007, International Paper and its
subsidiaries owned or managed about 300,000 acres
of forestlands in the United States, approximately
250,000 acres in Brazil, and through licenses and
forest management agreements, had harvesting
rights on government-owned forestlands in Russia.
Costs attributable to timber are charged against
income as trees are cut. The rate charged is
determined annually based on the relationship of
incurred costs to estimated current merchantable
volume.

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 reporting units. 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 conjunction with
annual goodwill impairments testing, the Company
recorded charges of $630 million and $129 million
related to its Coated Paperboard business and
Shorewood business,
respectively. No goodwill
impairment charges were recorded in 2007 or 2005
(see Note 11).

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 7). 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 a tax position is
supportable for income tax purposes, the item is
included in its income tax returns. Where treatment
liabilities are recorded
of a position is uncertain,
based upon the Company’s evaluation of the “more
likely than not” outcome considering the technical
merits of the position based on specific tax regu-
lations and the facts of each matter. Changes to
recorded liabilities are made only when an identifi-
able event occurs that changes the likely outcome,
such as 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.

experience

While the judgments and estimates made by the
Company are based on management’s evaluation of
the technical merits of a matter, assisted as neces-
sary by consultation with outside consultants, histor-
ical
that
management believes are appropriate and reason-
able under current circumstances, actual resolution
of these matters may differ from recorded estimated
amounts, resulting in charges or credits that could
materially affect future financial statements.

assumptions

and other

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circum-

See Note 4 for a discussion of the adoption of FASB
Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109” in 2007.

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
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:

International

Paper’s

for

In millions, except per share amounts

Net Earnings

As reported

Pro forma

Basic Earnings Per Common Share

As reported

Pro forma

Diluted Earnings Per Common Share

As reported

Pro forma

2005

$1,100

1,043

$ 2.26

2.15

$ 2.21

2.10

The effect on 2005 pro forma net earnings, basic
earnings per common share and diluted earnings
per common share of expensing the estimated fair
market value of stock options is not 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.

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 are 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

2007

2006

2005

NONCONTROLLING INTERESTS IN CONSOLIDATED

Earnings from continuing operations

$1,215

$1,282

$ 684

FINANCIAL STATEMENTS:

Effect of dilutive securities

–

Earnings from continuing operations -

assuming dilution

$1,215

$1,295

$ 711

Average common shares outstanding

428.9

476.1

486.0

Effect of dilutive securities

Restricted performance share plan

Stock options (a)

Contingently convertible debt

Average common shares outstanding -

3.7

0.4

–

3.0

0.2

9.4

0.8

2.9

20.0

assuming dilution

433.0

488.7

509.7

Earnings per common share from

continuing operations

$ 2.83

$ 2.69

$ 1.41

Diluted earnings per common share from

continuing operations

$ 2.81

$ 2.65

$ 1.40

(a) Options to purchase 17.5 million, 30.1 million and 30.5 million

shares for the years ended December 31, 2007, 2006 and 2005,

respectively, were not included in the computation of diluted

common shares outstanding because their exercise price

exceeded the average market price of the Company’s common

clarifies

statement

the FASB also issued SFAS
In December 2007,
No. 160, “Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB 51.”
This
that a noncontrolling
(minority) interest in a subsidiary is an ownership
interest in the entity that should be reported as
equity in the consolidated financial statements.
It
also requires consolidated net income to include the
amounts attributable to both the parent and non-
controlling interest, with disclosure on the face of the
consolidated income statement of
the amounts
attributed to the parent and to the noncontrolling
interest. This statement will be effective pro-
spectively
after
December 15, 2008 (calendar year 2009), with pre-
sentation and disclosure requirements applied retro-
spectively to comparative financial statements. The
Company is currently evaluating the provisions of
this statement.

beginning

years

fiscal

for

FAIR VALUE OPTION FOR FINANCIAL ASSETS AND

stock for each respective reporting date.

FINANCIAL LIABILITIES:

NOTE 3 INDUSTRY SEGMENT INFORMATION

information by industry segment and
Financial
geographic area for 2007, 2006 and 2005 is presented
on pages 43 and 44.

NOTE 4 RECENT ACCOUNTING
DEVELOPMENTS

BUSINESS COMBINATIONS:

In December 2007, the Financial Accounting Stan-
dards Board (FASB)
issued SFAS No. 141(R),
“Business Combinations.” Statement 141(R) estab-
lishes principles and requirements for how an
acquiring entity in a business combination recog-
nizes and measures the assets acquired and
liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement
objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to
investors and other users all of the information
needed to evaluate and understand the nature and
financial effect of the business combination.

basis,

value option may be

In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and
Financial Liabilities – Including an Amendment of
FASB Statement No. 115.” This statement permits
an entity to measure certain financial assets and
financial liabilities at fair value, which would result
in the reporting of unrealized gains and losses in
earnings at each subsequent reporting date. The
elected on an
fair
instrument-by-instrument
few
exceptions, as long as it is applied to the instru-
ment
in its entirety. The statement establishes
presentation and disclosure requirements to help
financial statement users understand the effect of
an entity’s election on its earnings, but does not
eliminate the disclosure requirements of other
accounting standards. This statement will be effec-
tive as of the beginning of the first fiscal year that
begins after November 15, 2007 (January 1, 2008),
and is to be applied prospectively as of the begin-
ning of the year in which it is initially applied. The
Company elected not to apply the fair value option
to any of its financial assets or liabilities.

with

EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT

PENSION AND OTHER POSTRETIREMENT PLANS:

statement

In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pen-
sion and Other Postretirement Plans – an Amend-
ment of FASB Statements No. 87, 88, 106, and
132(R).” This
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 year-end balance sheet. It also requires
a company to measure its plan assets and benefit
obligations as of its year-end balance sheet date
beginning with
after
December 15, 2008. The Company adopted the
provisions of this standard as of December 31,
2006, recording an additional liability of $492 mil-
lion and an after-tax charge to Accumulated other
comprehensive income of $350 million for
its
defined benefit and postretirement benefit plans.

ending

years

fiscal

FAIR VALUE MEASUREMENTS:

In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which provides a sin-
gle definition of fair value, together with a frame-
work 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 level being quoted
prices in active markets. This statement is initially
effective for financial statements issued for fiscal
years beginning after November 15, 2007 (calendar
year 2008), 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.
For all nonrecurring fair value measurements of
nonfinancial assets and liabilities, the statement is
after
effective
November 15, 2008 (calendar year 2009). The
Company is currently evaluating the provisions of
this statement.

beginning

years

fiscal

for

ACCOUNTING FOR PLANNED MAJOR MAINTENANCE

ACTIVITIES:

In September 2006, the FASB issued FASB Staff
Position (FSP) No. AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which
permits the application of three alternative methods
of accounting for planned major maintenance activ-
the direct expense, built-in-overhaul, and
ities:

deferral methods. The FSP was effective for the first
fiscal year beginning after December 15, 2006.
International Paper adopted the direct expense
method of accounting for these costs in the first
quarter of 2007 with no impact on its annual con-
solidated 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 posi-
tion taken or expected to be taken in tax returns.
Specifically, the financial statement effects of a tax
position may be recognized only when it
is
determined that it is “more likely than not” that,
based on its technical merits, the tax position will
be sustained upon examination by the relevant tax
authority. The amount recognized shall be meas-
ured as the largest amount of tax benefits that
exceed a 50% probability of being recognized. This
interpretation also expands income tax disclosure
International Paper applied the
requirements.
provisions of this interpretation beginning in the
first quarter of 2007. The adoption of this inter-
pretation resulted in a charge to the beginning
balance of retained earnings of $94 million at the
date of adoption.

ACCOUNTING FOR CERTAIN HYBRID FINANCIAL

INSTRUMENTS:

In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial
Instru-
ments – 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 other-
wise be required to be bifurcated from its host con-
tract
in accordance with SFAS No. 133. This
statement allows an entity to make an irrevocable
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 was
financial
effective for International Paper for all
instruments acquired,
to a
remeasurement event occurring after January 1,
2007. The adoption of SFAS No. 155 in 2007 did not
have a material
impact on the Company’s con-
solidated financial statements.

issued, or subject

ACCOUNTING CHANGES AND ERROR CORRECTIONS:

IMPLICIT VARIABLE INTERESTS:

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
International Paper adopted the provi-
obligation.
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.

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 is a matter of judgment
that depends on the relevant facts and circum-
stances. International Paper adopted the provisions
of FSP FIN 46(R)-5 in the second quarter of 2005,
with no material effect on its consolidated financial
statements.

NOTE 5 ACQUISITIONS, EXCHANGES AND
JOINT VENTURES

ACQUISITIONS:

On August 24, 2007, International Paper completed
the acquisition of Central Lewmar LLC, a privately
held paper and packaging distributor in the United
States, for $189 million.
International Paper’s dis-
tribution business, xpedx, now operates Central
Lewmar as a business within its multiple brand
strategy.

The following table summarizes the preliminary allo-
cation of the fair value of the assets and liabilities
acquired. The final allocation is expected to be com-
pleted by March 31, 2008.

In millions

Accounts receivable, net

Inventory

Other current assets

Plants, properties and equipment, net

Goodwill

Deferred tax asset

Other intangible assets

Total assets acquired

Other current liabilities

Total liabilities assumed

Net assets acquired

$116

272

$189

The identifiable intangible assets acquired in con-
nection with the Central Lewmar acquisition included
the following:

have been included in International Paper’s con-
solidated financial statements from the date of
acquisition in 2005.

Estimated
Fair Value

Average
Remaining
Useful Life

EXCHANGES:

In millions

Asset Class:

Customer lists

Non-compete covenants

Trade names

Total

13 years

5 years

15 years

$18

$29

Central Lewmar’s financial position and results of
operations have been included in International
Paper’s consolidated financial statements since its
acquisition on August 24, 2007.

In October 2005, International Paper had acquired
approximately 65% of Compagnie Marocaine des
Cartons et des Papiers (CMCP)
in Morocco for
approximately $80 million in cash plus assumed debt
of approximately $40 million. On July 31, 2007, the
Company purchased the remaining shares of CMCP
for approximately $40 million. The Moroccan pack-
aging company is now wholly owned by Interna-
tional Paper and managed as part of the Company’s
European Container business.

The identifiable intangible assets acquired in con-
nection with both of the CMCP acquisitions included
the following:

In millions

Asset Class:

Trademarks and trade names

Customer lists

Total

OTHER ACQUISITIONS:

Estimated
Fair Value

Average
Remaining
Useful Life

3 years

23 years

$ 2

$24

In 2001, International Paper and Carter Holt Harvey
Limited (CHH) each acquired a 25% interest in Inter-
national Paper Pacific Millennium Limited (IPPM).
IPPM is a Hong Kong-based distribution and pack-
aging company with operations in China and other
Asian countries. On August 1, 2005, pursuant to an
existing agreement, International Paper purchased a
50% third-party interest
in IPPM (now renamed
International Paper Distribution Limited) for $46 mil-
lion to facilitate possible further growth in Asia.
Finally, in May 2006, the Company purchased the
remaining 25% interest for $21 million. The financial
position and results of operations of this acquisition

On February 1, 2007, the Company completed the
non-cash exchange of certain 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 certain forestland operations includ-
ing 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 exchange improved the
Company’s competitive position by adding a globally
cost-competitive paper mill, thereby expanding the
Company’s uncoated freesheet capacity in Latin
America and providing additional growth oppor-
tunities in the region. The exchange was accounted
for based on the fair value of assets exchanged,
resulting in the recognition in 2007 of a pre-tax gain
of $205 million ($159 million after taxes) representing
the difference between the fair value and book value
of the assets exchanged. This gain is included in Net
(gains) losses on sales and impairments of busi-
nesses in the accompanying consolidated statement
of operations. The net assets exchanged were
included as Assets held for exchange in the accom-
panying consolidated balance sheet at December 31,
2006.

The following table summarizes the allocation of the
fair value of the assets exchanged to the assets and
liabilities acquired.

In millions

Accounts receivable, net

Inventory

Other current assets

Plants, properties and equipment, net

Forestlands

Goodwill

Other intangible assets

Other long-term assets

Total assets acquired

Other current liabilities

Deferred income taxes

Other liabilities

Total liabilities assumed

Net assets acquired

582

434

521

154

1,814

270

294

$1,520

Identifiable intangible assets included the following:

In millions

Asset Class:

Non-competition agreement

Customer lists

Total

Estimated
Fair Value

Average
Remaining
Useful Life

2 years

10 - 20 years

$ 10

144

$154

The following unaudited pro forma information for
the years ended December 31, 2007, 2006 and 2005
presents the results of operations of International
Paper as if the Central Lewmar acquisition and Luiz
Antonio asset exchange had occurred on January 1,
2005. This pro forma information does not purport to
represent
results of
International Paper’s actual
operations if the transactions described above would
have occurred on January 1, 2005, nor is it necessa-
rily indicative of future results.

In millions, except per share amounts

2007

2006

2005

Net sales

$22,479

$23,289

$22,855

Earnings from continuing operations

Net earnings

Earnings from continuing operations

per common share

Net earnings per common share

1,237

1,190

2.86

2.75

1,390

1,158

2.84

2.37

739

1,155

1.45

2.27

JOINT VENTURES:

United States, the Company is reporting its share of
Ilim’s results of operations on a one-quarter lag
basis. Accordingly, the accompanying consolidated
financial statements do not include any operating
results for Ilim for any period presented, while the
consolidated balance sheet as of December 31, 2007
includes the Company’s $620 million investment in
Ilim, plus $33 million of acquisition costs, in the cap-
tion Investments.

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
second joint venture, the Shandong International
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 financial position and results of
operations of this joint venture have been included in
International Paper’s consolidated financial state-
ments from the date of acquisition in 2006.

The operating results of these ventures did not have
a material effect on the Company’s consolidated
results of operations in either 2007 or 2006.

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, 2007. 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 2007, 2006 and 2005
organizational restructuring programs.

2 0 0 7 : During 2007, total restructuring and other
charges of $95 million before taxes ($59 million after
taxes) were recorded. These charges included:

(cid:129)

taxes)

a $30 million charge before taxes ($19 million
after
restructuring
for organizational
programs, principally
associated with the
Company’s Transformation Plan,

a $27 million charge before taxes ($17 million
after taxes) for the accelerated depreciation of
long-lived assets being removed from service,

a $33 million charge before taxes ($21 million
after taxes) for accelerated depreciation charges
for the Terre Haute mill that was shut down as
part of the Transformation Plan,

a $10 million charge before taxes ($6 million
after taxes) for environmental costs associated
with the Terre Haute mill,

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:

(cid:129)

a $4 million charge before taxes ($2 million after
the
taxes)
Company’s Brazil operations, and

related to the restructuring of

a pre-tax gain of $9 million ($6 million after tax-
es) for an Ohio Commercial Activity tax adjust-
ment.

The following table presents a detail of the $95 mil-
lion corporate-wide restructuring and other charges
by business:

In millions

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Printing Papers

$14(a)

Industrial Packaging

Consumer

Packaging

Forest Products

Distribution

Corporate

–

$12(a)

12(b)

$ 4

37(b)

–

Total

$41

–

$ 11(a)

–

(10)

(4)

$18

$26

$42

$ 9

$95

(a) Includes $12 million, $11 million and $4 million in the 2007

first, second and fourth quarters, respectively, of accelerated

depreciation charges related to equipment being removed

from service.

(b) Includes $6 million in the 2007 second quarter and $27 million

in the 2007 third quarter of accelerated depreciation charges

related to the closure of the Terre Haute, Indiana mill, and $10

million in the third quarter for Terre Haute environmental

expenses.

Included in the $30 million of organizational
restructuring and other charges is $18 million of
severance charges for 449 employees related to the
Company’s Transformation Plan. As of December 31,
2007, 332 employees had been terminated.

The following table presents a roll forward of the
severance and other costs included in the 2007
restructuring plans:

In millions

Opening Balance (first quarter 2007)

Additions (second quarter 2007)

Additions (third quarter 2007)

Additions (fourth quarter 2007)

2007 Activity

Cash charges

Balance, December 31, 2007

Severance
and Other

$ 6

(23)

$ 7

(cid:129)

taxes)

a $157 million charge before taxes ($95 million
restructuring
for organizational
after
programs, principally
associated with the
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 (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 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:

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
the income tax provision was recorded, including a
credit of $627 million from an agreement reached
with the U.S. Internal Revenue Service concerning
income tax
the 1997 through 2000 U.S.
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

Severance
and Other

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

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

2007 Activity

Cash charges

Balance, December 31, 2007

$ 18

(50)

(19)

(56)

$ –

The severance charges recorded in 2006 related to
1,669 employees. As of December 31, 2007, all 1,669
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:

(cid:129)

taxes)

a pre-tax charge of $256 million ($162 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.

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.

(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.

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

$166

$90

$256

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.

NOTE 7 BUSINESSES HELD FOR SALE,
DIVESTITURES AND IMPAIRMENTS

DISCONTINUED OPERATIONS:

2 0 0 7 : During the fourth quarter of 2007, the Com-
pany recorded a pre-tax charge of $9 million ($6 mil-
lion after taxes) and a pre-tax credit of $4 million ($3
million after taxes) relating to adjustments to esti-
mated losses on the sales of its Beverage Packaging
and Wood Products businesses, respectively. Addi-
tionally during the fourth quarter, a $4 million pre-tax
charge ($3 million after taxes) was recorded for addi-
tional taxes associated with the sale of the Compa-
ny’s former Weldwood of Canada Limited business.

During the third quarter of 2007, the Company com-
pleted the sale of the remainder of its non-U.S.
Beverage Packaging business.

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 (see Note 10). The sale of the North
American Beverage Packaging operations sub-
sequently closed on January 31, 2007, and the sale
of the remaining non-U.S. operations closed in the
third quarter of 2007.

Also during the fourth quarter, the Company entered
into separate agreements for the sale of 13 lumber
mills for approximately $325 million, and five wood
products plants for approximately $237 million, both
subject to various adjustments at closing. Both sales
were completed in March 2007.

Based on the fourth-quarter commitments to sell the
Beverage Packaging and Wood Products businesses,
the accounting
the Company determined that
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 (loss) and earnings (loss) per
share related to the Beverage Packaging, Wood
Products, Brazilian Coated Papers, Kraft Papers and
Weldwood of Canada Limited businesses for 2007,
2006 and 2005 were as follows:

In millions, except per share amounts

Revenues

2007

2006

2005

$ 394

$2,191

$2,397

Earnings from discontinued operations

Earnings (loss) from operations

$ (19)

$ 136

$ 297

Income tax benefit (expense)

(51)

(122)

Earnings (loss) from operations, net of

taxes

Loss on sales and impairments

Income tax (expense) benefit

Loss on sales and impairments, net of

(11)

(4)

(32)

175

(406)

–

taxes

(36)

(317)

Earnings (loss) from discontinued

operations, net of taxes

$ (47)

$ (232)

$ 175

Earnings (loss) per common share from

discontinued operations - assuming

dilution
Earnings (loss) from operations

Loss on sales and impairments

Earnings (loss) per common share from

discontinued operations, net of taxes

and minority interest - assuming

$(0.03)

$ 0.19

$ 0.34

(0.08)

(0.66)

–

dilution

$(0.11)

$ (0.47)

$ 0.34

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.

Additionally during the fourth quarter, a $37 million
pre-tax credit ($22 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 for other smaller
items.

During the third quarter of 2006, management had
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. This business
in
included a coated paper mill and lumber mill
Aropoti, Parana State, Brazil, as well as 50,000 hec-
tares (approximately 124,000 acres) of forestlands in
Parana. As the Company determined that
the
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.

During the first quarter of 2006,
the Company
determined that the accounting requirements under
SFAS No. 144 for reporting the Kraft Papers busi-
ness as a discontinued operation were met. 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 additional payments totaling up to $60 million
payable five years from the date of closing, con-
tingent 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 defini-
tive agreement. The sale of this business was sub-
sequently completed on January 2, 2007.

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

In millions, except per share amounts

Revenues

Loss from discontinued operation

$1,700

Loss from operation
Income tax expense
Minority interest benefit, net of taxes and minority interest

$ (32)
(96)
8

Loss from discontinued operation, net of taxes and minority

interest

Gain on sale of CHH
Income tax benefit

Gain on sale, net of taxes and minority interest

Earnings from discontinued operation, net of taxes and

minority interest

Earnings (loss) per common share from discontinued

operation - assuming dilution
Loss from operation, net of taxes and minority interest
Gain on sale, net of taxes and minority interest

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

FORESTLANDS:

(120)

29
332

361

$ 241

$ (0.24)
0.71

$ 0.47

2 0 0 6 : 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 (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 10). The first of these transactions completed 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 in 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 are separately presented in the accompanying
consolidated statement of operations under the cap-
tion Gain on sale of forestlands.

OTHER DIVESTITURES AND IMPAIRMENTS:

During the third quarter of 2007, a pre-tax charge of
$1 million ($1 million credit after taxes) was recorded
to adjust previously estimated losses on businesses
previously sold.

in the operations of

In addition, during the first quarter of 2007, a $6 mil-
taxes) was
lion pre-tax credit
recorded to adjust previously estimated gains/losses
of businesses previously sold.

($4 million after

The net 2007 pre-tax gains totaling $122 million
discussed above are included, along with the $205
million gain on the exchange for the Luiz Antonio
mill in Brazil (see Note 5), in Net (gains) losses on
sales and impairments of businesses in the accom-
panying consolidated statement of operations.

2 0 0 6 : During the fourth quarter of 2006, a net charge
of $21 million before and after taxes was recorded
for losses on sales and impairments of businesses.
These charges included 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
$61 million ($37 million after taxes) was recorded for
gains on sales and impairments of businesses. 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 forestlands 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 net 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
was considered more likely than not at June 30,
2006, which was completed in the third quarter, and
a net charge of $1 million before and after taxes
related to other smaller items.

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

in the operations of

sell
this business for approximately $1.4 billion,
to certain post-closing adjustments, and
subject
agreed to acquire a 10 percent limited partnership
interest in CMP Investments L.P., the company that
owns this business. Since this limited partnership
interest represents significant continuing involve-
ment
this business under
accounting principles generally accepted in the U.S.,
the operating results
for Coated and Super-
calendered Papers were required to be included in
continuing operations in the accompanying con-
solidated statement of operations. 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 (gains) losses on sales and
impairments of businesses in the accompanying
consolidated statement of operations.

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 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 (gains) losses
on sales and impairments of businesses in the
accompanying consolidated statement of operations.

At December 31, 2006, assets of businesses held for
sale totaling approximately $1.8 billion and liabilities
of businesses held for sale totaling approximately
$333 million, included the Kraft Papers business, the
Beverage Packaging business, the Wood Products
business and the Arizona Chemical business, and
consisted of:

In millions

Accounts receivable, net

Inventories

Plants, properties and equipment, net

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

$ 298

401

995

$1,778

$ 184

$ 333

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

In millions

Kraft Papers

Beverage Packaging

Wood Products

Arizona Chemical

Totals

Assets

Liabilities

$ 148

$ 16

572

562

496

107

159

$1,778

$333

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 (a noncash adjustment
to net earnings included in operating activities in the
consolidated statement of cash flows under the cap-
tion Gain on sale of forestlands). 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 (a
$4.8 billion noncash investing activity). Sub-
sequently, International Paper contributed its $200
million Class A interests in the Borrower Entities,
along with approximately $400 million of Interna-
tional Paper promissory notes,
to other newly
formed entities (the Investor Entities) in exchange for
Class A and Class B interests in these entities, and
in the
simultaneously sold its Class A interest
Investor Entities to a third party investor (a $600 mil-
lion noncash investing activity, and a $200 million
cash financing activity included in the consolidated
statement of cash flows in the caption Issuance of
debt). As a result, at December 31, 2006, Interna-
tional Paper holds Class B interests in the Borrower
Entities and Class B interests in the Investor Entities
International
valued at approximately $5.0 billion.
Paper has no obligation to make any further capital
contributions to these entities. Based on an analysis
of these entities under the provisions of FIN 46(R),
International Paper determined that it is not the
primary beneficiary of these newly formed Entities,
and therefore, should not consolidate its investments
in these entities.

Also during 2006, the Borrower Entities acquired
approximately $4.8 billion of International Paper debt
obligations for cash (a cash financing activity
included in the consolidated statement of cash
flows), resulting in a total of approximately $5.2 bil-
lion of International Paper debt obligations held by
the Borrower and Investor Entities at December 31,
2006. The various agreements entered into in con-
nection with these transactions provide that Interna-
tional Paper has, and International Paper intends to
affect, a legal right to offset its obligation under these
debt instruments with its investments in the entities.
for financial reporting purposes, as
Accordingly,

allowed under the provisions of FASB Interpretation
No. 39, International Paper has offset approximately
$5.0 billion of Class B interests in the entities against
$5.0 billion of International Paper debt obligations
held by these entities at December 31, 2007 and
2006. The remaining $200 million of debt obligations
is included in floating rate notes due 2009 – 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, 2007 and 2006, Interna-
tional Paper’s $550 million preferred interest in one
of the entities has been offset against related debt
obligations since International Paper has, and
intends to affect, a legal right of offset to net-settle
these two amounts. Of the remaining $477 million of
debt obligations, $461 million is included in floating
rate notes due 2009 – 2016 and $16 million in com-
mercial paper and bank notes 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, 2007, 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, $13 million and
$10 million in 2007, 2006 and 2005, respectively. The
expense related to these preferred securities is
shown in Minority interest expense in the accom-
panying consolidated statement of operations.

NOTE 9 INCOME TAXES

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

In millions

Earnings

U.S.

Non-U.S.

2007

2006

2005

$ 801

$3,166

$ 53

853

233

Earnings from continuing operations before

income taxes and minority interest

$1,654

$3,188

$286

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

In millions

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.

2007

2006

2005

$ 67

$ 125

$(391)

107

(52)

$183

$ 270

$(378)

$163

$1,583

$ (5)

(17)

172

(136)

(10)

(14)

$232

$1,619

$ (29)

Income tax provision (benefit)

$415

$1,889

$(407)

The Company’s deferred income tax provision
(benefit) includes a $2 million provision, a $1 million
provision and a $3 million benefit for 2007, 2006 and
for the effect of changes in
2005, respectively,
non-U.S. and state tax rates.

International Paper made income tax payments, net
of refunds, of $328 million, $249 million and $440
million in 2007, 2006 and 2005, respectively.

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

In millions

2007

2006

2005

The valuation allowance for deferred tax assets as of
January 1, 2007, was $111 million. The net change in
the total valuation allowance for the year ended
December 31, 2007, was a decrease of $25 million.

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

Retirement plan dividends
Tax credits
Tax audit settlements
Other, net

$1,654

$3,188

$ 286

35%

579
2

1,116
136

(124)
13
–
5

9
(6)
(10)
(36)
(17)

(19)
33
(6)
15

646
(7)
(14)
–
(11)

100
(41)

(30)
169
(9)
13

(8)
(6)
(19)
(560)
(16)

Income tax provision (benefit)

$ 415

$1,889

$(407)

Effective income tax rate

25%

59% -142%

The tax effects of significant temporary differences
representing deferred tax assets and liabilities at
December 31, 2007 and 2006, 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

Gross deferred tax liabilities

Net deferred tax liability

2007

2006

$ 410
79
398
406
256
21
273

$ 381
258
400
1,156
285
59
446

1,843
(86)

2,985
(111)

$ 1,757

$ 2,874

$(2,078)
(1,870)
(130)

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

$(4,078)

$(4,252)

$(2,321)

$(1,378)

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 2007 in
net deferred tax liabilities principally relates to the
Company’s use of net operating loss carryforwards.

International Paper adopted the provisions of FASB
Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), on January 1, 2007. As a
result of the implementation of FIN 48, the Company
recorded a charge to the beginning balance of
retained earnings of $94 million.
Including this
cumulative effect amount, total unrecognized tax
benefits at the date of adoption were $919 million. A
reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows:

In millions

Balance at adoption, January 1, 2007
Additions based on tax positions related to the current year

Additions for tax positions of prior years

Reductions for tax positions of prior years

Settlements

Expiration of statutes of limitation

Balance at December 31, 2007

$(919)
(17)

(49)

112

$(794)

Included in the balance at December 31, 2007 is $340
million for tax positions for which the ultimate bene-
fits are highly certain, but
for which there is
uncertainty about the timing of such benefits. How-
ever, except for the possible effect of any penalties,
any disallowance that would change the timing of
these benefits would not affect the annual effective
tax rate, but would accelerate the payment of cash to
the taxing authority to an earlier period.

The Company accrues interest on unrecognized tax
benefits as a component of interest expense. Penal-
ties, if incurred, would be recognized as a compo-
nent of income tax expense. The Company had
approximately $88 million and $91 million accrued
for the payment of estimated interest and penalties
associated with unrecognized tax benefits at Jan-
uary 1, 2007 and December 31, 2007, respectively.

The major jurisdictions where the Company files
income tax returns are the United States, Brazil,
France, Poland and Russia. Generally, tax years 2001
through 2006 remain open and subject to examina-
tion by the relevant tax authorities. The Company is
typically engaged in various tax examinations at any
given time, both in the United States and overseas.
Currently, the Company is engaged in discussions
with the U.S. Internal Revenue Service to conclude
the examination of tax years 2001 through 2003. As a
result of these discussions, other pending tax audit

settlements, and the expiration of statutes of limi-
tation, the Company currently estimates that the
amount of unrecognized tax benefits could be
reduced by up to $365 million during the next twelve
months, with no significant impact on earnings or
cash tax payments. While the Company believes that
it is adequately accrued for possible audit adjust-
ments, the final resolution of these examinations
cannot be determined at this time and could result in
final settlements that differ from current estimates.

The Company recorded an income tax provision for
2007 of $415 million, including a $41 million benefit
related to the effective settlement of tax audits, and
$8 million of other tax benefits. Excluding the impact
of special items, the tax provision was $423 million,
or 30% of pre-tax earnings before minority interest.

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 includes 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 a special tax adjustment, consisting
of a tax benefit of $627 million resulting from an
agreement reached with the U.S. Internal Revenue
Service concerning the 1997 through 2000 U.S.
federal income tax audit, a $142 million charge for
deferred taxes related to 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.

International Paper has non-U.S. net operating loss
carryforwards of approximately $352 million that
expire as follows: 2008 through 2017 — $14 million
and indefinite carryforwards of $338 million. Interna-
tional Paper has tax benefits from net operating loss
carryforwards
state taxing jurisdictions of
approximately $258 million that expire as follows:
2008 through 2017—$83 million and 2018 through
2027—$175 million.
International Paper also has
federal, non-U.S. and state tax credit carryforwards
that expire as follows: 2008 through 2017 —
$67 million, 2018 through 2027 — $92 million, and

for

indefinite carryforwards — $316 million. Further,
International Paper has state capital loss carryfor-
wards that expire as follows: 2008 through 2017 —
$9 million.

Deferred income taxes are not provided for tempo-
rary differences of approximately $3.7 billion, $2.7
billion and $2.4 billion as of December 31, 2007, 2006
and 2005, 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.

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, wood chips, raw materials, energy
and services, including fiber supply agreements to
purchase pulpwood that were entered into con-
currently with the 2006 Transformation Plan forest-
land sales (see Note 7).

future minimum
At December 31, 2007,
commitments under existing non-cancelable operat-
ing leases and purchase obligations were as follows:

total

In millions

2008 2009 2010 2011 2012 Thereafter

Lease obligations

$ 136 $116 $101 $ 84 $ 67

Purchase obligations (a)

1,953

294

261

235

212

1,480

Total

$2,089 $410 $362 $319 $279

$1,572

(a) Includes $2.1 billion relating to fiber supply agreements

entered into at the time of the Transformation Plan forestland

sales.

Rent expense was $168 million, $217 million and
$216 million for 2007, 2006 and 2005, 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. The Company has no future obligations
under this agreement.

In connection with sales of businesses, property,
Interna-
equipment, forestlands and other assets,
tional Paper commonly makes representations and
warranties relating to such businesses or assets, and
may agree to indemnify buyers with respect to tax
of
and
representations 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.

environmental

liabilities,

breaches

Under the terms of the sale agreement for the Bever-
age Packaging business, the purchase price of $500
million received by the Company is subject to a post-
closing adjustment based on adjusted annualized
earnings of the Beverage Packaging business for the
first six months of 2007 and other factors. As of
December 31, 2007, the purchaser of the business
has proposed a reduction in the purchase price total-
ing $48 million for this adjustment. While it is possi-
ble that such an adjustment could be required when
this matter is finalized, the Company believes, based
on its review of the purchaser’s proposals to date
that no such adjustment is required under the sale
agreement.

International Paper does not currently believe that it
future unrecorded
is reasonably possible that
liabilities for this and other such matters,
if any,
would have a material adverse effect on its con-
solidated 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 damage,
the process of degradation, once begun, continues
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 prod-
ucts that are the subject of the Omniwood Settlement
and 86,000 structures have installed products that are
the subject of the Woodruf Settlement. Masonite
stopped selling the products involved in the Hard-
board Settlement in May 2001, the products involved
in the Woodruf Settlement in May 1996 and the
products involved in the Omniwood Settlement in
September 1996.

if any,

Persons who are class members under the settle-
ments who do not pursue remedies may have
recourse to warranties,
in existence at the
expiration of the respective terms established under
the settlement agreements for making claims. The
warranty period generally extends for 25 years
following the installation of the product in question
and, although the warranties vary from product to

product, they generally provide for a payment of up
to two times the purchase price.

CLAIMS PAYMENT DATA

Through December 31, 2007, net settlement pay-
ments totaled approximately $1.2 billion ($935 million
for the Hardboard Settlement, $177 million for the
Omniwood Settlement and $56 million for the Wood-
of
including
ruf
non-refundable attorneys’ fees.

$136 million

Settlement),

The average settlement cost per claim for the years
ended December 31, 2007, 2006 and 2005 for the
Hardboard, Omniwood and Woodruf Settlements are
set forth in the table below:

AVERAGE SETTLEMENT COST PER CLAIM

In thousands

December 31, 2007
December 31, 2006

December 31, 2005

Hardboard

Omniwood

Woodruf

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

$2.2
2.2

2.5

$2.6
3.4

2.2

$4.2
4.6

4.6

$1.6
3.0

6.1

$3.9
4.4

4.3

$2.1
3.7

0.5

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

The following table shows an analysis of claims activ-
ity related to the Hardboard, Omniwood and Woodruf
Settlements for the years ended December 31, 2007,
2006 and 2005:

In thousands

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

No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2007

CLAIMS ACTIVITY

Hardboard

Omniwood

Woodruf

Total

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

2.4

4.6

(4.1)

(0.5)

2.4

5.4

(4.3)

(0.8)

2.7

6.1

(4.7)

(1.0)

3.1

0.4

(0.3)

–

0.5

0.3

(0.2)

–

0.6

0.2

(0.2)

–

0.6

0.9

0.6

(0.5)

(0.2)

0.8

0.6

(0.4)

(0.2)

0.8

0.4

(0.4)

0.2

1.0

0.3

–

0.3

–

0.3

–

0.3

42.2

32.5

(35.3)

(16.0)

23.4

24.3

(17.4)

(5.0)

25.3

35.0

(21.1)

(5.3)

33.9

5.7

6.0

(5.6)

(2.1)

4.0

0.9

(1.8)

(0.1)

3.0

1.5

(1.2)

(0.2)

3.1

5.0

5.6

(5.3)

(2.1)

3.2

0.6

(1.6)

(0.1)

2.1

1.3

(1.0)

(0.2)

2.2

38.9

27.3

(30.7)

(15.3)

20.2

18.3

(12.7)

(4.0)

21.8

28.5

(16.0)

(4.5)

29.8

Total

47.9

38.5

(40.9)

(18.1)

27.4

25.2

(19.2)

(5.1)

28.3

36.5

(22.3)

(5.5)

37.0

At December 31, 2007, there were $19 million of
payments due for claims that have been determined
to be valid ($14 million for Hardboard and $5 million
for Omniwood) and an estimated $13 million of
payments associated with claims currently under
evaluation ($10 million for claims related to the
Hardboard Settlement and $3 million for claims
related to the Omniwood Settlement).
In addition,
there was approximately $5 million of costs asso-
ciated with administrative and legal fees incurred but
not paid prior to year-end.

RESERVE FOR SIDING AND ROOFING SETTLEMENTS

At December 31, 2007, net reserves for the settle-
ments discussed above totaled $46 million, of which
$20 million is attributable to the Hardboard Settle-
ment, $25 million to the Omniwood Settlement and
$1 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, 2007, 2006 and 2005:

In millions

Balance, December 31, 2004

Payments

Insurance collections

Balance, December 31, 2005

Additional provision

Payments

Balance, December 31, 2006

Payments

Hard-
board

$ 158

(119)

(5)

(52)

Omni-
wood Woodruf

$ 97

(23)

–

(25)

(24)

$ 4

(4)

–

(2)

Total

$ 259

(146)

–

113

(79)

124

(78)

Balance, December 31, 2007

$ 20

$ 25

$ 1

$ 46

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
as to adequacy of the aggregate reserve, we employ
a third-party consultant to conduct statistical studies
of future costs utilizing claims experience data. These
projections are updated quarterly using recent claims
activity and other factors typically considered in pro-
jecting future claims and costs.

Throughout 2006, Omniwood and Woodruf claims
activity were in line with projections. However, during
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 consultant,
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 quar-
ter
claims data through
December 31, 2006. As a result, an additional 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). During 2007, claims activity was
substantially consistent with this updated projection,
although in connection with the January 15, 2008 fil-
ing deadline for Hardboard siding claims, the Com-
pany had received a large number of unverified
claims that will be evaluated during 2008.

taking into account

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

The Company believes that, as of the end of 2007, the
aggregate reserve balance for Hardboard, Omniwood
and Woodruf Settlements is adequate. However, the
Company will continue to evaluate the relevant data
for claims received through the end of the claims
period in order to determine if any further adjust-
ments 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

2007

2006

2005

$ –

–

$22

$334

258

114

Including collections received prior to 2005, cumu-
lative net cash settlements received totaled $448 mil-
lion through December 31, 2007. Approximately $46
million of additional cash will be collected in 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, 2007, approximately $79 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, or all of them
combined, will not have a material adverse effect on
its consolidated financial statements.

NOTE 11 SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION

Inventories by major category were:

In millions at December 31

Raw materials

Finished pulp, paper and packaging products

Operating supplies

Other

Inventories

2007

2006

$ 320

1,413

308

$ 265

1,341

271

$2,071

$1,909

The last-in, first-out inventory method is used to
value most of International Paper’s U.S. inventories.
Approximately 68% 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 $213 million and $252 million
at December 31, 2007 and 2006, respectively.

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

In millions at December 31

Pulp, paper and packaging facilities

Mills
Packaging plants

Other plants, properties and equipment

Gross cost
Less: Accumulated depreciation

2007

2006

$18,579
5,205
1,262

25,046
14,905

$16,665
5,093
1,285

23,043
14,050

Plants, properties and equipment, net

$10,141

$ 8,993

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 $30 million in 2007, $21 mil-
lion in 2006 and $14 million in 2005. Interest pay-
ments made during 2007, 2006 and 2005 were $452
million, $734 million and $819 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 $451
million in 2007, $651 million in 2006 and $681 million
in 2005, net of a $46 million credit related to the set-
tlement of the tax audits discussed above. Interest
income was $154 million, $130 million and $86 mil-
lion in 2007, 2006 and 2005, respectively. Interest
expense and interest income in 2007 both exclude
approximately $340 million related to variable inter-
est entities for which the Company has a legal right
of offset (see Note 8).

The following tables present changes in the goodwill
balances as allocated to each business segment for
the years ended December 31, 2007 and 2006:

(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

Balance
January 1,
2007

Reclassifi-
cations
and
Other (a)

Additions/
Reductions

Balance
December 31,
2007

$1,441

$104(c)

$498(b)

$2,043

670

510
308

6
–

8(d)

14(e)
86(f)

683

530
394

In millions

Printing Papers
Industrial

Packaging

Consumer

Packaging

Distribution

Consumer Packaging.

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

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

completion of the purchase accounting for a 66.5% interest

acquired in CMCP in October 2005, and a $5 million decrease

Total

$2,929

$115

$606

$3,650

from the purchase accounting for the Box USA acquisition.

(a) Represents the effects of foreign currency translations and

reclassifications.

(b) Includes $521 million from the acquisition of the Luiz Antonio

mill in February 2007, less a $23 million reduction from tax

benefits generated by the deduction of goodwill amortization

for tax purposes in Brazil.

related to goodwill recorded in the Luiz Antonio acquisition.

(d) Reflects a $3 million decrease from the final purchase adjust-

ments related to the Box USA acquisition, offset by a $2 million

increase from adjustments upon the purchase of the remaining

33.5% interest in Compagnie Marocaine des Cartons et des

Papiers (CMCP) in August 2007, an $8 million increase from the

acquisition of the Juarez and Chihuahua container plants in

November 2007 and a $1 million increase from the completion

of the purchase accounting for the IPPM acquisition.

(e) Reflects additional goodwill related to certain joint ventures in

China.

(f) Reflects $81 million from the acquisition of Central Lewmar in

August 2007 and $5 million from a small acquisition in

November 2007.

Balance
January 1,
2006 (a)

Reclassifi-
cations
and
Other (b)

Additions/
Reductions

Balance
December 31,
2006

In millions

(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.

Excluded from the above tables is goodwill totaling
approximately $1.2 billion at January 1, 2006 relating
to the Company’s Coated and Supercalendered
Papers business included in Assets of businesses
held for sale that was written off in connection with
the 2006 first-quarter $1.3 billion pre-tax charge to
reduce the net assets of that business to estimated
fair value. In addition, in the fourth quarter of 2006, in
conjunction with annual testing for possible goodwill
impairments, the Company recorded charges of $630
million and $129 million related to its Coated Paper-
business,
board
respectively, based on the estimated fair values of
these businesses determined using projected future
operating cash flows.

Shorewood

business

and

The following table presents an analysis of activity
related to asset retirement obligations since Jan-
uary 1, 2006:

Printing Papers

$1,615

$(174)

–

Industrial Packaging

677

(11)(c)

Consumer

Packaging

Distribution

Corporate

Total

1,019

299

179

(11)

(688)(d)

–

$1,441

670

510

308

–

In millions

Asset retirement obligation at January 1

New liabilities

Liabilities settled

Net adjustments to existing liabilities

Accretion expense

2007

$29

–

(4)

–

2006

$33

(5)

(1)

$3,621

$(699)

$2,929

Asset retirement obligation at December 31

$27

$29

(a) Restated to show the Beverage Packaging and Wood Products

businesses as held for sale, and to include the Company’s

European Coated Paperboard operations in the Consumer

Packaging segment.

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,
2007 and 2006:

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,
Luxembourg 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 its
receivable securitization program.

securitization

program.

In February 2006, International Paper repurchased
$195 million 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 millions

Balance, beginning of year

Repurchases of minority interests

Minority interest of acquired entities

Dividends paid

Minority interest expense

Other, net

Balance, end of year

2007

$213

2006

$185

(28)

25(a)

(10)

(15)

(12)

$228

$213

(a) Reflects the minority interest portion of an additional capital

contribution in 2007 related to the Shandong International

Paper & Sun Coated Paperboard Co., Ltd. joint venture.

NOTE 12 DEBT AND LINES OF CREDIT

In December 2007, International Paper repurchased
$96 million of 6.65% notes with an original maturity
date of December 2037. Other reductions in the
fourth quarter included the repayment of $147 mil-
lion of 6.5% debentures that matured in November
2007 and the payment of $42 million for various
environmental and industrial development bonds
with coupon rates ranging from 4.25% to 5.75% that
also matured within the quarter.

International Paper Investments
In October 2007,
(Luxembourg) S.ar.l, a wholly-owned subsidiary of
International Paper, issued $75 million of long-term
notes with an initial interest rate of LIBOR plus 100
basis points and a maturity date in April 2009, in
connection with its investment in Ilim (a noncash
financing activity).

In the second quarter of 2007, International Paper
repurchased $35 million of 5.85% notes with an
original maturity in October 2012.

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 7⁄8% notes - due 2007
6 7⁄8% notes - due 2023 - 2029
6.75% notes - due 2011

6.65% notes - due 2037

6.5% notes - due 2007

6.4% to 7.75% debentures - due 2025 - 2027

5.85% notes - due 2012

5.25% to 5.5% notes - due 2014 - 2016
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)

2007

2006

–

130

195

–

256

251

841

115

913

198

130

195

147

254

284

839

110

913

Floating rate notes - due 2009 - 2016 (b)

1,663

1,690

Environmental and industrial development bonds -

due 2008 - 2033 (c)

Commercial paper and bank notes (d)

Other (e)

Total (f)

Less: Current maturities

Long-term debt

1,889

1,934

149

119

6,620

267

246

7,223

692

$6,353

$6,531

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

2007 and 2006.

(b) The weighted average interest rate on these notes was 5.7% in

2007 and 5.0% in 2006.

2007 and 2006.

(d) The weighted average interest rate was 6.1% in 2007 and 5.4%

in 2006. Includes $118 million and $150 million of non-U.S.

denominated borrowings with a weighted average interest rate

of 6.2% and 5.1% in 2007 and 2006, respectively.

(e) Includes $38 million at December 31, 2007, and $3 million at

December 31, 2006, related to interest rate swaps treated as

fair value hedges (see Note 13).

(f) The fair market value was approximately $6.6 billion at

December 31, 2007 and $7.3 billion at December 31, 2006.

In addition to the long-term debt obligations shown
above, International Paper has $5.0 billion of debt
obligations payable to non-consolidated variable
interest entities that are due in 2016 for which
International Paper has, and intends to affect, a legal
right to offset these obligations with Class B interests
held in the entities. Accordingly, in the accompany-
ing consolidated balance sheet, as allowed under the
provisions of FASB Interpretation No. 39, Interna-
tional Paper has offset the $5.0 billion of debt obliga-
tions with $5.0 billion of Class B interests in these
entities as of December 31, 2007 (see Note 8).

Total maturities of long-term debt over the next five
years are 2008 - $267 million; 2009 - $1.3 billion; 2010
- $1.1 billion; 2011 - $396 million; and 2012 - $532
million.

At December 31, 2007 and 2006, International Paper
classified $112 million and $100 million, respectively,
of tenderable bonds and commercial paper and bank
notes as Long-term debt. International Paper has the
intent and ability to renew or convert these obliga-
tions, as evidenced by the available bank credit
agreements described below.

At December 31, 2007, International Paper’s unused
contractually committed bank credit agreements
totaled $2.5 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. The agreements include 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. These agree-
ments also include up to $1.0 billion of available
commercial paper-based financings under a receiv-
ables securitization program that expires in October
2009 with a facility fee of 0.10%. At December 31,
2007, there were no borrowings under either the
bank credit agreements or receivables securitization
program.

At December 31, 2007, outstanding debt included
approximately $149 million of commercial paper and
bank notes with interest rates that fluctuate based on
market conditions and the Company’s credit rating.

Maintaining an investment grade credit rating is an
important element of International Paper’s financing
strategy. At December 31, 2007, the Company held
long-term credit ratings of BBB (stable outlook) and
Baa3 (stable outlook) by Standard and Poor’s (S&P)
and Moody’s
(Moody’s),
respectively. The Company currently holds short-
term credit ratings by S&P and Moody’s of A-2 and
P-3, respectively.

Services

Investor

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
assets, Other assets, Other accrued liabilities and
Other liabilities. The earnings impact resulting from
the change in fair value of the derivative instruments
is recorded in the same line item in the consolidated
statement of operations as the underlying exposure
being hedged. The financial
instruments that are
used in hedging transactions are assessed both at
inception and quarterly thereafter to ensure they are
effective in offsetting changes in either the fair value
or cash flows of the related underlying exposures.
instrument’s
The ineffective portion of a financial
change in fair value, if any, is 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.
inception to
These instruments are evaluated at
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, 2007, of approximately $297 million
and maturities within four years do not qualify as
hedges under SFAS No. 133. For the years ended
December 31, 2007, 2006 and 2005, the change in fair
value of these swaps was immaterial. The fair value
of the swap contracts as of December 31, 2007, is a
$1 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, 2007
and 2006, outstanding notional amounts for interest
rate swap fair value hedges amounted to approx-
imately $1.4 billion and $1.9 billion, respectively. The
fair values of these swaps were net assets of approx-
imately $38 million and $2 million at December 31,
2007 and 2006, respectively.

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

$17 million

early retirements of debt. The resulting gains of
$6 million,
approximately
respectively, are included in Restructuring and other
charges in the accompanying consolidated state-
ment of operations (see Note 6).

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

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 Other Comprehensive
Income (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
purchased. For the years ended December 31, 2007
and 2006,
the reclassifications to earnings were
after-tax losses of $8 million and $7 million,
respectively, representing the after-tax cash settle-
ments on maturing energy hedge contracts. In 2005,
there was no reclassification from OCI to earnings
related to commodity hedging. In 2007, the unreal-
ized after-tax loss recorded to OCI was immaterial.
Unrealized after-tax losses of $13 million for 2006
and $2 million for 2005 were recorded to OCI.
After-tax losses of approximately $4 million as of
December 31, 2007, are expected to be reclassified to
earnings in 2008. The net fair value of these energy
hedge contracts were net liabilities of approximately
$5 million and $12 million at December 31, 2007 and
2006, respectively.

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 currency swaps or forward exchange contracts.
These financial instruments are effective as hedges
against
fluctuations in currency exchange rates.
Gains or losses from changes in the fair value of
these instruments, which are offset in whole or in

part by translation gains and losses on the non-U.S.
operation’s net assets hedged, are recorded as trans-
lation adjustments in OCI. Upon liquidation or sale of
the foreign investments, the accumulated gains or
losses from the revaluation of the hedging instru-
ments, together with the translation gains and losses
on the net assets, are included in earnings. Interna-
tional Paper did not have hedges of this type in 2007.
For the years ended December 31, 2006 and 2005,
net gains and losses included in the cumulative
translation adjustment relating to derivative and debt
instruments hedging foreign net
investments
amounted to an $11 million loss and a $19 million
gain after taxes and minority interest, respectively.

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 two years or less as of December 31, 2007. For the
years ended December 31, 2007, 2006 and 2005, net
unrealized gains after taxes totaling $33 million, $18
million and $48 million, respectively, were recorded
to OCI. Net after-tax gains of $30 million, $20 million
and $14 million were reclassified to earnings. As of
December 31, 2007, gains of $42 million after taxes
are expected to be reclassified to earnings in 2008.
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,
2007 and 2006, 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
38.5 million 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 1.2 million 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. During 2007, the Com-
pany purchased an additional 33.6 million shares of
its common stock on the open market for an average
price of $36.43 per share, plus costs to acquire the
shares for a total cost of $1.2 billion. Following the
completion of these share repurchases, International
Paper had 425.1 million shares of common stock
issued and outstanding at December 31, 2007.

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, and
substantially all hourly and union employees regard-
less of hire date. 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, are not eligible
for these pension plans but receive an additional
company contribution to their savings plan (see
“Other Plans” on page 84).

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. No contributions were
made in 2007, and none are expected to be required
in 2008.

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 salaried employees
who are senior vice presidents and above or who are
designated by the chief executive officer as partic-
ipants. These nonqualified plans are only funded to
the extent of benefits paid, which are expected to be
$27 million in 2008.

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

2007

$ 113

520

(633)

190

2006

$ 141

506

(540)

243

2005

$ 129

474

(556)

167

Net periodic pension expense (a)

$ 210

$ 377

$ 243

(a) Excludes $1.9 million, $9.1 million and $6.5 million in 2007,

2006 and 2005, respectively,

in curtailment losses, and $1.9

million, $8.7 million and $3.6 million in 2007, 2006 and 2005,

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 (gains) losses on sales and impairments

of businesses in the consolidated statement of operations.

The decrease in 2007 pension expense reflects the
earnings on the $1 billion contribution made to the
plan during the fourth quarter of 2006, lower amor-
tization of unrecognized actuarial losses, an increase
in the assumed discount rate to 5.75% in 2007 from
5.50% in 2006, and a decrease in active participants
due to divestitures. The increase in 2006 pension
expense was principally due to a change in the
mortality assumption to use the RP 2000 Table and
the use of a lower assumed discount rate.

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 2007, 2006 and 2005 were as
follows:

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2007

2006

2005

5.75% 5.50% 5.75%
8.50% 8.50% 8.50%
3.75% 3.25% 3.25%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2007 and
2006, were as follows:

Discount rate

Rate of compensation increase

2007

2006

6.20% 5.75%
3.75% 3.75%

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 2008, the
Company will use an expected long-term rate of

return on plan assets of 8.5%, a discount rate of 6.2%
and an assumed rate of compensation increase of
3.75%. The Company estimates that it will record net
pension expense of approximately $114 million for
its U.S. defined benefit plans in 2008, with the
decrease from expense of $210 million in 2007
principally reflecting lower amortization of actuarial
losses and an increase in the assumed discount rate
to 6.20% in 2008 from 5.75% in 2007.

The following illustrates the effect on pension
expense for 2008 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

2008

$29

(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 40% of
the plan’s projected benefit obligation, 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 investment manager performance.

International Paper’s pension plan asset allocations
by type of fund at December 31, 2007 and 2006, and
target allocations by asset category are as follows:

There were no International Paper shares included in
plan assets for 2007 and 2006.

At December 31, 2007, projected future pension
benefit payments are as follows:

In millions

2008

2009

2010

2011

2012

2013 - 2017

$ 570

563

565

570

579

3,041

Pension Plan Asset / Liability

Prior to 2005, the market value of plan assets for the
Company’s qualified defined benefit plan was less
than the plan benefit obligation, resulting in the
recording of a minimum pension liability and a
charge to OCI. At December 31, 2007, the fair value
of plan assets exceeded the projected benefit obliga-
tion (PBO), resulting in an after-tax credit to OCI of
$361 million. For the year ended December 31, 2006,
an after-tax credit to OCI of $484 million had been
recorded. During 2005, an after-tax charge of $290
million had been recorded. The accompanying con-
solidated balance sheet at December 31, 2007
includes a prepaid pension asset of $64 million for
the excess of the market value of pension plan assets
over the PBO for this plan. For the unfunded non-
qualified plan, the accompanying consolidated bal-
ance sheet at December 31, 2007 includes liabilities
totaling $307 million. Changes in these liabilities
resulted in after-tax credits to OCI of $10 million and
$12 million in 2007 and 2006, respectively, 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:

Before
Adoption

Adjustments

After
Adoption

$ 176

(435)

749

1,204

$(176)

(436)

235

377

–

(871)

984

1,581

Asset Category

Equity securities

Debt securities

Real estate

Other

Total

Percentage of

Plan Assets

at December 31,

2007

59%

31%

2006

57%

34%

Target
Allocations

52% - 63%

26% - 34%

5% - 10%

2% - 8%

In millions

Intangible asset

Liability

Deferred tax

100% 100%

Accumulated OCI

The accumulated benefit obligation for all defined
benefit plans was $8.5 billion and $8.8 billion at
December 31, 2007 and 2006, respectively. The fol-
lowing table summarizes information for pension
plans with an accumulated benefit obligation in
excess of plan assets at December 31, 2007 (the
nonqualified plan) and 2006 (the qualified and non-
qualified plans).

In millions

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

Unrecognized Actuarial Losses

2007

$307

261

–

2006

$9,237

8,801

8,366

SFAS No. 87 provides for delayed recognition of
actuarial gains and losses, including amounts arising
from changes in the estimated projected plan benefit
obligation due to changes in the assumed discount
rate, differences between the actual and expected
return on plan assets and other assumption changes.
These net gains and losses are recognized pro-
spectively over a period that approximates the aver-
age remaining service period of active employees
the plans
expected to receive benefits under
(approximately 11 years as of December 31, 2007) to
the extent that they are not offset by gains in sub-
sequent years. The estimated net loss and prior serv-
ice cost that will be amortized from OCI into net
periodic pension cost during the next fiscal year are
$119 million and $28 million, respectively.

The following table shows the changes in the benefit
obligation and plan assets for 2007 and 2006, and the
plans’ funded status. The benefit obligation as of
December 31, 2007 decreased by $454 million,
principally as a result of an increase in the discount
rate assumption used in computing the estimated
benefit obligation. Plan assets increased by $174
million, reflecting favorable investment results. The
fair value of plan assets is determined using quoted
closing market prices for publicly traded securities,
where
readily
determinable market prices are valued at their esti-
mated fair values.

Investments without

available.

In millions

Change in projected benefit obligation:

Benefit obligation, January 1
Service cost
Interest cost
Actuarial gain
Benefits paid
Divestitures
Restructuring
Special termination benefits
Plan amendments

2007

2006

$9,237
113
520
(599)
(575)
–
1
2
84

$9,278
141
506
(118)
(540)
(31)
2
27
(28)

Benefit obligation, December 31

$8,783

$9,237

Change in plan assets:

Fair value of plan assets, January 1
Actual return on plan assets
Company contributions
Benefits paid

Fair value of plan assets, December 31

Funded status, December 31

$8,366
720
29
(575)

$6,944
935
1,027
(540)

$8,540

$8,366

$ (243)

$ (871)

Amounts recognized in the consolidated balance sheet:
$

Non-current asset
Current liability
Non-current liability

64
(27)
(280)

–
(41)
(830)

Amounts recognized in accumulated other

comprehensive income under SFAS 158 (pre-
tax):

Net actuarial loss
Prior service cost

$ (243)

$ (871)

$1,513
239

$2,389
175

$1,752

$2,564

The components of the $812 million decrease in the
amounts recognized in Accumulated OCI during
2007 consisted of:

In millions

Current year actuarial gain
Amortization of actuarial loss
Current year prior service cost
Amortization of prior service cost

$(686)
(190)
84
(20)

$(812)

The total amounts recognized in net periodic benefit
costs and OCI were $603 million, $377 million and
$243 million for 2007, 2006 and 2005, respectively.

The following table shows the changes in the benefit
obligation and plan assets for 2007 and 2006 and the
plans’ funded status as of December 31, 2007 and
2006.

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

Expected return on plan assets

Actuarial (gain) loss

2007

2006

2005

$ 8

$ 13

$ 11

(13)

(1)

(13)

(10)

Net periodic pension expense (a)

$ 5

$ 17

$ 15

In millions

Change in projected benefit obligation:

Benefit obligation, January 1

Obligations for additional plans

Service cost

Interest cost

Participants’ contributions

Divestitures

Actuarial gain

Benefits paid

Effect of foreign currency exchange rate

movements

Benefit obligation, December 31

Change in plan assets:

2007

2006

$248

$276

–

(68)

(25)

(10)

(61)

(23)

(9)

$180

$248

(a) Excludes $3.4 million in curtailment gains in 2007, primarily

Fair value of plan assets, January 1

$179

$173

related to the sale of Beverage Packaging and Arizona Chem-

ical. Also 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 (gains) losses on sales and impairments of

businesses in the consolidated statement of operations.

Weighted average assumptions used to determine
net pension expense for 2007, 2006 and 2005 were
as follows:

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, December 31

Amounts recognized in the consolidated balance

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

5.66% 4.86% 5.11%
8.37% 6.80% 6.68%
3.52% 3.39% 3.32%

Non-current asset

Current liability

Non-current liability

2007

2006

2005

sheet:

The increase in the weighted average expected long-
term return on plan assets in 2007 reflects an
increase in expected returns in Brazil, consistent with
higher actual investment returns in Brazil in recent
years.

Amounts recognized in accumulated other

comprehensive income (pre-tax):

Prior service cost

Net actuarial (gain)/loss

(10)

(48)

(9)

(62)

$162

$179

$ (18)

$ (69)

$ 21

$ 10

(2)

(37)

(3)

(76)

$ (18)

$ (69)

$ 1

(24)

$ (23)

$ 23

Weighted average assumptions used to determine
benefit obligations as of December 31, 2007 and
2006, were as follows:

The components of the $46 million decrease in the
amounts recognized in Accumulated OCI during
2007 consisted of:

Discount rate

Rate of compensation increase

5.77%

3.45%

5.21%

3.35%

Current year actuarial gain

Amortization of actuarial loss

2007

2006

In millions

Effect of foreign currency exchange rate movements

$(27)

(16)

(3)

$(46)

The total amounts recognized in net periodic benefit
cost and OCI were $(41) million, $17 million and $15
million for 2007, 2006 and 2005, respectively.

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 $40 million, $32 million
and zero, respectively, at December 31, 2007. Plan
assets consist principally of common stock and fixed
income securities.

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.

Before
Adoption

Adjustments

After
Adoption

$ 2

(70)

$ 8

(9)

–

$ 10

(79)

In millions

Prepaid asset

Liability

Deferred tax

Accumulated OCI

OTHER PLANS

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

As determined by the provisions of each plan, 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 $91 million, $96 million and $88 mil-
lion for the plan years ending in 2007, 2006 and 2005,
respectively.

NOTE 16 POSTRETIREMENT BENEFITS

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.

The components of postretirement benefit expense
in 2007, 2006 and 2005, were as follows:

In millions

Service cost

Interest cost

Actuarial loss

Amortization of prior service cost

2007

2006

2005

$ 1

$ 2

(43)

(50)

(40)

Net postretirement benefit expense (a)

$ 15

$ 7

$ 20

(a) Excludes $0.7 million, $1.3 million and $1.8 million of curtail-

ment gains in 2007, 2006 and 2005, respectively, and $2.6 mil-

lion in 2005 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 $13.2 million, $0.2 million and

$4.1 million in curtailment gains in 2007, 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

(gains)

losses on sales and

impairments of businesses in the consolidated financial state-

ments.

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, 2007, 2006 and 2005 were
as follows:

Discount rate

2007

2006

2005

5.75% 5.50% 5.50%

assumptions used to
The weighted average
determine the benefit obligation at December 31,
2007 and 2006, were as follows:

U.S. POSTRETIREMENT BENEFITS

Discount rate

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

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

2007

2006

5.90% 5.75%
10.00% 10.00%
5.00% 5.00%

2017

2011

A 1% increase in the assumed annual health care cost
trend rate would have increased the accumulated
postretirement benefit obligation at December 31,

2007, by approximately $34 million. A 1% decrease in
the annual trend rate would have decreased the
accumulated postretirement benefit obligation at
December 31, 2007, by approximately $30 million.
The effect on net postretirement benefit cost from a
1% increase or decrease would be approximately
$2 million.

The plan is only funded in an amount equal to bene-
fits paid. The following table presents the changes in
benefit obligation and plan assets for 2007 and 2006:

In millions

Change in benefit obligation:

Benefit obligation, January 1

Service cost

Interest cost

Participants’ contributions

Actuarial loss

Benefits paid

Less Federal subsidy

Plan amendments

Divestitures

Restructuring

Special termination benefits

2007

2006

$ 624

$ 703

(134)

(133)

–

(88)

The total of amounts recognized in net periodic
benefit cost and OCI were $94 million, $7 million and
$20 million for 2007, 2006 and 2005, respectively.

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
$28 million and $38 million, respectively.

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

Current liability

Noncurrent liability

Deferred tax

Accumulated OCI

Before
Adoption

$ (59)

(520)

–

Adjustments

After
Adoption

$ –

(45)

$ (59)

(565)

At December 31, 2007, 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

$ 632

$ 624

Change in plan assets:

Fair value of plan assets, January 1

Company contributions

Participants’ contributions

Benefits paid

Fair value of plan assets, December 31

–

(134)

(133)

–

In millions

2008

2009

2010

2011

2012

Funded status, December 31

$(632)

$(624)

2013 - 2017

Benefit
Payments

Subsidy
Receipts

$ 82

$ 16

378

123

Amount recognized in the consolidated balance

sheet under SFAS 158:

Current liability

Non-current liability

Amount recognized in accumulated other

comprehensive income under SFAS 158 (pre-tax):

Net actuarial loss

Prior service credit

$ (67)

$ (59)

(565)

$(632)

$(624)

$ 243

$ 227

(119)

(182)

$ 124

$ 45

The components of the $79 million increase in the
amounts recognized in Accumulated OCI during
2007 consisted of:

In millions

Curtailment effects

Current year actuarial loss

Amortization of actuarial loss

Amortization of prior service credit

$ 20

(23)

$ 79

NON-U.S. POSTRETIREMENT BENEFITS

In addition to the U.S. plan, certain Canadian, Brazil-
ian and Moroccan employees are eligible for retiree
health care and life insurance. Net postretirement
benefit cost for our non-U.S. plans was $8 million for
2007, $3 million for 2006 and $3 million for 2005. The
benefit obligation for these plans was $28 million in
2007, $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 Compa-
ny’s non-U.S. postretirement benefit plans was an
increase in the non-current benefit liability of $2 mil-
lion and a charge to OCI of approximately $1 million.
Other changes in benefit obligations recognized in
OCI for the year included $1 million in net losses and
$1 million in amortized prior service cost.

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 of the Board of Directors (Committee)
whose members are not eligible for awards. Also,
stock appreciation rights (SAR’s) have been awarded
to employees of a non-U.S. subsidiary, with 3,310
and 4,225 rights outstanding at December 31, 2007
and 2006, 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.

International Paper
Effective January 1, 2006,
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
impact on the consolidated financial
material
statements.

STOCK OPTION PROGRAM

International Paper accounts for stock options under
SFAS No. 123(R). 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 2007 and 2006.

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
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
2007, 2006 and 2005, 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

2007

2006

2005

N/A

N/A
N/A

3.82%

22.65%

2.53%
3.50

4.92% 4.97% 2.99%
20.46% 19.70% 21.78%
2.74% 2.70% 2.42%
2.00
2.00

0.32

(a) The average fair market value of initial option grants during

2005 was $6.78.

(b) The average fair market values of replacement option grants

during 2007, 2006 and 2005 were $4.68, $4.63 and $2.05,

Under the program, upon exercise of an option, a
replacement option may be granted under certain

respectively.

The following summarizes the status of the Stock
Option Program and the changes during the three
years ending December 31, 2007:

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life
(years)

Aggregate
Intrinsic
Value
(thousands)

Options
(a,b)

Outstanding at

December 31, 2004 45,434,907

$39.70

6.80

$1,804

Granted

Exercised

Forfeited

Expired

861,827

(602,746)

(1,607,979)

(2,504,411)

Outstanding at

December 31, 2005 41,581,598

Granted

Exercised

Forfeited

Expired

997

(964,744)

(850,949)

(3,784,204)

Outstanding at

December 31, 2006 35,982,698

Granted

Exercised

Forfeited

Expired

Outstanding at

1,120

(3,538,171)

(457,200)

(3,974,712)

39.64

33.74

41.44

43.52

39.49

37.06

32.67

44.21

39.90

39.52

36.54

34.40

46.97

41.18

6.00

1,642

5.08

1,422

December 31, 2007 28,013,735

$39.81

4.40

$1,115

(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(R). 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 PSP was revised 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, 2007

20.02% - 23.98%

3.34% - 4.84%

The following summarizes PSP activity for the three
years ending December 31, 2007:

The following summarizes the activity of the Execu-
tive Continuity Award program and RSA program for
the three years ending December 31, 2007:

Outstanding at December 31, 2004

Granted

Shares issued

Forfeited

Outstanding at December 31, 2005

Granted

Shares issued

Forfeited

Outstanding at December 31, 2006

Granted

Shares issued (a)

Forfeited

Weighted
Average
Grant Date
Fair Value

$40.90

41.56

40.68

41.81

41.29

33.58

37.78

38.97

38.61

33.76

42.55

38.74

2,245,249

2,831,566

(519,533)

(361,965)

4,195,317

2,320,858

(638,541)

(373,176)

5,504,458

2,494,055

(1,562,174)

(219,327)

Outstanding at December 31, 2007

6,217,012

$35.67

(a) Includes 199,098 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.

Outstanding at December 31, 2004

Granted

Shares issued

Forfeited

Outstanding at December 31, 2005

Granted

Shares issued

Forfeited

Outstanding at December 31, 2006

Granted

Shares issued

Forfeited

Weighted
Average
Grant Date
Fair Value

$38.75

43.10

43.05

40.19

38.49

34.43

38.80

36.59

37.21

33.85

36.57

–

286,499

8,000

(13,000)

(31,124)

250,375

78,000

(89,458)

(61,667)

177,250

14,000

(68,625)

–

Outstanding at December 31, 2007

122,625

$37.18

At December 31, 2007, 2006 and 2005 a total of
27.4 million, 24.5 million and 21.1 million shares,
respectively, were available for grant under the
LTICP. A total of 9.4 million shares, 11.0 million
shares and 12.5 million shares were available for the
granting of restricted stock as of December 31, 2007,
2006 and 2005, 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, 2007, 2006 and 2005 was
$124 million, $106 million and $53 million,
respectively. The actual tax benefit realized for stock-
based compensation costs was $15 million for 2007
the years ended
and $3 million for both of
December 31, 2006 and 2005. At December 31, 2007,
$73 million, net of estimated forfeitures, of compen-
sation cost related to unvested restricted perform-
ance 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.

INTERIM FINANCIAL RESULTS (UNAUDITED) (a)

INTERNATIONAL PAPER

In millions, except per share amounts and stock
prices

2 0 0 7
Net sales
Gross margin (b)
Earnings from continuing

operations before income
taxes and minority interest

Loss from discontinued

operations
Net earnings
Basic earnings per share of

common stock
Earnings from continuing

operations

Loss from discontinued

operations
Net earnings

Diluted earnings per share of

common stock
Earnings from continuing

operations

Loss from discontinued

operations
Net earnings

Dividends per share of

common stock

Common stock prices

High
Low

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

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

1st
Quarter

$5,217
1,366

2nd
Quarter

$5,291
1,410

3rd
Quarter

$5,541
1,455

4th
Quarter

Year

$5,841
1,599

$21,890
5,830

606 (c)

294 (e)

315 (g)

439 (h)

1,654 (c,e,g,h)

(23)(d)
434 (c,d)

(10)(f)
190 (e,f)

(3)
217 (g)

(11)(i)
327 (h,i,j)

(47)(d,f,i)
1,168 (c-j)

$1.03 (c)

$0.46 (e)

$0.52 (g)

$0.80 (h)

$2.83 (c,e,g,h)

(0.05)(d)
0.98 (c,d)

(0.02)(f)
0.44 (e,f)

(0.01)
0.51 (g)

(0.02)(i)
0.78 (h,i,j)

(0.11)(d,f,i)
2.72 (c-j)

$1.02 (c)

$0.46 (e)

$0.52 (g)

$0.80 (h)

$2.81 (c,e,g,h)

(0.05)(d)
0.97(c,d)

(0.02)(f)
0.44 (e,f)

(0.01)
0.51 (g)

(0.02)(i)
0.78 (h,i,j)

(0.11)(d,f,i)
2.70 (c-j)

0.25

1.00

$38.00
32.75

$39.94
36.06

$41.57
31.05

$37.33
31.43

$41.57
31.05

$5,526
1,358

$5,716
1,445

$5,429
1,523

$5,324
1,421

$21,995
5,747

(1,223)(k)

99 (m)

594 (o)

3,718 (q)

3,188(k,m,o,q)

(24)(l)
(1,236)(k,l)

21 (n)
83 (m,n)

(161)(p)
224 (o,p)

(68)(r)
1,979 (q,r)

(232)(l,n,p,r)
1,050 (k-r)

$(2.49)(k)

$0.13 (m)

$0.81 (o)

$4.56 (q)

$2.69 (k,m,o,q)

(0.05)(l)
(2.54)(k,l)

0.04 (n)
0.17 (m,n)

(0.34)(p)
0.47 (o,p)

(0.15)(r)
4.41 (q,r)

(0.48)(l,n,p,r)
2.21 (k-r)

$(2.49)(k)

$0.13 (m)

$0.80 (o)

$4.53 (q)

$2.65 (k,m,o,q)

(0.05)(l)
(2.54)(k,l)

0.04 (n)
0.17 (m,n)

(0.34)(p)
0.46 (o,p)

(0.15)(r)
4.38 (q,r)

(0.47)(l,n,p,r)
2.18 (k-r)

0.25

$36.39
32.10

0.25

$37.98
30.69

0.25

$36.05
31.52

0.25

$35.63
31.85

1.00

$37.98
30.69

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, the Brazilian
Coated Papers business, the Beverage Pack-
aging business and the Wood Products busi-
ness as Discontinued operations.

(b) Gross margin represents net sales less cost of

products sold.

(c)

(d)

(e)

previously

announced

Includes an $18 million charge before taxes
($11 million after
for organizational
taxes)
restructuring charges associated with the
Trans-
Company’s
formation Plan, a pre-tax gain of $103 million
($96 million after taxes) on the sale of the
Arizona Chemical business, a pre-tax gain of
$205 million ($164 million after taxes) related
to the asset exchange for the Luiz Antonio mill
in Brazil, and a $6 million pre-tax credit ($4
million after taxes) for adjustments to the loss
on the sale of the Coated and Supercalendered
Papers business.

Includes a pre-tax gain of $21 million ($9 mil-
lion after taxes) relating to the sale of the Wood
Products business, a pre-tax loss of $15 million
($39 million after taxes) for adjustments to the
loss on the sale of the Beverage Packaging
business, a pre-tax gain of $6 million ($4 mil-
lion after taxes) for adjustments to the loss on
the sale of the Kraft Papers business, a $10 mil-
lion pre-tax credit ($6 million after taxes) for
additional refunds received from the Canadian
government of duties paid by the Company’s
Weldwood of Canada Limited business, and the
operating results of the Beverage Packaging
and Wood Products businesses.

Includes $17 million before taxes ($11 million
after taxes) of accelerated depreciation charges
for long-lived assets being removed from serv-
ice and $9 million before taxes ($5 million after
taxes) of other charges associated with the
Company’s Transformation Plan, a pre-tax gain
of $10 million ($5 million after taxes) to adjust
the gain on the sale of the Arizona Chemical
business, a pre-tax loss of $6 million ($4 million
after taxes) to adjust the loss on the sale of box
plants in the United Kingdom and Ireland, a $5
million after-tax adjustment related to the asset
exchange for the Luiz Antonio mill in Brazil,
and a net $3 million pre-tax charge ($3 million
after taxes) related to other smaller items.

(f)

Includes a pre-tax charge of $6 million ($4 mil-
lion after taxes) for adjustments relating to the

(g)

(h)

sale of the Wood Products business, a pre-tax
charge of $5 million ($3 million after taxes) for
adjustments relating to the sale of the Bever-
age Packaging business, and the operating
results of these businesses.

Includes a pre-tax charge of $27 million ($17
million after taxes) of accelerated depreciation
charges for the Terre Haute, Indiana mill which
was closed as part of the Company’s Trans-
formation Plan, a pre-tax charge of $10 million
($6 million after taxes) for environmental costs
associated with this closure, a pre-tax charge of
$3 million ($2 million after taxes) for Brazilian
restructuring charges, a pre-tax charge of $2
million ($1 million after taxes) for severance and
other charges associated with the Company’s
Transformation Plan, and a pre-tax gain of $9
million ($5 million after taxes) to reduce esti-
mated transaction costs accrued in connection
with the 2006 sale of U.S. Forestlands included
in the Company’s Transformation Plan.

for asset write-offs at

Includes a pre-tax charge of $4 million ($3 mil-
lion after taxes)
the
Pensacola mill, a pre-tax charge of $14 million
($9 million after taxes) for severance and other
charges associated with the Company’s Trans-
formation Plan, a pre-tax gain of $9 million ($6
million after taxes) for an Ohio Commercial
Activity Tax adjustment, a pre-tax gain of $7
million ($5 million after taxes) for an adjust-
ment to the loss on the sale of box plants in
the United Kingdom and Ireland, a pre-tax gain
of $5 million ($3 million after taxes) for an
adjustment to the loss on the sale of the Mar-
asquel mill, and a pre-tax gain of $1 million ($1
million after taxes) for other items.

(i)

(j)

(k)

Includes a pre-tax charge of $9 million ($5 mil-
lion after taxes) for the Beverage Packaging
business and a pre-tax gain of $4 million ($3
million after taxes)
for the Wood Products
business for adjustments related to the sales of
those businesses, a pre-tax charge of $4 mil-
lion ($3 million after taxes) for additional taxes
associated with the sale of Weldwood of
Canada Limited, and the quarterly operating
results of the Wood Products business.

Includes a $41 million tax benefit relating to
the effective settlement of certain income tax
audit issues.

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

the net assets of

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.

(l)

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 Papers, Brazilian
Coated Papers, Wood Products and Beverage
Packaging businesses.

(m) Includes a pre-tax credit of $62 million ($39
million after taxes) for gains on sales of U.S.
forestlands included in the Transformation
Plan, a pre-tax charge of $85 million ($53 mil-
lion after taxes) to adjust the carrying value of
the Company’s Coated and
the assets of
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 sev-
erance and other charges associated with the
Company’s Transformation Plan, and a $4 mil-
lion pre-tax charge ($3 million after taxes) for a
legal settlement.

(n)

(o)

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 operating
results of the Kraft Papers, Wood Products,
Beverage Packaging, and Brazilian Coated
Papers businesses.

the completion of

Includes a pre-tax gain of $304 million ($185
million after taxes) from sales of U.S. forestlands
included in the Transformation Plan, the recog-
nition 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
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.

the sales of

(p)

(q)

(r)

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 busi-
ness, pre-tax losses of $115 million and $165
million ($82 million and $165 million after
the
taxes)
Company’s Beverage Packaging and Wood
Products businesses,
to their
estimated fair values, a net pre-tax gain of $12
related to
million ($3 million after
smaller items, and the operating results of the
Kraft Papers, Brazilian Coated Papers, Wood
Products and Beverage Packaging businesses.

the carrying values of

respectively,

taxes)

Includes a pre-tax gain of $4.4 billion ($2.7 billion
after
forestlands
from sales of U.S.
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 Shorewood businesses,
a $128 million pre-tax charge ($84 million after
taxes) to reduce the carrying value of the fixed
assets of the Company’s Saillat mill in France to
their estimated 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 Trans-
formation Plan, a pre-tax gain 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, a pre-tax
charge of $157 million ($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.

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
pre-tax credit
for
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)

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, 2007, 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
disclosure controls and procedures, pursuant to
Rule 13a-15 under the Securities Exchange Act (the
Act). Based upon this evaluation, the Chief Execu-
tive Officer and Chief Financial Officer have con-
cluded that the Company’s disclosure controls and
procedures are effective to ensure that information
required to be disclosed by us in reports we file
under the Act is recorded, processed, summarized,
and reported by the management of the Company
on a timely basis in order to comply with the
Company’s disclosure obligations under the Act
and the SEC rules thereunder.

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

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

(cid:129)

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;

(cid:129)

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

All internal control systems have inherent limitations,
including the possibility of circumvention and over-
riding of controls, and therefore can provide only
reasonable assurance as to such financial statement
preparation and asset safeguarding. The Company’s
internal control system is supported by written poli-
cies
self-monitoring
mechanisms, and is audited by the internal audit
function. Appropriate actions are taken by manage-
ment to correct deficiencies as they are identified.

procedures,

contains

and

As of December 31, 2007, management has assessed
the effectiveness of the Company’s internal control
over financial reporting.
In a report included on
page 45, management concluded that, based on its
assessment, the Company’s internal control over
financial reporting is effective as of December 31,
2007.

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, has
audited the consolidated financial statements pre-
pared by us. Their report on the consolidated finan-
cial statements is included in Part II, Item 8. Financial
Statements and Supplementary Data. Deloitte &
Touche LLP has issued an attestation report on our
internal controls over financial reporting.

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
the performance of our
reporting procedures,
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, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal
control over financial reporting.

During the 2007 first quarter, the Company com-
pleted the non-cash exchange of assets for the Luiz
Antonio mill in Brazil. Integration activities, including
an assessment of internal controls over financial
reporting, are currently in process and are expected
to be completed in early 2008.

During the 2007 third quarter, the Company com-
pleted the acquisition of Central Lewmar LLC.
Integration activities,
including an assessment of
internal controls over financial reporting, are cur-
rently in process and are expected to be completed
in early 2008.

These two operations contributed approximately 3%
of net sales for the year ended December 31, 2007,
and approximately 4% of
total assets as of
December 31, 2007.

ITEM 9B. OTHER INFORMATION

As previously reported on the Company’s Current
Report on Form 8-K filed with the Securities and
Exchange Commission on October 10, 2007, Mr. Paul
Herbert, former senior vice president, International
Paper Company, resigned his position with the
Company to become chief executive officer of OJSC
Ilim Group (Ilim Group). Ilim Group is a 50:50 joint
venture between the Company and Ilim Holding S.A.

attached as Exhibit

Under the post-employment agreement between the
Company and Mr. Herbert, effective October 4, 2007
(the Agreement),
10.31,
Mr. Herbert continues to participate in Company-
provided health and welfare benefits during his serv-
ice to Ilim Group. In addition, in 2009 and 2010, the
Company will pay Mr. Herbert a lump sum amount
equal to the value of restricted stock that he would
have been eligible to receive under the Company’s
Performance Share Plan had he remained employed
during 2008 and 2009, respectively. For subsequent
years, Mr. Herbert’s long-term incentive compensa-
tion will be earned under, and paid by, Ilim Group’s
incentive compensation plans.

Mr. Herbert’s Company retirement benefits became
vested under our SERP, and, if his employment is
terminated under the following scenarios he will
receive the equivalent of an unreduced retirement
benefit: (1) his employment terminates after he has
completed two years of service to Ilim Group, (2) he
is terminated at any time without Cause (as defined
in the Agreement) or he voluntarily leaves for Good
Reason (as defined in the Agreement),
(3) he
becomes disabled, or (4) there is a change in control
Ilim Group resulting in his termination of
of
employment where he does not return to a Com-
parable Position (as defined by the Agreement) with
the Company.

Mr. Herbert is not eligible to receive severance under
the Company’s Salaried Severance Plan unless his
employment with Ilim Group is terminated and there
is no Comparable Position with the Company for him
to return to, or if he receives severance from Ilim
Group. Mr. Herbert remains covered by the Compa-
ny’s Tier I change in control agreement (previously
filed with the SEC as Exhibit 10.3 to the Company’s
Current Report on Form 8-K, dated October 17, 2005).

In the event Mr. Herbert’s employment is terminated
with Ilim Group within two years of a change in con-
trol of Ilim Group, then Mr. Herbert is not eligible for
benefits under the Company’s change in control
agreement, but instead may return to a Comparable
Position with the Company (or receive severance, if
no Comparable Position is available). If the Company
offers Mr. Herbert a Comparable Position, and he
chooses to not accept such offer of employment,
then Mr. Herbert may retire, and will not be eligible
for severance.

The Company has agreed that Mr. Herbert will
receive comparable tax equalization benefits pro-
vided to expatriates under our Global Mobility Policy.
The Company also agreed to reimburse legal
expenses incurred in connection with negotiating the
Agreement, and tax reimbursement on that amount.

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 3 and 4 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. We dis-
close any amendments to our Code and any waivers
from a provision of our code granted to our direc-
tors, chief executive officer and senior financial offi-

cers on our Internet Web site within four business
days following such amendment or waiver. To date,
no waivers of the code have been granted.

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 and Exchange Act 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.

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
hereby
compensation
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 trans-
actions 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 ACCOUNTANT 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 AND FINANCIAL
STATEMENT SCHEDULES

(a)

(1)

(2)

Financial Statements – See Item 8.
Financial Statements and Supple-
mentary Data.

Financial Statement Schedules – The
financial data
following additional
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
2007, 2006 and 2005

Report of Independent Registered Public
Financial
Accounting
Statement Schedule for 2007, 2006 and
2005

Firm on

Consolidated Schedule: II-Valuation and

Qualifying Accounts

100

101

(3)

(3.1)

(3.2)

(4.1)

(4.2)

Exhibits:

Composite copy of Restated Certifi-
cate of Incorporation of International
Paper Company (incorporated by
reference to Exhibit 3.1 to the
Company’s Annual Report on Form
ended
10-K for
December 31, 2006, File No. 1-3157).

fiscal

year

the

amended

By-laws of International Paper Com-
pany,
through
October 10, 2006 (incorporated by
reference to Exhibit 3.1 to the
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
(incorporated by reference to Exhibit
4.1 to the Company’s Current Report
on Form 8-K dated June 16, 2000, File
No. 1-3157).

(4.3)

(10.1)

(10.2)

(10.3)

(10.4)

with

accordance

Item 601
In
(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.

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
Timberlands I LP, Red Mountain
Operations LLC,
International Paper
Company, and the other selling par-
ties
A
on
(incorporated herein by reference to
Exhibit 10.1 to the Company’s Quar-
terly Report on Form 10-Q for the
quarter ended June 30, 2006, File
No. 1-3157).

Schedule

listed

Amendment, dated November
3,
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 the
Company’s Quarterly Report on Form
10-Q for
the quarter ended Sep-
tember 30, 2006, File No. 1-3157).

Purchase Agreement dated as of
April 4, 2006 among TimberStar
Southwest Parent LLC, TimberStar
International Paper
Southwest LLC,
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

(10.5)

(10.6)

(10.7)

(10.8)

(10.9)

(10.10)

Schedule A thereto
listed
(incorporated by reference to Exhibit
10.3 to the 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 reference to
Exhibit 2.1 to the Company’s Current
Report on Form 8-K dated June 6,
2006, File No. 1-3157).

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 to 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
International
Investments
Paper
(Holland) B.V. (incorporated by refer-
ence to Exhibit 2.1 to the 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.
(incorporated by
reference to Exhibit 2.8 to the
Company’s Annual Report on Form
10-K for
ended
December 31, 2006, File No. 1-3157).

fiscal

year

the

Agreement,

dated
Purchase
December 7, 2006, by and between
Sustainable Forests L.L.C. and RBIP,
Inc.
(incorporated by reference to
Exhibit 10.1 to the Company’s Current
dated
Report
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 the Company’s Current Report
on Form 8-K dated December 13,
2006, File No. 1-3157).

(10.11)

(10.12)

(10.13)

(10.14)

(10.15)

IP Hickory Note, dated December 7,
2006,
issued by International Paper
Company to Hickory Forests LLC
(incorporated by reference to Exhibit
4.2 to the Company’s Current Report
on Form 8-K dated December 13,
2006, File No. 1-3157).

Paper

Share Purchase Agreement, dated
in respect of Ilim
August 16, 2007,
Holdings S.A. by and among Interna-
tional
Investments
(Luxembourg) S.ar.l., Pulp Holding
Ilim Holding
Luxembourg S.ar.l.,
Luxembourg S.ar.l., Ilim Holding S.A.,
International
Company,
Mr. Zakhar Smushkin, Mr. Mikhail
Zingarevich, Mr. Leonid Eruhimovich
and
Zingarevich
Boris
(incorporated by reference to Exhibit
10.1 to the Quarterly Report on Form
10-Q for the quarter ended September
30, 2007, File No. 1-3157).

Paper

Mr.

First Amendment Deed to Share Pur-
chase Agreement, dated October 4,
2007, in respect of Ilim Holdings S.A.
by and among International Paper
Investments
(Luxembourg) S.ar.l.,
Pulp Holding Luxembourg S.ar.l., Ilim
Ilim
Holding Luxembourg S.ar.l.,
Holding S.A.,
International Paper
Company, Mr. Zakhar Smushkin,
Mr. Mikhail Zingarevich, Mr. Leonid
Eruhimovich and Mr. Boris Zingar-
evich (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on
Form 10-Q for
the quarter ended
September 30, 2007, File No. 1-3157).

2007 Management
Incentive Plan,
amended and restated as of January
1, 2007 (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June
30, 2007, File No. 1-3157). +

Long-Term Incentive Compensation
Plan, amended and restated as of
February
“LTICP”)
2005
(incorporated by reference to Exhibit
99.1 to the Company’s Current Report
on Form 8-K dated February 11, 2005,
File No. 1-3157). +

(the

(10.16)

Form of individual non-qualified stock
option agreement under the LTICP
to
by
(incorporated

reference

(10.17)

(10.18)

(10.19)

(10.20)

(10.21)

(10.22)

(10.23)

(10.24)

10.6

to the Company’s
Exhibit
Annual Report on Form 10-K for the
fiscal year ended December 31, 2001,
File No. 1-3157). +

under

award

individual executive con-
Form of
tinuity
LTICP
(incorporated by reference to Exhibit
10.9 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 1999, File No. 1-3157). +

the

Form of Restricted Stock Award
under
the LTICP (incorporated by
reference to Exhibit 10.17 to the
Company’s Annual Report on Form
10-K for
the fiscal year ended
December 31, 2006, File No. 1-3157).
+

Deferred Compensation Savings Plan
(incorporated by reference to Exhibit
10.11 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2000, File No. 1-3157). +

Pension Restoration Plan for Salaried
Employees (incorporated by reference
to Exhibit 10.12 to the Company’s
Annual Report on Form 10-K for the
fiscal year ended December 31, 2000,
File No. 1-3157). +

for

Unfunded Supplemental Retirement
Plan
as
amended and restated effective Jan-
uary 1, 2008. + *

Senior Managers,

Restricted Stock and Deferred Com-
pensation Plan for Non-Employee
Directors, effective January 1, 2008. +
*

Form of Non-Competition Agreement
entered into by certain Company
employees (including named executive
officers) who have received restricted
stock under the LTICP (incorporated by
reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended March 31,
2006, File No. 1-3157). +

Form of Non-Solicitation Agreement
entered into by certain Company
employees (including named executive
officers) who have received restricted
stock under the LTICP (incorporated by
reference to Exhibit 10.5 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended March 31,
2006, File No. 1-3157). +

(10.25)

(10.26)

(10.27)

(10.28)

(10.29)

(10.30)

(10.31)

(10.32)

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). +

Form of
Indemnification Agreement
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). +

Retirement Agreement dated March
21, 2006, between Robert M. Amen
and International Paper Company
(incorporated by reference to 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-
ments with
Executives
(incorporated by reference to Exhibit
10.1 to the Company’s Current Report
on Form 8-K filed on 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 filed on
October 17, 2005, File No. 1-3157). +

Executive Employment Agreement
between the Company and Paul Her-
bert, effective October 5, 2007. + *

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).

(10.33)

(10.34)

(10.35)

(10.36)

Consent dated as of December 7, 2006
to the 5-year Credit Agreement,
among the Company,
the lenders
party thereto, and JPMorgan Chase
Bank, N.A., as Administrative Agent
(incorporated by reference to Exhibit
10.35 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2006, File No. 1-3157).

Inc.,

Amended and Restated Credit and
Security Agreement dated as of
November 17, 2004, among Red Bird
Borrower,
Receivables,
International Paper Financial Services,
Inc., as Servicer,
International Paper
Company, as Performance Guarantor,
The Conduits from Time to Time Party
thereto, The Bank of Tokyo-Mitsubishi,
Ltd., New York Branch, as Gotham
Agent, JPMorgan Chase Bank, N.A.,
as Prefco Agent, BNP Paribas, acting
through its New York Branch, as
Starbird Agent, Citicorp North 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,
International Paper
Inc., as Servicer,
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 Co-
Agent, BNP Paribas, acting through its
New York Branch, as a Co-Agent,
Starbird Funding Corporation, Citicorp
Inc., as a Co-Agent,
North America,
and Wachovia
National
Association as Co-Agent and as
Administrative Agent (incorporated by
reference to Exhibit 10.37 to the
Company’s Annual Report on Form
10-K for
ended
December 31, 2006, File No. 1-3157).

Bank,

fiscal

year

the

(10.37)

(10.38)

Inc.,

Second Amendment, dated as of
October 25, 2006, to the Amended and
Restated Credit and Security Agree-
ment, by and among Red Bird
Borrower,
Receivables,
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
North America,
Inc., as a Co-Agent
National
and Wachovia
Association, as a Co-Agent and as
Administrative Agent (incorporated by
reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended September
30, 2006, File No. 1-3157).

Bank,

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,
National
and Wachovia
Association, as a Co-Agent and as
Administrative Agent (incorporated by
reference to Exhibit 10.39 to the
Company’s Annual Report on Form
10-K for
ended
December 31, 2006, File No. 1-3157).

Bank,

fiscal

year

the

Receivables Sale Agreement dated as
of December 26, 2001, between Inter-
national Paper Company, as origi-
nator,
Paper
Inc., as buyer
Financial Services,

International

and

(10.39)

(10.40)

(10.41)

(10.42)

(10.43)

(10.44)

(10.45)

(incorporated by reference to Exhibit
(b)(2) to the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

First Amendment to Receivables Sale
Agreement dated November 19, 2003,
(incorporated by reference to Exhibit
10.41 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2006, File No. 1-3157).

Second Amendment to Receivables
Sale Agreement dated November 17,
2004 (incorporated by reference to
Exhibit 10.42 to the Company’s
Annual Report on Form 10-K for the
fiscal year ended December 31, 2006,
File No. 1-3157).

Receivables Sale and Contribution
Agreement dated as of December 26,
2001, between International Paper
Financial Services, Inc., and Red Bird
Receivables,
Buyer
Inc.,
(incorporated by reference to Exhibit
(b)(3) to the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

First Amendment to Receivables Sale
and Contribution Agreement dated
February 28, 2002 (incorporated by
reference to Exhibit 10.44 to the
Company’s Annual Report on Form
10-K for
ended
December 31, 2006, File No. 1-3157).

fiscal

year

the

December

Second Amendment
to Receivables
Sale and Contribution Agreement
dated
2002
(incorporated by reference to Exhibit
10.45 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2006, File No. 1-3157).

23,

Third Amendment to Receivables Sale
and Contribution Agreement dated
December 3, 2003 (incorporated by
reference to Exhibit 10.46 to the
Company’s Annual Report on Form
ended
10-K for
December 31, 2006, File No. 1-3157).

fiscal

year

the

November

Fourth Amendment
to Receivables
Sale and Contribution Agreement
2004
dated
(incorporated by reference to Exhibit
10.47 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2006, File No. 1-3157).

17,

(10.46)

(10.47)

(11)

(12)

(21)

(23)

(24)

(31.1)

(31.2)

(32)

Contribution

[Amendment
Omnibus Amendment
No. 3 to Receivables Sale Agreement,
Amendment No. 5 to Receivables Sale
and
Agreement
Amendment No. 2 to Amended and
Restated
Security
Agreement] dated August 7, 2006
(incorporated by reference to Exhibit
(b)(4) to the Company’s Schedule TO
filed with the Securities and Exchange
Commission on August 16, 2006).

Credit

and

Omnibus Amendment
[Amendment
No. 3 to Receivables Sale Agreement
and Amendment No. 5 to Receivables
Sale and Contribution Agreement]
entered into as of February 28, 2007
(incorporated herein by reference to
Exhibit 10.1 to the Company’s Quar-
terly Report on Form 10-Q for the
quarter
2007,
ended March 31,
File No. 1-3157).

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 Company’s
Annual Report on Form 10-K for the
fiscal year ended December 31, 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 Tim S. Nicholls, 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.*

* filed herewith

+ Management contract or compensatory plan or arrangement.

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, 2007 and 2006, and for each of the three years in the period ended December 31,
2007, and the Company’s internal control over financial reporting as of December 31, 2007, and have issued our
reports thereon dated February 28, 2008 (which report on the consolidated financial statements expresses an
unqualified opinion and includes an explanatory paragraph regarding the Company’s adoption of new accounting
standards); such consolidated financial statements and 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(a)(2). 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 28, 2008

100

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, 2007

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance
at End of
Period

85 $
56

14 $
30

– $
–

(4)(a) $

(79)(b)

95
7

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

Description
Reserves Applied Against Specific Assets

Shown on Balance Sheet:

Doubtful accounts – current
Restructuring reserves

108 $
–

17 $
90

– $
–

(31)(a)
(57)(b)

94
33

(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.

101

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 29, 2008

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 29, 2008

Director

February 29, 2008

/S/ MARTHA FINN BROOKS

Director

February 29, 2008

Martha Finn Brooks

/S/ SAMIR G. GIBARA
Samir G. Gibara

Director

February 29, 2008

/S/ LYNN LAVERTY ELSENHANS

Director

February 29, 2008

Lynn Laverty Elsenhans

/S/ DONALD F. MCHENRY

Donald F. McHenry

Director

February 29, 2008

/S/ JOHN L. TOWNSEND III

Director

February 29, 2008

John L. Townsend III

/S/ JOHN F. TURNER

John F. Turner

/S/ WILLIAM G. WALTER

William G. Walter

/S/ ALBERTO WEISSER

Alberto Weisser

/S/ J. STEVEN WHISLER

J. Steven Whisler

/S/ TIM S. NICHOLLS

Tim S. Nicholls

/S/ ROBERT J. GRILLET

Robert J. Grillet

Director

Senior Vice President and Chief
Financial Officer

Vice President – Finance and
Controller

102

February 29, 2008

2007 LISTING OF FACILITIES
(all facilities are owned except noted otherwise)

PRINTING PAPERS

Uncoated Papers and Pulp

U.S.:

Courtland, Alabama
Selma, Alabama
(Riverdale Mill)

Ontario, California leased

(C & D Center)
Cantonment, Florida
(Pensacola Mill)
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
Franklin, Virginia

International:

Luiz Antônio, São Paulo, Brazil
Mogi Guacu, São Paulo, Brazil
Saillat, France
Kwidzyn, Poland
Svetogorsk, Russia
Inverurie, Scotland

INDUSTRIAL PACKAGING

Containerboard

U.S.:

Prattville, Alabama
Pensacola, Florida
Savannah, Georgia
Mansfield, Louisiana
Pineville, Louisiana
Vicksburg, Mississippi

International:

Yanzhou City, China
Arles, France

(Etienne Mill)
Kenitra, Morocco
Corrugated Container

U.S.:

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
Northlake, Illinois
Fort Wayne, Indiana
Hartford City, Indiana
Portland, Indiana leased
Lexington, Kentucky
Lafayette, Louisiana
Shreveport, Louisiana
Springhill, Louisiana
Auburn, Maine
Brownstown, Michigan
Howell, Michigan

Kalamazoo, Michigan
Monroe, Michigan leased

Arden Hills, Minnesota
Minneapolis, Minnesota
Houston, Mississippi leased
Kansas City, Missouri
North Kansas City, Missouri leased
Statesville, North Carolina
Byesville, Ohio
Cincinnati, Ohio
Newark, Ohio
Solon, Ohio
Wooster, Ohio
Eighty-four, Pennsylvania
Lancaster, Pennsylvania
Mount Carmel, Pennsylvania
Georgetown, South Carolina
Laurens, South Carolina
Spartanburg, South Carolina

A-1

Appendix I

Lavergne, Tennessee leased

Morristown, Tennessee
Murfreesboro, Tennessee
Dallas, Texas
Edinburg, Texas (2 locations)
El Paso, Texas
Ft. Worth, Texas
Hidalgo, Texas leased
San Antonio, Texas
Chesapeake, Virginia
Richmond, Virginia
Cedarburg, Wisconsin
Fond du Lac, Wisconsin

International:

Tillsonburg, Ontario, Canada leased
Las Palmas, Canary Islands
Tenerife, Canary Islands
Rancagua, Chile
Beijing, China
Chengdu, China
Dalian, China
Dongguan, China
Guangzhou, China
Shanghai, 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
Jaurez, Mexico leased
Puebla, Mexico leased
Agadir, Morocco
(2 locations)
1 leased

Casablanca, Morocco
Kenitra, Morocco
Alcala, Spain leased
Almeria, Spain
Barcelona, Spain
Bilbao, Spain
Gandia, Spain
Valladolid, Spain
Bangkok, Thailand

Appendix I

SPECIALTY BUSINESSES AND
OTHER

IP Mineral Resources

Houston, Texas leased

INDUSTRIAL PACKAGING

DISTRIBUTION

Coated Paperboard

Ontario, California leased

(C & D Center)
Augusta, Georgia
Springhill, Louisiana
(C & D Center)
Sturgis, Michigan
(C & D Center)

Greensboro, North Carolina
Riegelwood, North Carolina
Hazleton, Pennsylvania

(C & D Center)

Prosperity, South Carolina
Texarkana, Texas
Franklin, Virginia

Foodservice

U.S.:

Visalia, California
Shelbyville, Illinois
Kenton, Ohio
International:

Shanghai, China
Bogota, Columbia
Cheshire, England leased
D.N. Ashrat, Israel
Mexico City, Mexico leased

xpedx
U.S.:

Stores Group

Chicago, Illinois
140 locations nationwide

133 leased

South Central Region

Greensboro, North Carolina
39 branches in the Southeast

and Mid-west States

28 leased

West Region

Denver, Colorado
32 branches in the Rocky

Mountain, Northwest, and
Pacific States
19 leased

North Central Region

Hartford, Connecticut
32 branches in New England,
Upper Mid-west and Middle
Atlantic States
25 leased

National Group

Loveland, Ohio
7 locations in Georgia, Kansas,
Ohio, New York, Illinois, and
Missouri

Shorewood Packaging

U.S.:

Indianapolis, Indiana
Louisville, Kentucky
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
Smith Falls, Ontario, Canada
Toronto, Ontario, Canada
Guangzhou, China
Kunshan, China
Sacheon, South Korea
Ebbw Vale, Wales, United Kingdom

all leased

International:

Canada (3 locations)

all leased

Mexico (20 locations)

all leased

FOREST PRODUCTS

Forest Resources

U.S.:

Approximately 300,000 acres
in the South and North

International:

Approximately 250,000 acres

in Brazil

Wood Products

Meldrim, Georgia
Johnston, South Carolina
Sampit, South Carolina
Franklin, Virginia

A-2

2007 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

Consumer Packaging
Coated Paperboard

Total Packaging

Forest Resources

Appendix II

U.S.

Europe

Americas,
other
than U.S.

Asia

Total

3,400

340

3,740

1,040

–

4,780

4,798

1,879

6,677

1,381

–

1,381

134

127

1,642

270

340

610

882

–

882

–

882

–

495

5,663

340

6,003

1,174

127

7,304

5,068

2,714

7,782

We own, manage or have an interest in more than 1.0 million acres of forestlands

worldwide. These forest lands and associated acres are located in the following

regions:

South

North

Total U.S.

Brazil

Total

We have harvesting rights in:

Russia

Total

(M Acres)

303

309

260

569

516

1,085

A-3

International Paper
Senior Leadership

John V. Faraci

Carol L. Roberts

Greg C. Gibson

Kevin G. McWilliams

Chairman and
Chief Executive Officer

Senior Vice President
IP Packaging Solutions

Newland A. Lesko

Maura Abeln Smith

Executive Vice President
Manufacturing and Technology

John N. Balboni

Senior Vice President
Chief Information Officer

Michael J. Balduino

Senior Vice President
President, Shorewood Packaging

H. Wayne Brafford

Senior Vice President
Printing & Communications
Papers

Jerome N. Carter

Senior Vice President
Human Resources and
Communications

C. Cato Ealy

Senior Vice President
Corporate Development

Thomas E. Gestrich

Senior Vice President
President, International Paper
Asia

Thomas G. Kadien

Senior Vice President
President, xpedx

Mary A. Laschinger

Senior Vice President
President,
International Paper Europe,
Middle East, Africa and Russia

Senior Vice President
General Counsel,
Corporate Secretary and
Global Government
Relations

Mark S. Sutton

Senior Vice President
Supply Chain

W. Michael Amick Jr.

Vice President
xpedx

September G. Blain

Vice President
Supply Chain

Aleesa L. Blum

Vice President
Communications and
Sustainability

Paul Brown

Vice President
European Container

Thomas A. Cleves

Vice President
Investor Relations

Dennis J. Colley

Vice President
IP Packaging Solutions,
Supply Chain

James A. Connelly

Vice President
xpedx

Timothy S. Nicholls

Kirt J. Cuevas

Senior Vice President
Chief Financial Officer

Maximo Pacheco

Senior Vice President
President, International Paper do
Brasil

Vice President
Manufacturing
Coated Paperboard

Vice President
Commercial Printing &
Imaging Papers

Robert J. Grillet

Vice President Finance and
Controller

Errol A. Harris

Vice President
Global Treasury

Vice President
Tax

William A. Merrigan

Vice President
Global Supply Chain, Deliver

Ted R. Niederriter

Vice President and
Deputy General Counsel
Legal

Jeffrey A. Hearn

Jean-Michel Ribieras

Vice President
New Projects and
Technology
International Paper do Brasil

Peter G. Heist

Vice President
Coated Paperboard

Terri L. Herrington

Vice President
Internal Audit

William Hoel

Vice President
Container The Americas

Robert M. Hunkeler

Vice President
Trust Investments

Tommy S. Joseph

Vice President
Technology

Paul J. Karre

Vice President
Human Resources

Timothy A. Kelly

Vice President
European Papers

Austin E. Lance

Vice President
Foodservice

Vice President
Converting Papers & Pulp

John V. Sims

Vice President
Strategic Planning

David B. Struhs

Vice President
Environment, Health and
Safety

Greg Wanta

Vice President
Manufacturing
Printing & Communications
Papers

Thomas J.
Weisenbach

Vice President
xpedx

Robert W. Wenker

Vice President and
Chief Technology Officer
Information Technology

Ann B. Wrobleski

Vice President
Global Government
Relations

Ilim Group
Senior Leadership

Paul Herbert

Chief Executive Officer

Brian N. McDonald

Deputy CEO
Managing Director – Ilim East

John W. Rankin

Vice President
Manufacturing

Arthur J. Douville

Glenn R. Landau

Vice President
xpedx

Vice President
Containerboard

Michael P. Exner

David A. Liebetreu

Vice President
Manufacturing
Containerboard

Vice President
Global Sourcing

Richard B. Lowe

Vice President
xpedx

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

President and Chief Operating Officer
Novelis Inc.

Lynn Laverty Elsenhans

Executive Vice President, Global Manufacturing
Shell Downstream 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

J. Steven Whisler

Retired Chairman and Chief Executive Officer
Phelps Dodge Corporation

Papers used in this report:
Accent® Opaque, White, Smooth, 100 lb. cover
Accent® Opaque, White, Smooth, 50 lb. text

Printed in the U.S. by RR Donnelley
Design: Perdue Creative, Memphis, Tenn.

Illustration: Shane McDermott, Memphis, Tenn.

Board of Directors Photograph:
Wayne Crook, Memphis, Tenn.

Alberto Weisser Photograph:
Trey Clark, 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 11 a.m. local time,
Monday, May 12, 2008 at the Ritz Carlton, Westchester in White Plains, N.Y.

Transfer Agent and Registrar
BNY Mellon Shareowner 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:

BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, New Jersey 07310-1900
Telephone Number: (800) 678-8715
Foreign Shareholders: (201) 680-6578
www.bnymellon.com/shareowner/isd

Stock Exchange Listings
Common shares (symbol: IP) are listed on the following exchanges: New York,
Swiss and Amsterdam.

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

Reports and Publications
Copies of this annual report (including the financial statements and the
financial statement schedules), 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) 419-3888.

Investor Relations
Investors desiring further information about International Paper should contact
the investor relations department at corporate headquarters, (901) 419-9000.

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, 2007. 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 Board of Directors

Unavailable for group photo (right): Alberto Weisser, chairman and chief executive officer, Bunge Limited.

Global Headquarters
6400 Poplar Avenue
Memphis, TN 38197
1-901-419-9000

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

International Paper do Brasil
Avenida Paulista, 37 - 14º andar
01311-902 São Paulo SP, Brazil
55-11-3797-5797

International Paper Asia
Room 3006, K. Wah Center
1010 Huaihai Zhong Road
Shanghai, 200031
P. R. China
86-21-6113-3200

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