International Paper Company Annual Report 2008

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FY2008 Annual Report · International Paper Company

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PAPER, PACKAGING AND DISTRIBUTION

www.internationalpaper.com

Listed on the New York Stock Exchange

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

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2008 Highlights & Achievements

International Paper Board of Directors

Generated the best free cash flow
in IP history – despite significant
input cost increases – by operating
well, managing working capital and
decreasing capital spending

Completed the acquisition of
Weyerhaeuser's industrial packaging
business and exceeded the 2008
synergies target

Delivered our second-best earnings
per share since 2000 and achieved
record earnings in our North
American printing papers business,
both before special items

Successfully completed the
construction and early start-up of
a coated paperboard machine as
part of our joint venture with Sun
Paper in Asia

Secured new business and gained
share with key customers in
paper, packaging and distribution

Accomplished a major company-
wide safety milestone

Completed the first year of our
Russian joint venture with Ilim Group

OVER THE PAST THREE YEARS, International Paper has made significant
progress as we’ve reshaped ourselves as a global paper and packaging
company, become more focused and lower cost, and achieved better
global balance. In 2008, we continued to make progress toward becoming
a stronger and more competitive company even as we navigated
through a severe economic downturn.

Front row, from left, Samir G. Gibara, retired chairman and chief executive officer, The Goodyear Tire & Rubber
Co.; John V. Faraci, chairman and chief executive officer, International Paper Co.; and Donald F. McHenry,
distinguished professor of diplomacy, Georgetown University, and former U.S. ambassador to the United
Nations (retired Dec. 31, 2008).

Middle row, from left, Stacey J. Mobley, senior counsel, Dickstein Shapiro LLP; Lynn Laverty Elsenhans,
chairman, chief executive officer and president, Sunoco Inc.; David J. Bronczek, president and chief executive
officer, FedEx Express; and Martha F. Brooks, president and chief operating officer, Novelis Inc.

Back row, from left, Alberto Weisser, chairman and chief executive officer, Bunge Ltd.; John L. Townsend III,
former managing director, Goldman Sachs & Co.; William G. Walter, chairman, president and chief executive
officer, FMC Corp.; J. Steven Whisler, retired chairman and chief executive officer, Phelps Dodge Corp.; and
John F. Turner, former assistant secretary of state, Oceans and International and Scientific Affairs.

Global Headquarters:

Global Offices:

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

International Paper Europe
Middle East and Africa
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, 2008

‘ 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. È

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, 2008) was approximately $9,887,280,215.

The number of shares outstanding of the Company’s common stock, as of February 20, 2009 was 427,766,394.

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 2009 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, 2008

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
Critical Accounting Policies
Significant Accounting Estimates
Income Taxes
Recent Accounting Developments
Legal Proceedings
Effect of Inflation
Foreign Currency Effects
Market Risk

1
1
1
2
2
2
3
4
4
4
4
6
6

9
9
9

16
18
19
25
27
32
38
39
41
42
44
45
45
45

INTERNATIONAL PAPER COMPANY
INDEX TO ANNUAL REPORT ON FORM 10-K (Continued)
FOR THE YEAR ENDED DECEMBER 31, 2008

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 ACCOUNTING 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 2008 LISTING OF FACILITIES

APPENDIX II 2008 CAPACITY INFORMATION

51
53
54
55
56
57
94

104
105

106

A-1

A-4

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, 2008, including
the Containerboard, Packaging and Recycling busi-
ness (CBPR) acquired in August 2008 from Weyer-
haeuser Company, the Company operated 23 pulp,
paper and packaging mills, 157 converting and
packaging plants, 19 recycling plants and three bag
facilities. Production facilities at December 31, 2008
in Europe, Asia, Latin America and South America
included eight pulp, paper and packaging mills, 53
converting and packaging plants, and two recycling
plants. We distribute printing, packaging, graphic
arts, maintenance and industrial products principally
through over 237 distribution branches in the United
States and 35 distribution branches located in Cana-
da, Mexico and Asia. At December 31, 2008, we
owned or managed approximately 200,000 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:
Printing Papers;
Industrial Packaging; Consumer
Packaging; Distribution; Forest Products; and Spe-
cialty Businesses and Other. A description of these
business segments can be found on pages 25
through 27 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations. The Company’s 50% equity interest in Ilim
Holding S.A. is also a separate reportable industry
segment.

From 2004 through 2008, International Paper’s capi-
tal expenditures approximated $5.6 billion, excluding

mergers and acquisitions. These expenditures reflect
our continuing efforts to improve product quality
and environmental performance, as well as lower
costs, maintain reliability of operations and improve
forestlands. Capital spending for continuing oper-
ations in 2008 was approximately $1.0 billion and is
expected to be approximately $700 million in 2009.
You can find more information about capital
expenditures on page 33 of Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations.

Discussions of acquisitions can be found on pages
33 and 34 of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Oper-
ations.

You can find discussions of restructuring charges
and other special items on pages 22 through 25 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 47 and 48 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 48 of
Item 8. Financial Statements and
Supplementary Data.

COMPETITION AND COSTS

MARKETING AND DISTRIBUTION

Despite the size of the Company’s manufacturing
capacity for paper, 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 com-
pete with similar products produced by other forest
in some
products companies. We also compete,
instances, with companies in other industries and
against substitutes for wood and wood-fiber prod-
ucts.

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 16 through 32 of Item 7. Management’s Dis-
cussion and Analysis of Financial Condition and
Results of Operations. You can find information
about the Company’s manufacturing capacities on
page A-4 of Appendix II.

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 26 and 27 of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.

SALES VOLUMES BY PRODUCT

Sales volumes of major products for 2008, 2007 and 2006 were as follows:

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

In thousands of short tons

Printing Papers

U.S. Uncoated Papers
European and Russian Uncoated Papers
Brazilian Uncoated Papers
Asian Uncoated Papers

Uncoated Papers

Coated Papers (3)

Market Pulp (4)

Industrial Packaging

Corrugated Packaging (5)
Containerboard (5)
Recycling (5)
Saturated Kraft
Bleached Kraft
European Industrial Packaging
Asian Industrial Packaging

Industrial Packaging

Consumer Packaging

U.S. Coated Paperboard
European Coated Paperboard
Asian Coated Paperboard
Other Consumer Packaging

Consumer Packaging

2008

2007

2006

3,397
1,461
853
27

5,738

–

3,788
1,448
794
24

6,054

–

1,604

1,402

5,298
2,305
966
170
82
1,123
568

10,512

1,591
311
550
178

2,630

3,578
1,776
–
167
73
1,173
477

7,244

1,602
320
496
164

2,582

3,973
1,455
477
18

5,923

1,168

1,124

3,628
1,816
–
150
82
1,267
363

7,306

1,538
298

77(6)

162

2,075

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

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

(3) 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 CBPR volumes from date of acquisition in August 2008.

(6) 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

laboratories. Additionally,

The Company operates its primary research and
development center in Loveland, Ohio, as well as
several product
the
Company has a 1/3 interest in ArborGen, LLC, a joint
venture with certain other forest products and bio-
technology companies. We direct
research and
development activities to short-term, long-term and
technical assistance needs of customers and operat-
ing divisions, and to process, equipment and product
innovations. Activities include studies on innovation
and improvement of pulping, bleaching, chemical
recovery, papermaking and coating processes;
packaging design and materials development;
reduction of environmental discharges; re-use of raw
materials in manufacturing processes; recycling of
consumer and packaging paper products; energy
conservation; applications of computer controls to
manufacturing
and
improvement of products; and development of vari-
ous new products. Our development efforts specifi-
cally address product safety as well as the
minimization of solid waste. The cost to the Com-
pany of its research and development operations
was $22 million in 2008, $24 million in 2007 and $45
million in 2006.

innovations

operations;

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

ENVIRONMENTAL PROTECTION

Information concerning the effects of the Company’s
compliance with federal, state and local provisions
enacted or adopted relating to environmental pro-
tection matters is set forth on pages 44 and 45 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.

EMPLOYEES

approximately 16,900 employees. Approximately
12,600 of the union employees are represented by
the United Steel Workers (USW) under individual
location contracts.

During 2008, pursuant to the 2008 Agreement with
the USW that establishes a new framework for bar-
gaining future local labor contracts at 14 of our U.S.
pulp, paper and packaging mills, labor agreements at
the Texarkana, Texas, Courtland, Alabama, Prattville,
Alabama and Pineville, Louisiana paper mills were
renewed. Additionally, the Company announced the
shutdown and bargained the effects of the closing of
labor
the Bastrop, Louisiana mill. During 2009,
agreements are scheduled to expire and renew
under the terms of the USW Agreement, at the
Savannah, Georgia, Ticonderoga, New York, Pensa-
cola, Florida and Augusta, Georgia mill locations. In
addition, the labor agreement for one Weyerhaeuser
mill location, Pine Hill, Alabama, is scheduled to be
negotiated in 2009. It is not covered by the agree-
ment with the 14 mills described above.

The Company also reached an agreement with the
USW for 32 International Paper converting facilities
in 2008. Similar to the 2007 USW Agreement for the
mill locations, it establishes the framework for bar-
gaining future local agreements for those facilities
for a four-year period.

Labor agreements were renewed in 2008 at 13 con-
verting, distribution and consumer packaging oper-
ations, and our one remaining wood products
labor agreements were
location.
extended at seven converting locations formerly
owned by Weyerhaeuser; they are not covered by
the converting agreement described above.

In addition,

During 2009, 26 labor agreements are scheduled to
be negotiated in 23 converting, distribution and
consumer packaging operations. Thirteen of these
agreements are not covered by the converting
agreement reached with the USW described above.
The other 13 that are part of the USW agreement will
renew automatically if new agreements are not
reached.

EXECUTIVE OFFICERS OF THE
REGISTRANT

As of December 31, 2008, we had approximately
61,700 employees, 42,700 of whom were located in
the United States. Of the U.S. employees, approx-
imately 27,900 are hourly, with unions representing

John V. Faraci, 59, 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

John N. Balboni, 60, 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

Michael J. Balduino, 58, senior vice president-
consumer packaging since 2008. Mr. Balduino pre-
viously served as senior vice president responsible
for consumer products converting business and
president-Shorewood Packaging Corp. from 2004 to
2008. Mr. Balduino served as senior vice president-
sales and marketing from 2000 to 2003. Mr. Balduino
joined International Paper in 1992.

H. Wayne Brafford, 57, senior vice president-printing
and communications papers since 2005. Mr. Brafford
previously served as senior vice president-industrial
packaging from 2003 to 2005, 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, 60, 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. In February 2009, Mr. Carter
announced that he will retire from the Company
effective May 1, 2009.

C. Cato Ealy, 52, 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.

Tommy S. Joseph, 48, senior vice president-
manufacturing and technology since February 2009.
Mr. Joseph previously served as vice president-
technology from 2005 to February 2009. He served as
vice president-specialty papers business from 2003
to 2005. Mr. Joseph joined International Paper in
1983.

Thomas E. Gestrich, 62, 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, 52, 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, 48, 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, 47, 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
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.

Maximo Pacheco, 56, 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, 49, senior vice president – industrial
packaging since 2008. Ms. Roberts previously served
as senior vice president – IP packaging solutions
from 2005 to 2008. Ms. Roberts served as vice
president-container of the Americas from 2000 to
2005. Ms. Roberts joined International Paper in 1981.

Maura A. Smith, 53, 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.

Mark S. Sutton, 47, senior vice president-supply
chain since 2008. Mr. Sutton previously served as
vice president-supply chain from 2007 until 2008.
Mr. Sutton served as vice president-strategic plan-
ning 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.

Robert J. Grillet, 53, vice president-finance and con-
troller since 2003. Mr. Grillet previously served as
senior vice president-xpedx from 2000 to 2003.
Mr. Grillet joined International Paper in 1976.

Terri L. Herrington, 53, 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.

RAW MATERIALS

Raw materials essential to our businesses include
wood fiber, purchased in the form of pulpwood,
wood chips and old corrugated containers (OCC),
and certain chemicals, including caustic soda, starch,
and polyethylene. Information concerning fiber sup-
ply purchase agreements that were entered into in
connection with the Company’s 2006 Transformation
Plan is presented in Note 11 Commitments and Con-
tingent Liabilities on page 76 of Item 8. Financial
Statements and Supplementary Data.

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
the Securities and Exchange Commission,
following are some important
factors that could
cause the Company’s actual results to differ materi-
ally from those projected in any forward-looking
statement.

RISKS RELATING TO INDUSTRY CONDITIONS

C H A N G E S I N T H E C O S T O R A V A I L A B I L I T Y O F

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

E N E R G Y

A N D

T R A N S-

O U R

C O U L D

A F F E C T

caustic

P O R T A T I O N
P R O F I T-
A B I L I T Y . We rely heavily on certain raw materials
(principally wood
and
fiber,
polyethylene), energy sources (principally natural
gas, coal and fuel oil) and third party companies that
transport our goods. Our profitability has been, and
will continue to be, affected by changes in the costs
and availability of such raw materials, energy sour-
ces and transportation sources.

soda

T H E

I N D U S T R I E S

I N W H I C H W E O P E R A T E

E X P E R I E N C E B O T H E C O N O M I C C Y C L I C A L I T Y

A N D C H A N G E S I N C O N S U M E R P R E F E R E N C E S .

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

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

A L L Y A F F E C T O U R F I N A N C I A L C O N D I T I O N ,

R E S U L T S O F O P E R A T I O N S A N D C A S H F L O W S .
Substantially all of our businesses have experienced,
and are likely to continue to experience, cycles relat-
ing to industry capacity and general economic con-
ditions. The length and magnitude of these cycles
have varied over time and by product. In addition,
changes in consumer preferences may increase or
decrease the demand for our fiber-based products
and non-fiber substitutes. Consequently, our operat-
ing cash flow is sensitive to changes in the pricing
and demand for our products.

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

C O U L D

I N T E R N A T I O N A L L Y
N E G A T I V E L Y
I M P A C T O U R F I N A N C I A L R E S U L T S . We operate
in a competitive environment, both in the United
States and internationally,
in all of our operating
segments. Pricing or product strategies pursued by
competitors could negatively impact our financial
results.

RISKS RELATING TO MARKET AND ECONOMIC
FACTORS

C O N T I N U E D

A D V E R S E

D E V E L O P M E N T S

I N

G E N E R A L

B U S I N E S S A N D E C O N O M I C C O N-

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

A N D

C O N D I T I O N

F I N A N C I A L
R E S U L T S O F
O P E R A T I O N . General economic conditions may
adversely affect industrial non-durable goods pro-
duction, consumer spending, commercial printing
and advertising activity, white-collar employment
levels and consumer confidence, all of which impact
demand for our products.
In addition, continued
volatility in the capital and credit markets, which

impacts interest rates, currency exchange rates and
the availability of credit could have a material
adverse effect on our business, financial condition
and our results of operations.

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 . Maintaining an investment-
grade credit rating is an important element of our
financial strategy and a downgrade of our Compa-
ny’s ratings below investment grade may limit our
access to the capital markets, have an adverse effect
on the market price of our securities and increase our
cost of borrowing. In light of current economic con-
ditions,
the Company’s desire to maintain its
investment grade rating may cause the Company to
take certain actions designed to improve its cash
flow, including sale of assets, reduction or suspen-
sion of the dividend and further reductions in capital
expenditures and working capital. Similarly, we are
subject to the risk that one of the banks that has
issued irrevocable letters of credit supporting the
installment notes issued in connection with sales of
our forestlands is downgraded below a required
rating. If this were to happen, it may increase the
cost to the Company of securing a replacement let-
ter-of-credit bank or could result in an acceleration of
deferred taxes if a replacement bank cannot be
obtained.

T H E I M P A I R M E N T O F F I N A N C I A L I N S T I T U T I O N S
M A Y A D V E R S E L Y A F F E C T U S . We have exposure
to counterparties with which we execute trans-
including U.S. and foreign commercial
actions,
investment banks,
banks,
insurance companies,
investment funds and other financial
institutions,
some of which may be exposed to ratings down-
grade, bankruptcy, liquidity, default or similar risks,
especially in connection with recent financial market
turmoil. A ratings downgrade, bankruptcy, receiver-
ship, default or similar event involving a counter-
party may adversely affect our access to capital,
future business and results of
liquidity position,
operations.

O U R 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 A R E

T O N U M E R O U S

S U B J E C T
F A C T O R S W H I C H
C O U L D C A U S E T H E S E C O S T S T O C H A N G E . We
have defined benefit pension plans covering sub-
stantially all salaried U.S. employees hired prior to
July 1, 2004 and substantially all hourly and union
employees regardless of hire date. We provide
retiree health care benefits to certain of our U.S.
salaried and certain hourly employees. Our pension
costs are dependent upon numerous factors result-
ing from actual plan experience 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 pension costs in future periods. Likewise,
changes in assumptions regarding current discount
rates and expected rates of return on plan assets
could also increase pension and health care costs.
Significant changes in any of these factors may
adversely impact our cash flows, financial conditions
and results of operations.

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

F U N D E D ,

A N D

O V E R

T I M E W E W I L L

B E

R E Q U I R E D T O M A K E C A S H P A Y M E N T S T O T H E

P L A N S , R E D U C I N G T H E C A S H A V A I L A B L E F O R
O U R B U S I N E S S . We record a liability associated
with our pension plans equal to the excess of the
benefit obligation over the fair value of plan assets.
The benefit liability recorded under the provisions of
Statement of
Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans,” at
December 31, 2008 was $3.2 billion. Although we
expect to have no obligation to fund our plans in
2009, over the next several years we may make con-
tributions to the plans that could be material. The
amount of such contributions will be dependent
upon a number of factors, principally the actual earn-
ings and changes in values of plan assets, changes
in interest rates and the impact of possible funding
relief legislation currently under consideration in the
U.S. Congress.

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

C O U L D A D V E R S E L Y A F F E C T O U R B U S I N E S S
A N D R E S U L T S O F O P E R A T I O N S . Our operating
results and business prospects could be substantially
affected by risks related to 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 tax consequences, fluctuations in the
value of
local currency versus the U.S. dollar,
nationalization or any change in social, political or
labor conditions in any of these countries or regions
could negatively affect our financial results.

T H E A M O U N T O F O U R D E B T O B L I G 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 B U S I N E S S .

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

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

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

C O N D I T I O N S I N T H E C R E D I T M A R K E T S A N D
T H E A V A I L A B I L I T Y O F C R E D I T G E N E R A L L Y . As
of December 31, 2008, we had $1.6 billion of debt
refinanced before
that had to be repaid or

December 31, 2009, including $362 million of notes
that matured in January 2009 and were repaid with
cash on hand, and a €500 million (approximately
$696 million) term loan due August 31, 2009 that we
are currently negotiating to refinance. We have
approximately $1.3 billion and $600 million in debt
that matures in 2010 and 2011, respectively. We may
be required to dedicate a substantial portion of our
cash flow from operations to payments on our
indebtedness. If we use a substantial portion of our
cash flow to repay indebtedness, our flexibility in
planning for and reacting to changes in our business
and the industries in which we operate may be
limited. This may place us at a competitive
disadvantage compared to our competitors with less
debt. Similarly, if we are unable to generate suffi-
cient cash from operations to repay our debt, or are
unable to refinance our debt because credit market
conditions remain volatile, this may have an adverse
impact on our cost of borrowing, liquidity, financial
condition and results of operations.

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 , H E A L T H A N D S A F E T Y L A W S A N D

R E Q U I R E M E N T S C O U L D A D V E R S E L Y A F F E C T

O U R B U S I N E S S A N D R E S U L T S O F O P E R A T I O N S .
Our operations are subject to U.S. and non-U.S. laws
and regulations relating to the environment, health
and safety. There can be no assurance that com-
pliance with existing and new laws and require-
ments, including with global climate change laws
significant
and regulations, will not
expenditures, or that existing reserves for specific
matters will
future
adequate
be
unanticipated costs.

require

cover

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 C O U L D

H A V E A M A T E R I A L A D V E R S E E F F E C T O N O U R
C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S . The
costs and other effects of pending litigation against
us cannot be determined with certainty. Although we
believe that the outcome of any pending or threat-
ened lawsuits or claims, or all of them combined, will
not have a material adverse effect on our con-
there can be no
solidated financial statements,
assurance that the outcome of any lawsuit or claim
will be as expected.

RISKS RELATING TO OUR OPERATIONS

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

M A N U F A C T U R I N G
N E G-
A T I V E L Y I M P A C T O U R F I N A N C I A L R E S U L T S . We
operate our facilities in compliance with applicable

F A C I L I T I E S

C O U L D

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 finan-
cial results. Any of our manufacturing facilities, or
any of our machines within an otherwise operational
facility, could cease operations unexpectedly due to
a number of events, including:

(cid:129)

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;

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; and

(cid:129)

other operational problems.

Any such downtime or facility damage could prevent
us from meeting customer demand for our products
and/or
require us 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
requirements could be impaired, resulting in lower
sales and having a negative effect on our financial
results.

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

D U C T E D B Y J O I N T V E N T U R E S T H A T W E C A N-

N O T O P E R A T E S O L E L Y F O R O U R B E N E F I T .
Several of our operations, particularly in emerging
markets, are carried on by joint ventures such as the
Ilim Group in Russia.
In joint ventures we share
ownership and management of a company with one
or more parties who may or may not have the same
goals, strategies, priorities or resources as we do. In
general, joint ventures are intended to be operated
for the benefit of all co-owners, rather than for our
exclusive benefit. Operating a business as a joint

venture often requires additional organizational
formalities as well as time-consuming procedures for
sharing information and making decisions. In joint
ventures, we are required to pay more attention to
our relationship with our co-owners as well as with
the joint venture, and if a co-owner changes, our
relationship may be adversely affected. In addition,
the benefits from a successful
joint venture are
shared among the co-owners, so that we do not
joint
receive all the benefits from our successful
ventures.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FORESTLANDS

As of December 31, 2008, the Company owned or
managed approximately 200,000 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. 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
in conjunction with the Company’s 2006
2006,
Transformation 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 page 23 of
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations, and
on pages 69 and 70 of Item 8. Financial Statements
and Supplementary Data. Our remaining forestlands
are being marketed to optimize the economic value
to our shareholders. Most of these forestlands con-
sist of properties that are likely to be sold to invest-
ors 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
alternatives,
including possible acquisitions and
sales or other dispositions of properties. You can
find a discussion about the level of planned capital
investments for 2009 on page 33, and dispositions
and restructuring activities as of December 31, 2008,
on pages 22 through 25 of Item 7. Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, and on pages 65 through 71 of
Item 8. Financial Statements and Supplementary
Data.

ITEM 3. LEGAL PROCEEDINGS

Information concerning the Company’s legal pro-
ceedings is set forth on pages 44 and 45 of Item 7.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and on pages
76 through 79 of Item 8. Financial Statements and
Supplementary Data.

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

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year
ended December 31, 2008.

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 2008 and 2007 are set forth on page 94 of
Item 8. Financial Statements and Supplementary

Data. As of the filing of this Annual Report on 10-K,
the Company’s common shares are traded on the
New York stock exchange.
International Paper
options are traded on the Chicago Board of Options
Exchange. As of February 20, 2009,
there were
approximately 21,535 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.

Period

January 1, 2008 - January 31, 2008

February 1, 2008 - February 29, 2008

April 1, 2008 - April 30, 2008

November 1, 2008 - November 30, 2008

Total

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

N/A

Total Number
of Shares
Purchased (a)

Average Price
Paid per
Share

838

$31.02

1,458,246

237

3,000

1,462,321

31.85

27.20

17.26

(a) Shares acquired from employees from share withholdings to pay income taxes under the Company’s restricted stock programs.

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, 2003 with a $100
investment in each of our ROI Peer Group and the
S&P 500 also made on December 31, 2003. The graph
portrays total return, 2003–2008, assuming reinvest-
ment of dividends.

Return on $100 Investment at YE 2003

s
r
a
l
l

o
D

160

140

120

100

2003

2004

2005

2006

2007

2008

S&P 500 Index

ROI Peer Group

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

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

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY (a)

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

2008

2007

2006

2005

2004

RESULTS OF OPERATIONS
Net sales
Costs and expenses, excluding interest
Earnings (loss) from continuing operations before

income taxes, equity earnings and minority interest

Equity earnings, net of taxes
Minority interest expense, net of taxes
Discontinued operations
Net earnings (loss)
Earnings (loss) applicable to common shares

FINANCIAL POSITION
Working capital
Plants, properties and equipment, net
Forestlands
Total assets
Notes payable and current maturities of long-term

debt

Long-term debt
Common shareholders’ equity

BASIC PER SHARE OF COMMON STOCK
Earnings (loss) from continuing operations
Discontinued operations
Net earnings (loss)

DILUTED PER SHARE OF COMMON STOCK
Earnings (loss) from continuing operations
Discontinued operations
Net earnings (loss)
Cash dividends
Common shareholders’ equity

COMMON STOCK PRICES
High
Low
Year-end

$24,829
25,490

$21,890
19,939

$21,995
18,286

$21,700
20,819

$20,721
19,633

(1,153)(b)
49
3
(13)(c)
(1,282)(b-d)
(1,282)(b-d)

1,654(e)

–
24
(47)(f)
1,168(e-g)
1,168(e-g)

3,188(h)

–
17
(232)(i)
1,050(h-i)
1,050(h-i)

286(j)
–
9
416(k)
1,100(j-l)
1,100(j-l)

376(m)
–
24
(273)(n)

(35)(m-o)
(35)(m-o)

$ 2,605
14,202
594
26,913

828
11,246
4,169

$ 2,893
10,141
770
24,159

$ 3,996
8,993
259
24,034

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

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

267
6,353
8,672

692
6,531
7,963

1,178
11,019
8,351

209
13,626
8,254

$ (3.02)
(0.03)
(3.05)

$ 2.83
(0.11)
2.72

$ 2.69
(0.48)
2.21

$ 1.41
0.85
2.26

$ 0.49
(0.56)
(0.07)

$ (3.02)
(0.03)
(3.05)
1.00
9.75

$ 2.81
(0.11)
2.70
1.00
20.40

$ 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

$ 33.77
10.20
11.80

$ 41.57
31.05
32.38

$ 37.98
30.69
34.10

$ 42.59
26.97
33.61

$ 45.01
37.12
42.00

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

CAPITAL EXPENDITURES

NUMBER OF EMPLOYEES

1.5
0.73
(14.9)(b-d)
(4.0)(b-d)

1.7
0.43
14.8(e-g)
7.2(e-g)

1.9
0.47
14.6(h-i)
8.1(h-i)

2.4
0.59
13.2(j-l)
5.2(j-l)

2.3
0.62
(0.4)(m-o)
3.1(m-o)

$ 1,002

$ 1,292

$ 1,073

$ 1,095

$ 1,119

61,700

51,500

60,600

68,700

79,400

ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL GLOSSARY

Current ratio—

current assets divided by current liabilities.

Total debt to capital ratio—

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

Return on equity—

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

Return on investment—

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

FOOTNOTES TO FIVE-YEAR FINANCIAL SUMMARY

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

2008:

(b)

Includes restructuring and other charges of
$370 million before taxes ($227 million after
taxes), including a pre-tax charge of $123 mil-
lion ($75 million after taxes)
for shutdown
costs for the Louisiana mill, a pre-tax charge of
$30 million ($18 million after taxes) for the
shutdown of a paper machine at the Franklin
mill, a charge of $53 million before taxes ($32
million after taxes) for severance and related
costs associated with the Company’s 2008
overhead cost reduction initiative, a charge of
$75 million before taxes ($47 million after
taxes)
for adjustments to legal reserves, a
pre-tax charge of $30 million ($19 million after
taxes) for costs associated with the reorganiza-
tion of the Company’s Shorewood operations,
a pre-tax charge of $53 million ($33 million
after taxes) to write off deferred supply chain
initiative development costs for U.S. container
operations that will not be implemented due to

the CBPR acquisition, a charge of $8 million
before taxes ($5 million after taxes) for closure
costs associated with the Ace Packaging busi-
ness, and a pre-tax gain of $2 million ($2 mil-
lion after taxes) for adjustments to previously
recorded reserves and other charges asso-
ciated with the Company’s 2006 Trans-
formation Plan. Also included are a charge of
$1.8 billion (before and after taxes) for the
impairment of goodwill in the Company’s U.S.
Printing Papers and U.S. and European Coated
Paperboard businesses, a pre-tax charge of
$107 million ($84 million after taxes) to write
down the assets of the Inverurie, Scotland mill
to estimated fair value, a pre-tax gain of $6
million ($4 million after taxes) for adjustments
to estimated transaction costs accrued in
connection with the 2006 Transformation Plan
forestland sales, a $39 million charge before
taxes ($24 million after taxes) relating to the
write-up of
inventory to fair value in con-
nection with the CBPR acquisition and a $45
million charge before taxes ($28 million after
taxes) for integration costs associated with the
CBPR acquisition.

(c)

Includes a pre-tax charge of $25 million ($16
million after taxes) for the settlement of a post-
closing adjustment on the sale of the beverage
packaging business, pre-tax gains of $9 million
for adjustments to
($5 million after taxes)
reserves associated with the sale of dis-
continued businesses, and the operating
results of certain wood products facilities.

(d)

Includes a $40 million tax benefit related to the
restructuring of the Company’s international
operations.

2007:

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 2006 Trans-
formation 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
for
environmental costs associated with a mill
closure, and a pre-tax gain of $5 million ($4
million after
items. Also
included are a $9 million pre-tax gain ($5 mil-
lion after taxes) to reduce estimated trans-

for other

taxes)

(e)

action costs accrued in connection with the
2006 sale of U.S. forestlands included in the
Company’s 2006 Transformation Plan; and a
$327 million gain before taxes ($267 million
after taxes) for net gains on sales and impair-
ments 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
for adjust-
million ($48 million after taxes)
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
million after
for payments received
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)

(f)

(g)

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

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

(i)

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:

2006:

(j)

(h)

Includes restructuring and other charges of
$300 million before taxes ($184 million after
taxes), including a $157 million charge before
taxes ($95 million after taxes) for organiza-
tional restructuring and other charges princi-
pally associated with the Company’s 2006
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 2006
Transformation Plan; a charge of $759 million
before and after taxes for the impairment of
in the Coated Paperboard and
goodwill

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 associated with the Company’s 2006
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)
settlement with the U.S.
related to a

(k)

(l)

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.

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
tax provision,
including a reduction of $627
million from a settlement reached with the
U.S. Internal Revenue Service concerning the
1997 through 2000 U.S. federal
income tax
audit, a charge of $142 million for deferred
taxes related to earnings repatriations under
the American Jobs Creation Act of 2004, and
$31 million of other tax charges.

2004:

(m) 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.

(n)

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.

(o)

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

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

EXECUTIVE SUMMARY

International Paper’s operating results in 2008
reflected two distinct economic periods. During the
first three quarters, business conditions were soft but
steady. Sales volumes for containerboard and boxes
were solid, and paper and market pulp volumes,
while below prior-year levels, were steady. Average
price realizations increased for key products, and
market downtime was minimal. While key input
costs for raw materials and energy and freight costs
increased significantly over the nine-month period,
we were able to offset these effects with selling price
increases, solid manufacturing operations and con-
tinued cost reduction efforts.

Beginning with the end of the third quarter, U.S.
economic activity contracted significantly resulting in
dramatic declines in demand for uncoated freesheet
products, corrugated boxes and market pulp. Global
pulp prices began declining significantly, and paper
and containerboard pricing leveled out as they
reached a 2008 peak. With the significant drop in
demand, and International Paper’s commitment to
balance production with customer needs, we took
about one million tons of lack-of-order downtime
during the fourth quarter. Fortunately, input costs
also peaked and began to decline.

Despite these severe, unfavorable fourth-quarter
business conditions, the Company posted a 13%
increase in net sales in 2008 to $24.8 billion, and
generated a record $2.7 billion of cash from continu-
ing operations.

As we begin 2009, we expect that operating profits
for the first quarter will be less than in the fourth
quarter of 2008, with the size of the decline depend-
ent upon the amount of downtime taken to match
production with customer demand, and upon
changes in pricing and input costs. Sales volumes
for our paper and packaging businesses are
expected to be similar to fourth-quarter levels. We
expect average sales price realizations for uncoated
paper and containerboard to be under some pres-
sure, while U.S. coated paperboard prices are
expected to increase.
Input costs for wood and
energy, and transportation costs, should continue to
decline, although energy costs in Europe and Brazil
are expected to increase. Planned mill maintenance
outages will be higher in the United States, but
should remain about flat in Europe and Brazil. Earn-

ings from our Ilim joint venture are expected to be
below fourth-quarter totals.

Results of Operations

Industry segment operating profits are used by Inter-
national Paper’s management to measure the earn-
ings performance of its businesses. Management
believes that this measure allows a better under-
standing of trends in costs, operating efficiencies,
prices and volumes.
Industry segment operating
profits are defined as earnings before taxes, equity
interest expense,
earnings and minority interest,
items.
corporate items and corporate special
Industry segment operating profits are defined by
the Securities and Exchange Commission as a
non-GAAP financial measure, and are not GAAP
alternatives to net income or any other operating
measure prescribed by accounting principles gen-
erally accepted in the United States.

International Paper operates in six segments: Print-
Industrial Packaging, Consumer Pack-
ing Papers,
aging, Distribution, Forest Products, and Specialty
Businesses and Other.

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

In millions

2008

2007

2006

Industry segment operating profits

$ 1,393

$1,897

$ 1,604

Corporate items, net

Corporate special items*

Interest expense, net

Minority interest

Income tax provision

Equity earnings

Discontinued operations

(103)

(1,949)

(492)

(5)

(162)

(13)

(206)

241

(297)

(5)

(276)

2,373

(521)

(9)

(415)

(1,889)

–

(47)

–

(232)

Net earnings (loss)

$(1,282)

$1,168

$ 1,050

* Corporate special items include gains on 2006 Transformation

Plan forestland sales, restructuring and other charges, net

losses (gains) on sales and impairments of businesses, good-

will impairment charges, insurance recoveries and reversals of

reserves no longer required.

lower sales volumes ($85 million),

Industry segment operating profits of $1.4 billion
were $504 million lower in 2008 than in 2007 as the
impacts of higher energy and raw material costs
($721 million), higher distribution costs ($135
million),
lower
earnings from land and mineral rights sales ($59
million), and other items ($57 million) offset benefits
from higher average prices ($570 million), and the
net impact of cost reduction initiatives,
improved
operating performance and a more favorable prod-
uct mix ($365 million). Additionally, charges totaling

$382 million were recorded in 2008 industry segment
operating profits for facility closures, impairments
and reorganization costs, and charges related to the
integration of
the Weyerhaeuser Containerboard,
Packaging and Recycling (CBPR) business acquired
in the 2008 third quarter.

Segment Operating Profit
(in millions)

$362

($856)

$570

($85)

$1,897

($59)

($57)

($382)

$2,750
$2,500
$2,250
$2,000
$1,750
$1,500
$1,250
$1,000
$750
$500
$250
$0

7
0
0
2

Pric

e
m
Volu

s/Mix
eratio
st/O

o
C

s
e
g
uta
Mill O

d Freig
aterials a

s
ale
eral S
d Min
n
d a
n
a
L

orp
C

s/Oth
orate Ite

w m

a
R

s
m

cial Ite

e
p
S

$1,393

8
0
0
2

The principal changes in 2008 operating profit by
segment were as follows:

(cid:129)

Printing Papers’ profits of $474 million were
$365 million lower as the benefits of higher
average sales price realizations, a more favor-
able mix of products sold and improved manu-
facturing operating costs were more than offset
by higher raw material and energy costs, higher
freight costs, lower sales volumes and increased
lack-of-order downtime. Additionally,
2008
results included a $123 million charge for costs
associated with the permanent shutdown of the
Louisiana mill, a $107 million charge to reduce
the carrying value of the assets of the Inverurie,
Scotland mill to their estimated fair value, and a
charge of $30 million for costs associated with
the shutdown of a paper machine at the Franklin
mill.

Industrial Packaging’s profits of $390 million
were up $16 million as the impacts of higher
average sales price realizations, increased sales
volumes (including sales from the CBPR acquis-
ition) net of increased lack-of-order downtime, a
more favorable mix of products sold, favorable
operating costs, and lower costs associated with
the conversion of the paper machine at the
Pensacola mill to lightweight linerboard pro-
duction were offset by higher raw material and
freight
associated with the
integration of the CBPR business, and a charge
related to the write-up of the inventory of CBPR
to fair value.

costs,

costs

(cid:129)

Consumer Packaging’s profits of $17 million
were $95 million lower reflecting higher raw
material, energy and freight costs, unfavorable
mill operating costs, and higher charges asso-
ciated with the reorganization of the Shorewood
business, partially offset by improved average
sales price realizations, higher sales volumes,
and a more favorable mix of products sold.

Distribution’s profits of $103 million were $5
million lower in 2008 due to the offsetting
impacts of lower sales volumes and improved
average sales margins and the full-year con-
tributions from the August 2007 Central Lewmar
acquisition.

Forest Products’ profits of $409 million were
down $49 million as lower forestland and real
estate sales more than offset $261 million of
profits on mineral rights sales.

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

Corporate items, net, of $103 million of expense in
2008 were lower than the $206 million of expense in
2007 due to lower pension expenses. The decrease
in 2007 versus $276 million of expense in 2006
reflects lower pension expenses partially offset by
higher supply chain initiative costs.

Corporate special items, including impairments of
goodwill, restructuring and other charges and net
losses (gains) on sales and impairments of busi-
nesses, were a loss of $1.9 billion in 2008 compared
with a gain of $241 million in 2007 and a gain of $2.4
billion in 2006. The loss in 2008 includes $1.8 billion
of goodwill impairment charges and $179 million of
restructuring and other charges. The large gain in
2006 includes $4.8 billion from the sales of forest-
lands included in the 2006 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, was $492 million in 2008
compared with $297 million in 2007 and $521 million
in 2006. The increase in 2008 reflects the issuance of
approximately $6 billion of debt in connection with
the acquisition of
the CBPR business, while the
decrease in 2007 reflects lower average debt balan-
ces and lower interest rates from debt refinancings
and repayments.

The 2008 income tax provision of $162 million
includes a net $11 million benefit related to 2008
special tax adjustment items. The 2007 income tax
provision of $415 million includes a $41 million
benefit related to 2007 special tax adjustment items.
The 2006 income tax provision of $1.9 billion con-
sists of $1.6 billion of deferred taxes (principally
reflecting deferred taxes on the 2006 Transformation
Plan forestland sales) and a $300 million current tax
provision, and includes an $11 million charge related
to 2006 special tax adjustment items. Excluding spe-
cial items, taxes as a percent of pre-tax earnings
increased to 31.5% in 2008 from 30% in 2007 and
29% in 2006, reflecting a higher proportion of earn-
ings in higher tax rate jurisdictions.

Discontinued Operations

In 2008, $13 million of net adjustments were
recorded relating to post-closing adjustments and
estimates associated with prior sales of discontinued
businesses.

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.

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

For the year ended December 31, 2008, International
Paper generated $2.7 billion of cash flow from con-
tinuing operations, compared with $1.9 billion in
2007. Capital spending from continuing operations
for 2008 totaled $1.0 billion, or 74% of depreciation
and amortization expense. Cash expenditures for
acquisitions totaled $6.1 billion, principally for the
acquisition of the CBPR business, while issuances of
debt totaled $6.0 billion, principally for the CBPR
acquisition. Our liquidity position remains strong,
supported by approximately $2.5 billion of unused,
facilities that we believe are
committed credit
adequate to meet
future 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 2009 will be to continue to maximize
our financial flexibility to facilitate access to capital
markets on favorable terms.

Capital spending for 2009 is targeted at $700 million,
or about 43% of 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, pension and postretirement
benefit obligations and income taxes.

Legal

An analysis of significant
litigation activity is
included in Note 11 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 North America,
Europe, Russia, Latin America, Asia and North Africa.
Factors that impact the demand for our products
include industrial non-durable goods production,
consumer spending, commercial printing and adver-
tising activity, white-collar employment levels, and
movements in currency exchange rates.

Product prices are affected by general economic
trends, inventory levels, currency movements and
worldwide capacity utilization. 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; salary and benefits costs, including pensions;
and manufacturing conversion costs.

The following is a discussion of International Paper’s
results
ended
December 31, 2008, and the major factors affecting
these results compared to 2007 and 2006.

operations

year

the

for

RESULTS OF OPERATIONS

For the year ended December 31, 2008, International
Paper reported net sales of $24.8 billion, compared
with $21.9 billion in 2007 and $22.0 billion in 2006.
International net sales (including U.S. exports)
totaled $6.9 billion or 28% of total sales in 2008. This
compares to international net sales of $6.3 billion in
2007 and $5.6 billion in 2006.

Full year 2008 net income was a loss of $1.3 billion
($3.05 per share), compared with net income of $1.2
billion ($2.70 per share) in 2007 and $1.1 billion
in 2006. Amounts include the
($2.18 per share)
results of discontinued operations.

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

In millions

Net Earnings (Loss)
Deduct – Discontinued operations:

Loss (earnings) from operations

Loss on sales or impairment

Earnings (Loss) From Continuing

Operations
Add back (deduct):

2008

2007

2006

$(1,282)

$1,168

$ 1,050

(85)

317

(1,269)

1,215

1,282

Income tax provision

Equity earnings, net of taxes

Minority interest expense, net of taxes

162

(49)

415

–

1,889

–

Earnings (loss)
from continuing operations after
taxes in 2008 were a loss of $1.3 billion, including
$2.1 billion of special item charges, compared with
income of $1.2 billion in 2007 and income of $1.3 bil-
lion in 2006. Compared with 2007, higher average
realizations,
operating
price
sales
performance,
expenses
lower
and
(primarily pensions) were offset by the impact of
higher average raw material costs,
lower sales
volumes,
lower earnings from land sales, higher
distribution costs, higher tax expense, higher net
interest expense and the incremental loss from spe-
cial items. Results for 2008 also included equity earn-
ings, net of
relating to the Company’s
investment in Ilim Holding S.A.

favorable
corporate

taxes,

See Industry Segment Results on pages 27 through
32 for a discussion of the impact of these factors by
segment.

Earnings From Continuing Operations
(after tax, in millions)

$398

($59)

$253

($598)

$1,215

($41)

$28

$54

($130)

($15)

($2,376)

Earnings (Loss) From Continuing

Operations Before Income Taxes,

Equity Earnings and Minority Interest

(1,153)

1,654

Interest expense, net

Minority interest included in operations

Corporate items

Special items:

Restructuring and other charges

Insurance recoveries

Gain on sale of forestlands

Impairments of goodwill

Net losses (gains) on sales and

impairments of businesses

Reserve adjustments

Industry Segment Operating Profit
Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other

492

103

179

–

(6)

1,777

297

(19)

206

–

(9)

–

3,188

521

(8)

276

300

(19)

(4,788)

759

(1)

–

(327)

1,381

–

(6)

$ 1,393

$1,897

$ 1,604

$ 474

$ 839

$ 453

390

103

409

–

374

112

108

458

277

631

Total Industry Segment Operating Profit

$ 1,393

$1,897

$ 1,604

7
0
0
2

Pric

e
m
Volu

s/Mix
eratio
st/O

o
C

s
e
g
uta
Mill O

s/Oth
orate Ite

d Freig
aterials a

s
ale
eral S
d Min
n
d a
n
a
L

orp
C

w m

a
R

Ilim

Intere

x
Ta

s
m

cial Ite

e
p
S

($1,269)

Discontinued Operations

2 0 0 8 : In 2008, net after-tax charges totaling $12 mil-
lion were recorded for adjustments of net losses
(gains) on sales and impairments of businesses
reported as discontinued operations,
including a
pre-tax charge of $25 million ($16 million after taxes)
in the first quarter for the settlement of a post-
closing adjustment on the sale of the Beverage
Packaging business, and pre-tax gains of $9 million
($5 million after taxes) in the fourth quarter for
adjustments to reserves associated with the sale of
discontinued businesses.

8
0
0
2

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

2 0 0 7 : In 2007, after tax charges totaling $36 million
were recorded for adjustments of net losses (gains)
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 (gains) 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 (before and after taxes) were recorded
to reduce the carrying values of the net assets of the
Beverage Packaging and Wood Products businesses,
respectively, to their estimated fair values. Also dur-
ing the 2006 third quarter, International Paper com-
its interests in a beverage
pleted the sale of
packaging operation in Japan for a pre-tax gain of
$12 million ($3 million after taxes), and the sale of its
Brazilian Coated Papers business to Stora Enso Oyj
for approximately $420 million, subject to certain
post-closing adjustments. 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 oper-
ation.

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

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

Additionally during the fourth quarter, a $37 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.

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

Income Taxes

A net income tax provision of $162 million was
recorded for 2008, including a $40 million tax benefit
related to the restructuring of
the Company’s
international operations and a $29 million charge for
estimated U.S. income taxes on a gain recorded by
the Company’s Ilim Holding S.A.
joint venture
related to the sale of a Russian subsidiary. Excluding
the impact of special items, the tax provision was
$369 million or 31.5% of pre-tax earnings before
equity earnings and minority interest.

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 $423 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 equity earnings
and minority interest.

The higher income tax rates in 2008 and 2007 reflect
a higher proportion of earnings in higher tax rate
jurisdictions.

Equity Earnings, Net of Taxes

Equity earnings, net of
in 2008 consisted
principally of the Company’s share of earnings from
its 50% investment in Ilim Holding S.A. in Russia (see
page 32).

taxes,

Corporate Items and Interest Expense

Minority interest expense, net of taxes, was $3 mil-
lion in 2008 compared with $24 million in 2007 and
$17 million in 2006. The decrease in 2008 reflects
lower earnings for the International Paper & Sun
Cartonboard Co., Ltd. joint ventures in 2008 and the
Company’s acquisition of the remaining shares of a
Moroccan box plant joint venture in the third quarter
of 2007. The increase in 2007 compared with 2006
reflected the formation of the International Paper &
Sun Cartonboard Co., Ltd. joint ventures in the fourth
quarter of 2006.

In 2008, net interest expense totaled $492 million.
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. Excluding special
items,
interest expense, net, of $492 million in 2008
increased from $299 million in 2007, reflecting the
issuance of approximately $6 billion of debt in con-
nection with the acquisition of the CBPR business.
The decrease from $527 million in 2006 to $299 mil-
lion in 2007 reflects lower average debt balances and
lower interest rates from debt refinancings and
repayments.

For the 12 months ended December 31, 2008, corpo-
rate items totaled $103 million of expense compared
with $206 million in 2007 and $276 million in 2006.
The decrease in 2008 principally reflects lower pen-
sion expenses. The decrease in 2007 compared with
2006 principally reflects the benefit of lower pension
expenses partially offset by higher supply chain ini-
tiative costs.

Overhead charges allocated to industry segments
decreased $140 million in 2008 versus 2007 due to
lower benefit-related and corporate staff overhead
costs, partially offset by higher LIFO inventory costs.
Allocated overhead in 2007 was $56 million higher
than in 2006 due to higher medical and 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 8 : During 2008, restructuring and other charges
totaling $179 million before taxes ($110 million after
taxes) were recorded. These charges included:

(cid:129)

a $53 million charge before taxes ($32 million
after taxes)
for severance and related costs
associated with the Company’s 2008 overhead
cost reduction initiative,

a $75 million charge before taxes ($47 million
after taxes) for adjustments to legal reserves,

a $53 million pre-tax charge ($33 million after
taxes) to write off deferred supply chain initiative
development costs for U.S. container operations
that will not be implemented due to the CBPR
acquisition, and

a $2 million gain (before and after taxes) for
adjustments to previously recorded reserves
and other charges associated with the Compa-
ny’s 2006 Transformation Plan.

In addition, restructuring and other charges totaling
$191 million ($117 million after taxes) were recorded
in the Printing Papers,
Industrial Packaging and
Consumer Packaging industry segments including:

(cid:129)

a $123 million charge ($75 million after taxes) for
costs associated with the shutdown of the Bas-
trop, Louisiana mill,

a $30 million charge ($18 million after taxes) for
costs associated with the shutdown of a paper
machine at the Franklin, Virginia mill,

a $30 million charge ($19 million after taxes)
related to the reorganization of the Company’s
Shorewood operations, and

an $8 million charge ($5 million after taxes) for
closure costs associated with the Ace Packaging
business.

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)

a $30 million charge before taxes ($19 million
after taxes) for organizational restructuring pro-
grams, principally associated with the Compa-
ny’s 2006 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 2006 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 tax-
es) for an Ohio Commercial Activity tax adjust-
ment.

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 2006 Transformation Plan,

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

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

taxes)

for

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

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

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.

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

Gain on Sale of Forestlands

2 0 0 8 : During the second and third quarters of 2008,
a pre-tax gain totaling $6 million ($4 million after
taxes) was recorded to adjust reserves related to the
2006 Transformation Plan forestland sales.

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
the Company
announced Transformation Plan,
completed sales totaling approximately 5.6 million
acres of forestlands for proceeds of approximately
$6.6 billion, including $1.8 billion in cash and $4.8
billion of installment notes supported by irrevocable
letters of credit. The first of these transactions in the
second quarter included approximately 76,000 acres
sold for cash proceeds of $97 million, resulting in a
pre-tax gain of $62 million. During the third quarter,
476,000 acres of forestlands were sold for $401 mil-
lion, including $265 million in cash and $136 million
of installment notes, resulting in a pre-tax gain of
the
$304 million. Finally,
Company completed sales of 5.1 million acres of
forestlands for $6.1 billion, including $1.4 billion in
cash and $4.7 billion 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.

in the fourth quarter,

Impairments of Goodwill

In the fourth quarter of 2008, in conjunction with
annual testing of its reporting units for possible
goodwill
impairments as of the beginning of the
fourth quarter, the Company recorded a $59 million
charge to write off all recorded goodwill of its Euro-
pean Coated Paperboard business. Subsequent to
this testing date, the Company performed an interim
test as of December 31, 2008 and recalculated the
estimated fair value of its reporting units as of that
rate
date using higher cost-of-capital discount
assumptions and updated future cash flow projec-
tions, which resulted in the goodwill for two addi-
tional business units, the Company’s U.S. Printing
Papers business and its U.S. Coated Paperboard
business, being potentially impaired. Based on
management’s preliminary estimates, an additional
goodwill
impairment charge of $379 million was
recorded, representing all of the goodwill for the U.S.
Coated Paperboard business, as this was manage-
ment’s best estimate of the minimum impairment
charge that would be required upon the completion
of a detailed allocation of the business unit fair val-
ues to the individual assets and liabilities of each of
the respective reporting units.
In February 2009,
based on additional work performed to date, man-
agement determined that it was probable that all of
the $1.3 billion of recorded goodwill for the U.S.

Printing Papers business would be impaired when
testing is completed. Accordingly, an additional
goodwill
impairment charge of $1.3 billion was
recorded as a charge to operating results for the year
ended December 31, 2008. Due to the complexity of
the businesses involved, it is expected that testing
will be finalized for these businesses by the end of
the first quarter of 2009.

In the fourth quarter of 2006, the Company had
recorded goodwill impairment charges of $630 mil-
lion and $129 million related to its U.S. Coated
Paperboard business and Shorewood business,
respectively. No goodwill impairment charges were
recorded in 2007.

Net Losses (Gains) on Sales and Impairments
of Businesses

Net losses (gains) on sales and impairments of busi-
nesses included in Corporate special items totaled a
gain of $1 million (before and after taxes) in 2008, a
pre-tax gain of $327 million ($267 million after taxes)
in 2007, and a pre-tax loss of $1.4 billion ($1.3 billion
after taxes) in 2006. The principal components of
these gains/losses were:

2 0 0 8 : During the first quarter of 2008, a $1 million
credit (before and after taxes) was recorded to adjust
the estimated loss for a business previously sold.

In addition, a $107 million loss ($84 million after
taxes) for the impairment of the Inverurie, Scotland
mill was recorded in the Printing Papers industry
segment.

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
continuing involvement
the
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 a $205 million
pre-tax gain ($164 million after
taxes) on the
exchange for the Luiz Antonio mill in Brazil (see Note
5), in Net losses (gains) 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 ($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.

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
down the assets of
the Company’s Coated and
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
to certain post-closing adjustments, and
subject
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.

In addition in 2006, industry segment operating prof-
its included a $128 million pre-tax impairment
charge ($84 million after taxes) to reduce the carry-
ing value of the fixed assets of the Company’s Saillat
mill in France to their estimated fair value (in the
Printing Papers segment), and in the third quarter, a
pre-tax gain of $13 million ($6 million after taxes)
related to a sale of property in Spain (in the Industrial
Packaging segment).

Industry Segment Operating Profits

Industry segment operating profits of $1.4 billion in
2008 declined from both $1.9 billion in 2007 and $1.6
billion in 2006. The benefits of significantly higher

average price realizations ($570 million) and lower
operating costs, lower mill outage costs and a more
favorable mix of products sold ($365 million) were
more than offset by higher energy and raw material
costs ($721 million), higher
freight costs ($135
lower
million),
earnings from land and mineral sales ($59 million),
higher costs related to special items ($382 million),
and other items ($57 million).

lower sales volumes ($85 million),

Lack-of-order downtime in 2008 increased sig-
nificantly to approximately one million tons, princi-
pally in the 2008 fourth quarter, compared with
50,000 tons in 2007 and 155,000 tons in 2006, as the
Company adjusted production in line with its
customer demand. The 2008 total included approx-
imately 105,000 tons related to an uncoated paper
machine at our Franklin mill and pulp production at
our Louisiana mill prior to their permanent shutdown
in the fourth quarter of 2008.

levels as demand for

Looking forward to the first quarter of 2009, industry
segment operating profits are expected to be lower
than fourth-quarter 2008 earnings, with the amount
of the decline dependent upon the amount of down-
time taken to match production with customer
demand, and upon changes in pricing and input
costs. Sales volumes for our paper and packaging
businesses are expected to be similar to 2008 fourth-
quarter
industrial and
consumer packaging is expected to remain essen-
tially the same. We expect average sales price
realizations for uncoated paper and containerboard
to be under some pressure, while U.S. coated
paperboard price realizations are expected to
increase, reflecting the renegotiation of a number of
large customer contracts in the third and fourth
quarters of 2008. Input costs for wood and energy,
and transportation should continue to decline,
although energy prices in Europe and Brazil are
expected to increase. Planned mill maintenance
outages will be higher in the U.S., but will remain
about flat in Europe and Brazil. Earnings from our
Ilim joint venture are expected to be lower than earn-
ings reported in the fourth quarter reflecting weaker
demand, reduced selling prices and an unfavorable
foreign exchange impact.

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 the world’s leading producer of
uncoated printing and writing papers. Products in
this segment include uncoated 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 by commercial printers in copiers,
imaging.
desktop and laser printers and digital
End-use applications include advertising and promo-
tional materials such as brochures, pamphlets,
greeting cards, books, annual reports and direct mail.
Uncoated papers also produces a variety of grades
that are converted by our customers into envelopes,
tablets, business forms and file folders. Uncoated
papers are sold under private label and International
include Hammermill,
Paper brand names that
Springhill, Williamsburg, Postmark, Accent, Great
White, Ballet, Chamex and Rey. The mills producing
uncoated papers are located in the United States,
Brazil, France, Poland and Russia. Brazilian oper-
ations function through International Paper do Brasil,
Ltda, which owns or manages approximately
250,000 acres of forestlands in Brazil. The mills have
uncoated paper production capacity of approx-
imately 5.5 million tons annually.

M A R K E T P U L P : Market pulp is used in the manu-
facture of printing, writing and specialty papers,
towel and tissue products and filtration products.
Pulp is also converted into products such as diapers
and sanitary napkins. Pulp products include fluff and
southern softwood pulp, as well as southern and
birch hardwood pulps. These products are produced
in the United States, France, Poland and Russia, and
are sold around the world. International Paper facili-
ties have annual dried pulp capacity of about
1.4 million tons.

Industrial Packaging

International Paper has become the largest manu-
facturer of containerboard in the United States with
the integration of Weyerhaeuser Company’s pack-
aging business. Production capacity is now about
11.0 million tons annually. Our products include
linerboard, medium, whitetop, recycled linerboard,
recycled medium and saturated kraft. About 80% of
production is converted domestically into corrugated
boxes and other packaging by 137 U.S. container
recycles
plants. Additionally,
approximately 1.1 million tons of OCC and mixed
and white paper through our 21 recycling plants in
the U.S. and Mexico. In Europe, operations include
recycled containerboard mills in France and Morocco

International Paper

and 22 container plants in France, Italy, Spain, Tur-
In Asia, operations include 10
key and Morocco.
container plants in China and one container plant in
Thailand. The Company’s container plants are sup-
ported by regional design centers, which offer total
packaging solutions and supply chain initiatives.

Consumer Packaging

The coated paperboard business produces high qual-
ity coated paperboard (SBS) for a variety of pack-
aging and commercial printing end uses. Everest®,
Fortress® and Starcote® brands are used in pack-
aging applications for everyday products such as
food, cosmetics, pharmaceuticals, computer soft-
ware and tobacco products. Carolina® brand is used
in commercial printing end uses such as greeting
lottery tickets and
cards, paperback book covers,
direct mail
advertising.
and point-of-purchase
International Paper is the world’s largest producer of
solid bleached sulfate board with annual U.S. pro-
duction capacity of about 1.9 million tons. Mills
producing coated board in Poland, Russia and China
complement the Company’s U.S. capacity, uniquely
positioning us to provide value-added,
innovative
products for global customers.

Shorewood Packaging Corporation utilizes emerging
technologies in its 18 facilities worldwide to produce
world-class packaging with high-impact graphics for
a variety of markets, including home entertainment,
tobacco, cosmetics, general consumer and pharma-
ceuticals.

The Foodservice business offers cups,
lids, food
containers and plates through three domestic plants
and four international facilities.

Distribution

Through xpedx,
the Company’s North American
merchant distribution business, the Company pro-
vides distribution services and products to a number
of customer markets, supplying commercial printers
with printing papers and graphic pre-press, printing
the building
presses and post-press equipment;
services and away-from-home markets with facility
supplies; and manufacturers with packaging supplies
and equipment. For a growing number of customers,
the Company exclusively provides distribution
capabilities including warehousing and delivery
services. xpedx is the leading wholesale distribution
marketer in these customer and product segments in
North America, operating 129 warehouse locations
and 131 retail stores in the U.S., Mexico and Canada.

Forest Products

International Paper owns or manages approximately
200,000 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 Initiative (SFITM). The
Company’s remaining forestlands are managed as a
portfolio to optimize the economic value to share-
holders. Most of its portfolio represents properties
that are likely to be sold to investors and other buy-
ers for various uses or held for real estate develop-
ment.

Specialty Businesses and Other

C H E M I C A L S : This business was sold in the first
quarter of 2007.

Ilim Holding S.A.

In October 2007, International Paper and Ilim Holding
S.A. (Ilim) completed a 50:50 joint venture to operate
a pulp and paper business located in Russia. Ilim’s
largest facilities include three paper mills located in
Bratsk, Ust-Ilimsk and Koryazhma, Russia, with
combined total pulp and paper capacity of over
2.5 million tons. Ilim controls timberland and forest
areas exceeding 11.6 million acres (4.7 million
hectares).

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 2008 increased 4%
from 2007 and 2% from 2006. However, operating
profits in 2008 were 44% lower than in 2007 and 5%
higher than in 2006. Benefits from higher average

sales price realizations ($344 million), a favorable
mix of products sold ($54 million), improved manu-
facturing operations ($39 million) and other items
($11 million) were more than offset by higher raw
material and energy costs ($374 million), higher
freight costs ($76 million), and lower sales volumes
and increased lack-of-order downtime ($103 million).
Additionally, 2008 results included a charge for costs
associated with the permanent shutdown of the
Louisiana mill ($123 million), an impairment charge
to reduce the carrying value of the fixed assets at the
Inverurie, Scotland mill ($107 million) and a charge
for costs associated with the shutdown of a paper
machine at the Franklin mill ($30 million). The print-
ing papers segment took 635,000 tons of downtime
in 2008,
including
largely in the fourth quarter,
305,000 tons of
lack-of-order downtime to align
production with customer demand. This compared
with 325,000 tons of total downtime in 2007 of which
30,000 tons related to lack-of-orders.

Printing Papers

In millions

Sales

Operating Profit

2008

$6,810

474

2007

$6,530

839

2006

$6,700

453

N O R T H A M E R I C A N P R I N T I N G P A P E R S net sales
in 2008 were $3.4 billion compared with $3.5 billion
in 2007 and $4.4 billion in 2006 ($3.5 billion excluding
the Coated and Supercalendered Papers business
which was sold in the third quarter of 2006). Sales
volumes decreased in 2008 versus 2007, partially due
to reduced production capacity resulting from the
conversion of the Louisiana mill to 100% pulp pro-
duction in June 2008 and the conversion of the
uncoated freesheet machine at the Pensacola mill to
linerboard production in the summer of 2007. Aver-
age sales price realizations increased significantly,
reflecting benefits from price increases announced
throughout 2008. Operating earnings of $405 million
in 2008 decreased from $415 million in 2007, but
were higher than the $367 million earned in 2006
($312 million excluding the Coated and Super-
calendered
from
improved average sales price realizations were offset
by the effects of higher input costs for wood, energy
and chemicals and higher freight costs. Mill operat-
ing costs were favorable compared with the prior
year, due primarily to the conversions of the higher-
cost paper machines at the Louisiana and Pensacola
mills and lower mill overhead spending and operat-
ing improvements. Planned maintenance downtime
costs were lower
in 2008 than in 2007, but
lack-of-order downtime increased to 135,000 tons in
2008 from 25,000 tons in 2007.
In addition, 2008
earnings included a $30 million charge for costs

business).

Benefits

Papers

associated with the shutdown of a paper machine at
the Franklin mill.

Sales volumes for the first quarter of 2009 are
expected to decrease slightly from 2008 fourth-
quarter levels. Profit margins are expected to begin
the quarter slightly above fourth-quarter
levels,
although margins later
in the quarter may be
affected by continued weak market demand. Planned
maintenance outage costs should be lower, as
should raw material costs for wood and energy.
Lack-of-order downtime in the first quarter of 2009 is
projected to be somewhat above fourth-quarter 2008
levels.

B R A Z I L I A N P A P E R S net sales for 2008 of $950 mil-
lion were higher than the $850 million in 2007 and
the $495 million in 2006. Compared with 2007, aver-
age sales price realizations improved significantly in
both domestic and export markets. Sales volumes
increased for both paper and pulp. Operating profits
for 2008 of $186 million were up from $174 million in
2007 and $98 million in 2006. Margins were favor-
ably affected by a favorable mix of higher-margin
domestic sales, but this benefit was partially offset
by higher costs for planned mill maintenance down-
time. Input costs increased significantly, principally
for electricity and natural gas. Earnings toward the
end of 2008 benefited from favorable foreign
exchange factors, reflecting the 20% devaluation of
the Brazilian Real in the third quarter.

Entering 2009, sales volumes for uncoated freesheet
paper in the first quarter are expected to be season-
ally lower. Profit margins are expected to be solid
but below fourth-quarter levels reflecting seasonal
factors, a less favorable product mix and increased
input costs for electricity and chemicals.

E U R O P E A N P A P E R S net sales in 2008 were $1.7 bil-
lion compared with $1.5 billion in 2007 and $1.3 bil-
lion in 2006. Sales volumes in 2008 were higher than
in 2007 reflecting pulp sales from our new BCTMP
facility in Svetogorsk. Average sales price realiza-
tions increased significantly in 2008 in both Eastern
and Western European markets. Operating profits
were $39 million in 2008 compared with $171 million
in 2007 and a loss of $45 million in 2006 that
included a $128 million charge to reduce the carrying
value of the Saillat, France mill. Earnings in 2008
included a $107 million charge to reduce the carrying
value of the fixed assets at the Inverurie, Scotland
mill to their estimated realizable value. Higher input
costs for wood, energy and freight more than offset
the benefits from higher net sales, lower planned
mill maintenance outage costs and favorable manu-

facturing costs. Earnings in 2008 were also adversely
affected by unfavorable foreign exchange move-
ments.

Looking ahead to 2009, first-quarter sales volumes
are expected to be stronger in Russia, reflecting
increased sales into Western Europe, and seasonally
higher
in Western Europe. Profit margins are
expected to be slightly below 2008 fourth-quarter
levels. Input costs are expected to increase, partic-
ularly for energy costs in Poland where electricity
rates are increasing 33%, and for chemicals. Planned
maintenance outage costs will be slightly higher
than in the 2008 fourth quarter.

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 both 2008 and 2007, compared
with $15 million in 2006. Operating earnings
decreased slightly in 2008 compared with 2007, but
were close to breakeven in all periods.

U . S . M A R K E T P U L P sales in 2008 totaled $750 mil-
lion compared with $655 million in 2007 and $510
million in 2006. Sales volumes in 2008 were up from
2007 levels despite a decline in the fourth quarter,
reflecting the conversion of the Bastrop, Louisiana
mill to 100% pulp in June and the conversion of the
Riegelwood pulp dryer and finishing equipment to
manufacture higher margin fluff versus market pulp.
Average sales price realizations improved sig-
nificantly in 2008, principally reflecting higher aver-
age prices earlier in the year for softwood, hardwood
and fluff pulp. Operating earnings in 2008 were a
loss of $156 million, including a charge of $123 mil-
lion for costs associated with the permanent shut-
down of the Louisiana mill, compared with earnings
of $78 million in 2007 and $33 million in 2006. The
benefits from higher average sales price realizations
were more than offset by increased input costs for
wood, energy and chemicals and higher freight
costs. Mill operating costs were also higher reflecting
the increased production at the Louisiana mill. Plan-
ned maintenance downtime costs were also higher
year-over-year, and weak markets in the last four
months of the year resulted in 135,000 tons of addi-
tional
lack-of-order downtime for 2008 compared
with 2007.

In the first quarter of 2009, market demand is
expected to remain weak. As a result, prices for both
market and fluff pulp may continue to be low. Costs
will increase as a result of planned mill maintenance
outages, but input costs for wood and energy and for
freight should be lower.

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 2008
increased 47% to $7.7 billion compared with $5.2 bil-
lion in 2007, and 56% compared with $4.9 billion in
2006. Operating profits in 2008 were 4% higher than
in 2007 and 41% higher than in 2006. Despite sig-
nificant market-related downtime, total year-over-
year shipments were higher due to the inclusion of
the Weyerhaeuser CBPR business acquired in the
2008 third quarter. This net increase ($51 million),
improved price realizations ($228 million) and a
more favorable mix of products sold ($19 million)
were partially offset by the effects of higher raw
material and freight costs ($235 million) and higher
other costs ($2 million). Additionally, costs related to
the conversion of the paper machine at Pensacola to
production of lightweight linerboard were lower in
2008 ($39 million). Operating earnings in 2008 also
included a $39 million charge related to the write-up
of the CBPR inventory to fair value and charges for
integration costs associated with the CBPR acquis-
ition ($45 million). The year-over-year impact of the
costs associated with the second-quarter 2008
Vicksburg recovery boiler explosion, net of insurance
took
proceeds, was negligible. The segment
1.1 million tons of downtime in 2008 which included
700,000 tons of market-related downtime compared
with 165,000 tons of downtime in 2007 which
included 16,000 tons of market-related downtime.

Industrial Packaging

In millions

Sales

Operating Profit

2008

$7,690

390

2007

$5,245

374

2006

$4,925

277

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 2008 were $6.2 billion, compared with $3.9
billion in 2007 and $3.7 billion in 2006. Operating
profits in 2008 were $322 million, up from $305 mil-
lion in 2007 and $242 million in 2006. Sales and prof-
its for 2008 include the operating results of the
Weyerhaeuser CBPR business from the August 4,
2008 acquisition date. Operating profits also reflect
charges of $39 million related to the write-up of
CBPR inventory to fair value and $45 million of CBPR
integration costs.

Excluding the effect of the CBPR acquisition, contain-
erboard and box shipments were lower in 2008
compared with 2007 reflecting the economic down-
turn in the fourth quarter. Average sales price
realizations were significantly higher than in 2007
benefiting from sales price increases implemented in
late 2007 and during 2008; however, the benefit of
these higher sales prices was more than offset by
higher average input costs for wood, energy and
chemicals. Freight costs also increased significantly
year-over-year. Manufacturing performance was
strong, and costs associated with planned mill main-
tenance outages were lower. Lack-of-order down-
time totaled 700,000 tons in 2008 including 355,000
tons at CBPR facilities. Fourth-quarter 2008 results
income
included approximately $33 million of
related to the final
for the
insurance settlement
Vicksburg mill recovery boiler explosion. Operating
results for 2007 included $52 million of costs
incurred to convert the paper machine at the Pensa-
cola mill to the production of lightweight linerboard,
with an additional $13 million recorded in 2008.

Looking ahead to the first quarter of 2009, sales
volumes for containerboard and boxes are expected
to remain at about fourth-quarter levels, while profit
margins should be comparable to fourth-quarter
levels. Planned mill maintenance outage costs
should be higher in the first quarter of 2009 than in
the fourth quarter of 2008. Manufacturing operating
costs are expected to be significantly lower, princi-
pally for the box plants.

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 2008 were $1.2 billion, up from $1.1 billion in
2007 and $1.0 billion in 2006. Sales volumes declined
primarily due to weaker markets for industrial prod-
ucts throughout Europe. Operating profits in 2008
were $64 million compared with $67 million in 2007
and $37 million in 2006. Earnings for the box busi-
ness increased from the prior year with significant
gains in France,
Italy and Spain. Sales margins
improved reflecting strong average sales prices for
boxes, lower costs for kraft and recycled container-
board and the effects of waste reduction and box
redesign
costs were
unfavorable as inflationary cost increases more than
offset the benefits of manufacturing improvement
programs. Earnings from our joint venture in Turkey
were lower than in 2007 primarily due to weak gen-
eral economic conditions.

Conversion

initiatives.

Entering the first quarter of 2009, sales volumes
should be seasonally stronger as the winter fruit and
vegetable season continues, but industrial markets
are expected to remain weak. Profit margins are

expected to decline slightly reflecting some pressure
on box prices and lower recycled board prices at the
Etienne mill.

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
2008 were $350 million compared with $265 million
in 2007 and $180 million in 2006. Operating profits
totaled $4 million in 2008 compared with $2 million
in 2007 and a loss of $2 million in 2006.

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 6%
compared with 2007 and 19% compared with 2006.
Operating profits declined 85% from 2007 and 82%
from 2006 levels. Benefits from improved average
sales price realizations ($93 million), higher sales
volumes for U.S., European and Asian coated
paperboard ($8 million), and a favorable mix of
products sold ($19 million), were more than offset by
higher raw material and energy costs ($153 million),
increased freight costs ($20 million), unfavorable mill
lower sales volumes for
operations ($14 million),
U.S. converting businesses ($5 million) and other
items ($4 million). Additionally, 2008 included $30
million of costs associated with the reorganization of
the Shorewood business compared with $11 million
of reorganization charges in 2007.

Consumer Packaging

In millions

Sales

Operating Profit

2008

$3,195

2007

$3,015

112

2006

$2,685

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 $2.5 billion in 2008 compared with $2.4
billion in both 2007 and 2006. Operating earnings of
$8 million in 2008 decreased from $70 million in 2007
and $64 million in 2006.

Coated paperboard sales volumes were essentially
flat in 2008 compared with 2007. Average sales price
realizations improved substantially in 2008; although
these benefits were more than offset by higher raw
material and freight costs. However, in the third and
fourth quarters, a number of large customer con-
tracts were renegotiated to allow more timely future

price adjustments to reflect changes in costs. Plan-
ned maintenance downtime expenses in 2008 were
about flat compared with 2007, while manufacturing
operating costs were unfavorable.

the

realization

Foodservice sales volumes were higher in 2008 than
in 2007. Average sales prices were also higher
reflecting
increases
implemented to recover raw material cost increases.
Raw material costs for bleached board and poly-
styrene were significantly higher
than in 2007.
Manufacturing costs improved, reflecting increased
productivity and reduced waste.

price

Shorewood sales volumes in 2008 declined from
2007 levels due to weak demand in tobacco,
consumer products and display markets, partially
offset by improvements in the home entertainment
segment. Sales margins improved from 2007 reflect-
ing a more favorable mix of products sold. Raw
material costs were higher in 2008 primarily for
bleached board, but operating costs were flat.
Charges to restructure operations were $19 million
higher in 2008.

Entering 2009, coated paperboard sales volumes in
the first quarter are expected to be lower as down-
time is taken to match production with customer
demand. Average sales price realizations are
expected to improve as 2008 pricing actions are real-
ized. Earnings should benefit from fewer planned
mill maintenance outages compared with the 2008
fourth quarter. Overall raw material costs for wood,
polyethylene and energy are expected to be about
flat. Foodservice sales volumes are expected to
improve slightly and average sales price realizations
should be higher. Raw material costs, particularly for
resins, should be significantly lower. Shorewood
sales volumes for the first quarter 2009 are expected
to seasonally decline, but
this negative impact
should be partially offset by benefits from cost
improvements associated with prior-year restructur-
ing 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
2008 were $300 million compared with $280 million
in 2007 and $230 million in 2006. Sales volumes in
2008 were higher than in 2007 as demand in domes-
tic markets strengthened during the first three quar-
ters of 2008. Average sales price realizations also
improved in 2008, primarily due to increased sales
prices in European domestic markets. Operating
earnings in 2008 of $22 million declined from $30
million in 2007 and $31 million in 2006. The addi-
tional contribution from higher net sales was more
than offset by higher input costs for wood and

energy, higher
changes in foreign exchange rates.

freight

costs and unfavorable

Entering 2009, sales volumes for the first quarter
should be comparable to the fourth quarter while
average sales price realizations are expected to soft-
en. Input costs are expected to increase, primarily for
electricity costs at the Kwidzyn, Poland mill and for
chemicals. These factors should be somewhat offset
by a favorable currency exchange rate movement in
Poland.

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
$390 million in 2008 compared with $330 million in
2007 and $50 million in 2006, reflecting the acquis-
ition of a 50% ownership interest in International
Paper & Sun Cartonboard Co., Ltd. during the fourth
quarter of 2006. Operating earnings in 2008 were a
loss of $13 million compared with earnings of $12
million in 2007 and a loss of $2 million in 2006. The
loss in 2008 was primarily due to a $12 million
charge to revalue pulp inventories at our Shandong
International Paper and Sun Coated Paperboard Co.,
Ltd. joint venture and start-up costs associated with
the joint venture’s new folding box board paper
machine.

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’s margins and earnings are relatively
stable across an operating cycle. Providing custom-
ers with the best choice and value in both products
and supply chain services is a key competitive factor.
Additionally, efficient customer service, cost-effective
logistics and focused working capital management
are key factors in this segment’s profitability.

Distribution

In millions

Sales

Operating Profit

2008

$7,970

103

2007

$7,320

108

2006

$6,785

D I S T R I B U T I O N ’ S 2008 annual sales increased 9%
from 2007 and 17% from 2006 while operating profits
in 2008 decreased 5% compared with 2007 and
increased 6% compared with 2006.

Annual sales of printing papers and graphic arts
supplies and equipment totaled $5.2 billion in 2008

compared with $4.7 billion in 2007 and $4.3 billion in
2006, reflecting a full year of contributions from the
Central Lewmar business acquired in August 2007
and increased focus on publication and catalog
markets. Mill direct sales were up 17% from 2007
and 38% from 2006, while sales from stock were
down 4% from 2007 and about unchanged from
2006. Trade margins for printing papers decreased
from 2007 and 2006 reflecting an increase in lower-
margin direct sales.

Revenue from packaging products was $1.6 billion in
2008 compared with $1.5 billion for both 2007 and
for packaging products
2006. Trade margins
remained relatively even compared with the past two
years. Facility supplies annual revenue was $1.1 bil-
lion in both 2008 and 2007 and $1.0 billion in 2006,
principally reflecting increased sales volumes.

Total xpedx operating profit was $103 million in 2008
compared with $108 million in 2007 and $97 million
in 2006, primarily reflecting lower demand for stock
sales.

Looking ahead to the first quarter 2009, sales vol-
umes are expected to be lower reflecting seasonal
declines and the weaker current economic con-
ditions. xpedx will continue to focus on efficiency
and productivity initiatives to mitigate the effect of
the demand decline.

Forest Products

Forest Products currently manages approximately
200,000 acres of forestlands in the United States.
Operating results are driven by the timing and pric-
ing of specific forestland tract sales. The decline in
sales reflects the significant decline in forestland
acreage since 2006. Future operations will continue
to be driven by pricing and demand for forestland
and real estate sales.

Forest Products

In millions

Sales

Operating Profit

2008

$200

409

2007

$485

458

2006

$765

631

Sales in 2008 decreased 59% from 2007 and 74%
from 2006. Operating profits were down 11% from
2007 and 35% from 2006. As part of the Company’s
2006 Transformation Plan, 5.6 million acres of forest-
land were sold in 2006, primarily in the fourth quar-
ter, 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 in 2008 included $261 million from
the sale of 13,000 net acres of subsurface mineral
rights in Louisiana. Profits from stumpage sales and
recreational income were $31 million in 2008, com-
pared with $25 million in 2007 and $222 million in
2006, reflecting the significant reduction in forestland
acreage. Profits from forestland and real estate sales
were $144 million in 2008 compared with $469 mil-
lion in 2007 and $571 million in 2006. Operating
expenses decreased to $27 million from $36 million
in 2007 and $162 million in 2006, reflecting the
reduced level of operations.

Looking forward to 2009, the amount and timing of
operating earnings will reflect the periodic sales of
remaining acreage and can be expected to vary from
quarter to quarter.

Specialty Businesses and Other

The Specialty Businesses and Other segment princi-
pally included the operating results of the Arizona
Chemical business as well as certain smaller busi-
nesses. The Arizona Chemical business was sold in
February 2007.

Specialty Businesses and Other

In millions

Sales

Operating Profit

2008

$–

–

2007

$135

2006

$935

Equity Earnings, Net of Taxes – Ilim Holding
S.A.

On October 5, 2007,
International Paper and Ilim
Holding S.A. (“Ilim”) announced the completion of a
50:50 joint venture to operate in Russia. Due to the
complex structure of
Ilim’s operations, and the
extended time required to prepare consolidated
financial information in accordance with accounting
principles generally accepted in the United States,
the Company reports its share of Ilim’s operating
results on a one-quarter lag basis. Accordingly, the
accompanying consolidated statement of operations
for the twelve months ended December 31, 2008
includes the Company’s 50% share of Ilim’s operat-
ing results for the period from acquisition through
September 30, 2008, together with the results of
other small equity investments, under the caption
Equity earnings, net of taxes. Ilim is reported as a
separate reportable industry segment.

The Company recorded equity earnings for Ilim, net
of taxes of $54 million in 2008. Earnings included a
$4 million after-tax foreign exchange gain on the
remeasurement of U.S. dollar-denominated debt, a
$3 million after-tax charge to write off a share

repurchase option, and a one-time $6 million
after-tax charge reflecting the write-up of finished
goods and work-in-process inventory to fair value as
of the acquisition date. In August 2008, Ilim sold its
56% investment in the Saint Petersburg Cartonboard
and Printing Mill (KPK) for $238 million. No gain or
loss was realized by the Company on the sale of KPK
because the fair value assigned to that business by
the Company at the acquisition date was equal to the
sales proceeds.

Sales volumes for the joint venture were strong
during the 12-month period, but declined slightly in
August and September as demand weakened and
the sale of the KPK facility was realized. Export sales
to China during the period totaled over 900,000 tons.
Pulp and paper prices trended lower in the latter half
of the year in both domestic and export sales reflect-
ing weakening general economic conditions. Input
costs for wood, chemicals and energy increased
gradually throughout the period. Declining volumes
and supply chain improvements contributed to lower
distribution costs. The Company received a $67 mil-
lion cash dividend from the joint venture in
December 2008.

For Ilim’s 2008 fourth quarter to be reported in the
Company’s 2009 first quarter, both sales volumes
and sales price realizations are expected to be
affected by weak global economic conditions. Pro-
duction downtime may be taken as a result of weak-
ening demand. In addition, a foreign exchange loss
on U.S. dollar-denominated debt is expected due to
the strengthening of the U.S. dollar versus the Rus-
sian Ruble.

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 2008 focused on the issuance
of debt for the acquisition of the Weyerhaeuser CBPR

business and the subsequent repayments beginning
in the 2008 fourth quarter. The Company intends to
continue to strengthen its balance sheet through
further debt repayments during 2009.

Cash Provided by Operations

Cash provided by continuing operations totaled $2.7
billion in 2008 compared with $1.9 billion for 2007
and $1.0 billion for 2006, which was 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 continu-
ing operations are earnings from continuing oper-
ations adjusted for non-cash income and expense
items and changes in working capital. Earnings from
continuing operations, adjusted for non-cash income
and expense items, decreased by $135 million in
2008 versus 2007. This compares with an increase of
$123 million for 2007 over 2006, excluding the pen-
sion contribution in 2006. However, changes in
working capital components, accounts receivable
and inventory less accounts payable and accrued
liabilities, contributed $317 million of cash in 2008,
compared with a $539 million use of cash in 2007
and a $354 million use in 2006.

Investment Activities

Investment activities in 2008 included expenditures
totaling $6.1 billion for acquisitions, primarily the
purchase of the CBPR business, and a $21 million
increase in the Company’s 50% equity interest in Ilim
Holding S.A. in Russia, and the receipt of $14 million
of additional cash proceeds from divestitures.

Capital spending for continuing operations was $1.0
billion in 2008, or 74% of depreciation and amor-
tization, compared with $1.3 billion, or 119% of
depreciation and amortization in 2007, and $1.0 bil-
lion, or 87% of depreciation and amortization in 2006.

The following table shows capital spending for con-
tinuing operations by business segment for the years
ended December 31, 2008, 2007 and 2006.

We currently expect capital expenditures in 2009 to
be about $700 million, or 43% of depreciation and
amortization.

Acquisitions

Packaging

Containerboard,

On August 4, 2008, International Paper completed
the assets of Weyerhaeuser
the acquisition of
Company’s
and
Recycling (CBPR) business for approximately $6 bil-
lion in cash, subject to post-closing adjustments. In
June 2008, the Company had issued $3 billion of
unsecured senior notes in anticipation of the acquis-
the purchase price was
ition. The remainder of
financed through borrowings under a $2.5 billion
bank term loan, $0.4 billion of borrowings under a
receivables securitization program and existing cash
balances. The CBPR operating results are included in
International Paper’s North American Industrial
Packaging business from the date of acquisition.

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

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

In October 2005,

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 consolidated in International Paper’s financial
statements from its date of acquisition in 2005.

In millions

Printing Papers

Industrial Packaging

Consumer Packaging
Distribution

Forest Products

Subtotal

Corporate and other

2008

2007

2006

$ 383

$ 556

$ 523

Exchanges

282

287
9

963

405

276
6

1,265

257

130
6

988

Total from continuing operations

$1,002

$1,288

$1,009

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

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, and
contributed an additional $21 million in 2008. A key
element of the proposed joint venture strategy is a
long-term investment program in which the joint
venture intends to invest, when market and financing
conditions are appropriate, approximately $1.5 bil-
lion in Ilim’s three mills over approximately five
years, with the funding generated through cash from
operations and additional borrowings by the joint
venture. This planned investment in the Russian pulp
and paper industry will be used to upgrade equip-
ment,
increase production 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 structure of Ilim’s operations, and the
extended time required to prepare consolidated
financial information in accordance 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. The Compa-
ny’s investment in Ilim is included in the caption
Investments in the accompanying consolidated
balance sheet.

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
In
paperboard machines in Yanzhou City, China.
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 that was completed and began operations
in the third quarter of 2008.

Financing Activities

2 0 0 8 : Financing activities during 2008 included debt
issuances of $6.0 billion and retirements of $696 mil-
lion, for a net issuance of $5.3 billion.

In August 2008, International Paper borrowed $2.5
billion of long-term debt with an initial interest rate
of LIBOR plus a margin of 162.5 basis points. The
margin can vary depending upon the credit rating of
the Company. The debt requires quarterly principal
payments starting in the fourth quarter of 2008 and
has a final maturity in August 2013. Debt issuance
costs of approximately $50 million related to this
borrowing were recorded in Deferred charges and
other assets in the accompanying consolidated bal-
ance sheet and will be amortized over the term of the
loan. Also in August 2008, International Paper bor-
rowed approximately $395 million under its receiv-
ables securitization program. As of December 31,
2008, all of the borrowings under the receivables
securitization program were repaid.

The above funds, together with the $3 billion from
unsecured senior notes borrowed in the second
quarter discussed below and other available cash,
were used for the CBPR business acquisition in
August 2008.

In the third quarter of 2008,
International Paper
repaid $125 million of the $2.5 billion long-term debt
and repurchased $63.5 million of notes with interest
rates ranging from 4.25% to 8.70% and original
maturities from 2009 to 2038.

Also in the third quarter, the Company entered into a
series of forward-starting floating-to-fixed interest
rate swap agreements with a notional amount of
$1.5 billion in anticipation of borrowing under the $3
billion committed bank credit agreement for the
purchase of the CBPR business. The floating-to-fixed
interest rate swaps were effective September 2008
and mature in September 2010. These forward-
starting interest rate swaps are being accounted for
as cash flow hedges in accordance with SFAS
No. 133 as hedges of the benchmark interest rate of

future interest payments related to any borrowing
under the bank credit agreement. In the fourth quar-
ter of 2008, the Company terminated $550 million of
these floating-to-fixed interest rate swap agreements
resulting in a loss of approximately $17 million
recorded in Accumulated other comprehensive loss
in the accompanying consolidated balance sheet
(see Note 14).

In the second quarter of 2008, International Paper
issued $3 billion of unsecured senior notes consist-
ing of $1 billion of 7.4% notes due in 2014, $1.7 bil-
lion of 7.95% notes due in 2018, and $300 million of
8.7% notes due in 2038. Debt issuance costs of
approximately $20 million related to the new debt
were recorded in Deferred charges and other assets
in the accompanying consolidated balance sheet and
are being amortized over the terms of the respective
notes.

Also in the second quarter of 2008,
International
Paper entered into a series of fixed-to-floating inter-
est rate swap agreements, with a notional amount of
$1 billion and maturities in 2014 and 2018, to man-
age interest rate exposures associated with the new
$3 billion of unsecured senior notes. These interest
rate swaps are being accounted for as fair value
hedges in accordance with SFAS No. 133. In 2008,
International Paper terminated $1.8 billion of interest
rate swap agreements designated as fair value
above
some
hedges,
fixed-to-floating interest rate swaps, resulting in a
gain of $127 million. This gain was deferred and
recorded in Long-term debt in the accompanying
consolidated balance sheet to be amortized over the
life of the related debt obligations through June 2018
(see Note 13).

including

the

International Paper utilizes interest rate swaps to
change the mix of fixed and variable rate debt and
manage interest expense. At December 31, 2008,
International Paper had interest rate swaps with a
total notional amount of $1.4 billion and maturities
ranging from one to eight years. During 2008, exist-
ing swaps decreased the weighted average cost of
debt from 6.41% to an effective rate of 6.07%. The
inclusion of
income from
the offsetting interest
short-term investments further reduced this effective
rate to 5.21%.

Other financing activities during 2008 included a net
issuance of approximately 2.4 million shares of
treasury stock for various incentive plans, including
stock option exercises that generated approximately
$1 million of cash and restricted stock that did not
generate cash. Payments of restricted stock with-
holding taxes totaled $47 million.

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 maturing 6.5% debentures, 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.

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.

At December 31, 2007, International Paper had inter-
est rate swaps with a total notional amount of $1.7
billion and maturities ranging from one to nine
years. During 2007, existing swaps increased the
weighted average cost of debt from 6.51% to an
effective rate of 6.62%. The inclusion of the offsetting
interest
from short-term investments
reduced this effective rate to 4.36%.

income

financing activity in 2007 included the
Other
repurchase of 33.6 million shares of International
Paper common stock for approximately $1.2 billion,
and a net issuance of 5.2 million shares under vari-
ous 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 from its 2006 Transformation
Plan forestland sales to retire notes with interest

rates ranging from 3.8% to 10.0% and original matur-
ities 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.

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

In February 2006, International Paper repurchased
$195 million of 6.4% debentures with an original
maturity date of February 2026. Other reductions in
the first quarter of 2006 included early payment of
approximately $495 million of notes with coupon
rates ranging from 4.0% 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 and maturities ranging from one to ten 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 a net issuance of 2.8 million shares under vari-
ous incentive plans, including stock option exercises
that generated $32 million of cash.

Off-Balance Sheet Variable Interest Entities

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

$4.8 billion and approximately $400 million of Interna-
tional Paper promissory notes for interests in entities
formed to monetize the notes. International Paper
determined that it was not the primary beneficiary of
these entities, and therefore should not consolidate
these entities. During 2006, these entities acquired an
additional $4.8 billion of International Paper debt
securities for cash, resulting in a total of approx-
imately $5.2 billion of
International Paper debt
obligations held by these entities at December 31,
2006. Since International Paper has, and intends to
affect, a legal right to offset its obligations under
these debt instruments with its investments in the
entities, International Paper has offset $5.1 billion of
interest in the entities against $5.1 billion of Interna-
tional Paper debt obligations held by the entities as
of December 31, 2008.

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.

Liquidity and Capital Resources Outlook for
2009

Capital Expenditures and Long-Term Debt

International Paper expects to be able to meet pro-
jected capital expenditures, service existing debt and
meet working capital and dividend requirements
during 2009 through current cash balances and cash
from operations, supplemented as required by its
various existing credit facilities.

bank

credit

At December 31, 2008,
International Paper had
approximately $1.1 billion in cash and $2.5 billion of
agreements, which
committed
management believes are adequate to cover
expected operating cash flow variability during the
current economic cycle. The credit agreements gen-
erally provide for interest rates at a floating rate
index plus a pre-determined margin dependent upon
International Paper’s credit rating. These agreements
include a $1.5 billion fully committed revolving bank
credit agreement that expires in March 2011 that has
a facility fee of 0.10% payable quarterly, and a
receivables securitization program that provides up
to $1.0 billion of committed commercial paper-based
financings based on eligible receivable balances that
expires in October 2009 and has a facility fee of

0.10%. At December 31, 2008, there were no borrow-
ings under either the bank credit agreements or
receivables securitization program. On January 23,
2009,
the Company amended the receivables
securitization program to extend the maturity date
from October 2009 to January 2010. The amended
agreement has a facility fee of 0.75% payable quar-
terly. The Company also intends to expand the
coverage of its securitization program during 2009 to
include some of its receivables in Europe.

International Paper has approximately $1.6 billion of
debt and notes payable obligations maturing in 2009.
In January 2009, the Company used approximately
$362 million of cash to repay its maturing 4.25%
notes. Other debt obligations maturing in 2009
include 500 million of euro-denominated debt
(equivalent to $696 million at December 31, 2008)
that matures in August 2009. International Paper is
currently negotiating the refinancing of this euro-
denominated debt.

less

than

ratio

The Company was in compliance with all its debt
covenants at December 31, 2008. The Company’s
financial covenants require the maintenance of a
minimum net worth of $9 billion and a total-
debt-to-capital
60%. At
of
December 31, 2008, International Paper’s net worth,
as defined, was $11.2 billion, and the total-
debt-to-capital ratio was 51.9%. Net worth is defined
in the covenants as the sum of common stock,
paid-in capital and retained earnings, less treasury
stock plus any cumulative goodwill
impairment
charges. The calculation also excludes other
comprehensive income. The total-debt-to-capital
ratio is defined as total debt divided by the sum of
total debt plus net worth.

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.

Maintaining an investment grade credit rating is an
important element of International Paper’s financing
strategy. At December 31, 2008, the Company held
long-term credit ratings of BBB (negative outlook)
and Baa3 (negative outlook) by S&P and Moody’s,
respectively. The Company currently has short-term
credit ratings of A-3 and P-3 by S&P and Moody’s,
respectively.

Contractual obligations for future payments under
existing debt and lease commitments and purchase
obligations at December 31, 2008, were as follows:

In millions

2009

2010

2011

2012

2013 Thereafter

Maturities of long-term

debt (a)

$ 828 $1,344 $1,389 $ 967 $1,504

$ 6,042

Debt obligations with

right of offset (b)

Lease obligations

–

174

Purchase obligations (c) 2,570

511

147

630

124

585

–

106

575

–

530

5,098

139

4,030

Total (d)

$3,572 $2,632 $2,140 $1,648 $2,120

$15,309

(a) Total debt includes scheduled principal payments only. The

2009 debt maturities reflects the reclassification of $796 million

of Notes payable and current maturities of long-term debt,

including the 500 million of euro-denominated debt, to Long-

term debt based on International Paper’s intent and ability to

renew or convert

these obligations, as evidenced by the

Company’s available bank credit agreements.

(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, 2008,

International

Paper has offset approximately $5.7 billion of interests in the

entities against this $5.7 billion of debt obligations held by the

entities (see Note 8 in the accompanying consolidated financial

statements).

entered into at the time of the 2006 Transformation Plan forest-

land sales.

(d) Not included in the above table due to the uncertainty as to the

amount and timing of the payment are unrecognized tax bene-

fits of approximately $331 million.

Pension Obligations and Funding

At December 31, 2008, the projected benefit obliga-
tion for the Company’s U.S. defined benefit plans
determined under U.S. Generally Accepted Account-
ing Principles was approximately $3.2 billion higher
than the fair value of plan assets. Approximately $2.9
billion of this amount relates to plans that are subject
to minimum funding requirements. Under current
IRS funding rules, the calculation of minimum fund-
ing requirements differs from the calculation of the
present value of plan benefits (the projected benefit
obligation) for accounting purposes.
In December
2008, the Worker, Retiree and Employer Recovery
Act of 2008 (WERA) was passed by the U.S. Con-
gress which provided for pension funding relief and
technical corrections. Funding contributions depend
on the funding method selected by the Company,
and the timing of its implementation, as well as on
actual demographic data and the targeted funding

level. At this time, we do not expect that the final-
ization of the funded status as of December 31, 2008
will require the Company to make contributions to its
plans in 2009. The timing and amount of con-
tributions in 2010 and beyond, which could be
material, will depend on a number of factors, includ-
ing the actual earnings and changes in values of plan
assets, changes in interest rates and the possible
impact of other funding relief proposals that may be
adopted by Congress.

Alternative Fuel Credits

The U.S. Internal Revenue Code allows an excise tax
credit for alternative fuel mixtures produced by a
taxpayer for sale, or for use as a fuel in a taxpayer’s
trade or business. The credit, equal to $.50 per gallon
of alternative fuel contained in the mixture,
is
refundable to the taxpayer. During the fourth quarter
of 2008, the Company filed to be registered as an
alternative fuel mixer, and in January 2009 received
notification that the registration was approved. The
Company continues to accumulate information to file
for refunds for eligible periods, generally subsequent
to November 2008.

CRITICAL ACCOUNTING POLICIES

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

their application,

Accounting policies whose application may have a
significant effect on the reported results of oper-
ations and financial position of International Paper,
and that can require judgments by management that
affect
include SFAS No. 5,
“Accounting for Contingencies,” SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-
Lived Assets,” SFAS No. 142, “Goodwill and Other
Intangible Assets,” SFAS No. 87, “Employers’
Accounting
106,
Pensions,”
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions,” as amended by SFAS Nos.
132 and 132(R), “Employers’ Disclosures About
Pension and Other Postretirement Benefits,” SFAS
No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans,” and SFAS
No. 109, “Accounting for Income Taxes.” The follow-
ing is a discussion of the impact of these accounting
policies on International Paper:

SFAS No.

for

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 11 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
future costs per claim.
regarding projections of
International Paper utilizes a third party consultant to
assist in developing these estimates. Liabilities for
environmental matters require evaluations of rele-
vant environmental regulations and estimates of
future remediation alternatives and costs. Interna-
tional Paper determines these estimates 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 group’s carrying amount
cannot be recovered through future operations and
exceeds its fair value. An impairment charge is then
recorded to reduce the carrying amount to fair value.
Assessments of possible impairments of long-lived
assets are made when events or changes in circum-
stances indicate that the carrying value of the asset
may not be recoverable through future operations. A
goodwill
impairment exists when the carrying
amount of a reporting unit’s goodwill exceeds its
implied fair value. Testing for possible impairment of
goodwill
is required annually, and on an interim
basis if an event occurs or circumstances change
that, more likely than not, would reduce the fair
value of a reporting unit below its carrying amount.
The amount and timing of these impairment charges
require the estimation of future reporting unit cash
flows, cost-of-capital discount rates and the fair
market value of the related business unit assets and
liabilities.

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-
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.

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,

I N C O M E T A X E S International Paper
records its
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
matters may differ
from recorded estimated
amounts.

SIGNIFICANT ACCOUNTING ESTIMATES

G O O D W I L L I M P A I R M E N T A N A L Y S I S Under the
provisions of Statement of Financial Accounting
Standards No. 142, the testing of goodwill for possi-
ble impairment is a two-step process. In the first
step, the fair value of the Company’s reporting units
is compared with their carrying value,
including
goodwill. If fair value exceeds the carrying value,
goodwill is not considered to be impaired. If the fair
value of a reporting unit is below the carrying value,
then step two is performed to measure the amount
of the goodwill impairment loss for the reporting
unit. This analysis requires the determination of the
fair value of all of the individual assets and liabilities
of
including any currently
unrecognized intangible assets, as if the reporting
unit had been purchased on the analysis date. Once
these fair values have been determined, the implied
fair value of the unit’s goodwill is calculated as the
excess, if any, of the fair value of the reporting unit
determined in step one over the fair value of the net
assets determined in step two. The carrying value of
goodwill is then reduced to this implied value, or to
zero if the fair value of the assets exceeds the fair
through a goodwill
value of
impairment charge.

the reporting unit,

The impairment analysis requires a number of
judgments by management. In calculating the esti-
mated fair value of its reporting units in step one, the
Company uses the projected future cash flows to be
generated by each unit over the estimated remaining
useful operating lives of the unit’s assets, discounted
using the estimated cost-of-capital discount rate for

each reporting unit. These calculations require many
including discount rates, future growth
estimates,
rates, and cost and pricing trends for each reporting
unit. Subsequent changes in economic and operat-
ing conditions can affect these assumptions and
could result in additional interim testing and good-
will
impairment charges in future periods. Upon
completion, the resulting estimated fair values are
then analyzed for reasonableness by comparing
them to earnings multiples for historic industry
business transactions, and by comparing the sum of
the reporting unit fair values and other corporate
assets and liabilities divided by diluted common
shares outstanding to the Company’s market price
per share on the analysis date.

During 2008, as in prior years, the Company per-
testing for
formed the required annual goodwill
impairment as of the beginning of the fourth quarter,
resulting in a $59 million impairment charge to write
off all goodwill for the Company’s European Coated
to this testing
Paperboard business. Subsequent
date, the Company performed an interim test as of
December 31, 2008 and recalculated the estimated
fair value of its reporting units as of that date using
updated future cash flow projections and higher
cost-of-capital discount rates. Based on this testing,
step two testing for possible impairment was
required for the Company’s U.S. Printing Papers
business and its U.S. Coated Paperboard business.
Based on management’s preliminary estimates, an
additional goodwill impairment charge of $379 mil-
lion was recorded, representing all of the goodwill
for the U.S. Coated Paperboard business, as this was
the minimum
management’s best estimate of
impairment charge that will be required upon the
completion of detailed step two analyses. In Febru-
ary 2009, based on additional work performed to
date, management determined that it was probable
that all of the $1.3 billion of recorded goodwill for the
U.S. Printing Papers business would be impaired
when testing is completed. Accordingly, an addi-
tional goodwill impairment charge of $1.3 billion was
recorded as a charge to operating results for the year
ended December 31, 2008. Due to the complexity of
the businesses involved, it is expected that testing
will be finalized for these businesses by the end of
the first quarter of 2009.

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.

imately $29 million. The effect on net postretirement
benefit cost from a 1% increase or decrease in the
annual trend rate would be approximately $2 million.

Benefit obligations and fair values of plan assets as
of December 31, 2008, for International Paper’s pen-
sion and postretirement plans are as follows:

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

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

$8,960

$6,079

315

596

168

–

115

–

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

Discount rate

Expected long-term return on plan assets

Rate of compensation increase

2008

2007

2006

6.20% 5.75% 5.50%
8.50% 8.50% 8.50%
3.75% 3.75% 3.25%

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

Health care cost trend rate assumed for next year

Rate that the cost trend rate gradually declines to

Year that the rate reaches the rate it is assumed to

remain

2008

2007

9.50% 10.00%
5.00% 5.00%

2017

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
Aa-graded bonds. The plan’s projected cash pay-
ments are then matched to this yield curve to
develop the discount rate. The expected long-term
rate of return on plan assets reflects projected
returns for an investment mix determined upon
completion of a detailed asset/liability study that
meets the plans’ investment objectives.

Increasing (decreasing) the expected long-term rate
of return on U.S. plan assets by an additional 0.25%
would decrease (increase) 2009 pension expense by
approximately $19 million, while a (decrease)
increase of 0.25% in the discount
rate would
(increase) decrease pension expense by approx-

Year

2008
2007

2006

2005

2004

Return

(23.6)%
9.6%

14.9%

11.7%

14.1%

Year

2003

2002

2001

2000

1999

Return

26.0%

(6.7)%

(2.4)%

(1.4)%

21.4%

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 9 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 $176 million and $29 million,
respectively.

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

In millions

Pension expense

2008

2007

2006

2005

2004

U.S. plans (non-cash)

$123

$210

Non-U.S. plans

Postretirement expense

U.S. plans

Non-U.S. plans

$377

$243

$111

Net expense

$158

$238

$404

$281

$181

The decrease in 2008 U.S. pension expense princi-
pally reflects an increase in the assumed discount
rate to 6.20% in 2008 from 5.75% in 2007 and lower
amortization of unrecognized actuarial losses. The
decrease in 2007 U.S. pension expense principally
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 earnings 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.

funded to the extent of benefit payments, which
totaled $24 million for the year ended December 31,
2008.

Assuming that discount rates, expected long-term
returns on plan assets and rates of future compensa-
tion increases remain the same as in 2008, 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

2010 (a)

2009 (a)

$317

$245

$368

$294

(a) Based on 12/31/08 assumptions.

The Company estimates that it will record net pen-
sion expense of approximately $245 million for its
U.S. defined benefit plans in 2009, with the increase
from expense of $123 million in 2008 principally
the CBPR
reflecting the additional employees of
business acquired in 2008, a lower return on asset
assumption of 8.25% in 2009 from 8.50% in 2008,
higher amortization of actuarial
losses and a
decrease in the assumed discount rate to 6.00% in
2009 from 6.20% in 2008. Net postretirement benefit
costs in 2009 will increase primarily as a result of the
expiration of prior service cost amortization credits
from plan amendments made in prior years.

The market value of plan assets for International
Paper’s U.S. qualified pension plan at December 31,
2008 totaled approximately $6.1 billion, consisting of
approximately 39% equity securities, 39% debt secu-
rities, and 22% real estate and other assets. Plan
assets did not include International Paper common
stock.

The Company’s funding policy for its qualified pen-
sion plans is to contribute amounts sufficient to meet
funding requirements, plus any additional
legal
amounts that the Company may determine to be
appropriate considering the funded status of the
plan, tax deductibility, the cash flows generated by
the Company, and other factors. The Company
expects to have no obligation to fund its domestic
qualified plan in 2009 and made no contributions in
2008. The Company continually reassesses the
amount and timing of any discretionary con-
tributions. The nonqualified defined benefit plans are

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, 2008, 25.1 million options were
outstanding with exercise prices ranging from $29.31
to $66.69 per share. At December 31, 2007,
28.0 million options were outstanding with exercise
prices ranging from $29.31 to $66.81 per share.

INCOME TAXES

The Company’s effective income tax rates, before
minority interest, equity earnings and discontinued
operations, were (14)%, 25% and 59% for 2008, 2007
and 2006, respectively. These effective tax rates
include the tax effects of certain special and unusual
items that can significantly affect
the effective
income tax rate in a given year, but may not recur in
subsequent years. Management believes that the
effective tax rate computed after excluding these
special or unusual items may provide a better esti-
mate of the rate that might be expected in future
years if no additional special or unusual items were
to occur in those years. Excluding these special and
unusual items, the effective income tax rate for 2008
was 31.5% of pre-tax earnings compared with 30% in
2007 and 29% in 2006. The increases in the rate in
2008 and 2007 reflect a higher proportion of earnings
in higher tax rate jurisdictions. We estimate that the
2009 effective income tax rate will be approximately
32-33% based on expected earnings and business
conditions; however, tax incentives included in the
recently enacted American Recovery and Reinvest-
ment Act of 2009 could significantly reduce that tax
rate.

RECENT ACCOUNTING DEVELOPMENTS

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

A S S E T T R A N S F E R S , V A R I A B L E I N T E R E S T E N T I-

T I E S , A N D Q U A L I F Y I N G S P E C I A L P U R P O S E
E N T I T I E S : In December 2008, the Financial Account-
ing Standards Board (FASB) issued FSP FAS 140-4
and FIN 46(R)-8, which require public companies to
provide additional disclosures about
transfers of
financial assets and an enterprise’s involvement with
variable interest entities, including qualifying special
purpose entities. The disclosures required by this
FSP must be provided in financial statements for the
first reporting period ending after December 15, 2008
(calendar year 2008). The Company included the
requirements of this FSP in the preparation of the
accompanying financial statements.

A C C O U N T I N G F O R C O N V E R T I B L E D E B T S E C U-
R I T I E S : In May 2008, the FASB issued FSP APB 14-1,
“Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement).” This FSP specifies that
issuers that have convertible debt instruments that
may be settled in cash upon conversion (including
partial cash settlement) should separately account
for the liability and equity components in a manner
that will reflect the entity’s nonconvertible debt bor-
rowing rate when interest cost is recognized in sub-
sequent periods. This FSP is effective for financial
statements issued in fiscal years (and interim peri-
ods) beginning after December 15, 2008 (calendar
year 2009), and should be applied retrospectively to
all past periods presented even if the instrument has
matured, has been converted, or has otherwise been
extinguished as of the FSP’s effective date. The
Company has no convertible debt instruments that
may be settled in cash upon conversion.

In April 2008,

the FASB
I N T A N G I B L E A S S E T S :
issued FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets,” which amends the factors
that should be considered in developing renewal or
extension assumptions used in determining the
useful life of a recognized intangible asset. This FSP
is effective for financial statements issued for fiscal
years
(and interim periods) beginning after
December 15, 2008. The Company is currently
evaluating the provisions of this FSP.

I N S T R U M E N T S

D E R I V A T I V E
H E D G I N G
A C T I V I T I E S : In March 2008, the FASB issued SFAS
No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – An Amendment of FASB

A N D

Statement No. 133.” This statement requires qual-
itative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair
value amounts of, and gains and losses on,
derivative instruments, and disclosures about credit-
risk-related contingent features in derivative agree-
ments. Statement No. 161 is effective for fiscal years
(and interim periods) beginning after November 15,
2008 (calendar year 2009). The Company intends to
provide these disclosures beginning in the first quar-
ter of 2009.

141(R),
141(R)

SFAS No.
Statement

B U S I N E S S C O M B I N A T I O N S : In December 2007, the
“Business
issued
FASB
Combinations.”
establishes
principles and requirements for how an acquiring
entity in a business combination 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 under-
stand the nature and financial effect of the business
combination. This statement will be effective pro-
spectively for business combinations for which the
acquisition date is on or after the beginning of the
first annual reporting period beginning on or after
December 15, 2008 (calendar year 2009). The Com-
pany is currently evaluating the provisions of this
statement.

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
statement clarifies 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 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 will
apply the provisions of this standard in the first
quarter of 2009, and does not anticipate this will
have a material effect on its consolidated financial
statements.

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 was effective January 1,
2008. The Company elected not to apply the fair
value option to any of its financial 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 December 2008, the FASB issued
FSP FAS 132(R)-1 which amends Statement
No. 132(R)
to require more detailed disclosures
about employers’ plan assets, including employers’
investment strategies, major categories of plan
assets, concentrations of risk within plan assets, and
valuation techniques used to measure the fair value
of plan assets. The disclosures required by this FSP
must be provided in financial statements for fiscal
years ending after December 15, 2009 (calendar year
2009). The Company is currently evaluating the
provisions of the FSP.

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 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 fiscal years end-
ing after December 15, 2008. The Company adopted
the provisions of this standard as of December 31,
2006, recording an additional liability of $492 million
and an after-tax charge to Accumulated other com-
prehensive income of $350 million for its defined
benefit and postretirement benefit plans.

In September
F A I R V A L U E M E A S U R E M E N T S :
2006, the FASB 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.
In
February 2008, the FASB issued FSP FAS 157-2
which delays the effective date of Statement No. 157
for all nonrecurring fair value measurements of non-
financial assets and liabilities until
fiscal years
beginning after November 15, 2008 (calendar year
2009). The Company partially adopted the provisions
of SFAS No. 157 with respect to its financial assets
and liabilities that are measured at fair value effec-
tive January 1, 2008 (see Note 14). In October 2008,
the FASB issued FSP FAS 157-3, which clarifies the
application of SFAS No. 157 in cases where the
market for the asset is not active. FSP FAS 157-3 is
effective upon issuance. The Company considered
the guidance provided by this FSP in the preparation
of
the accompanying financial statements. The
Company is currently evaluating the effects of the
remaining provisions of SFAS No. 157.

In September 2006,

A C C O U N T I N G F O R P L A N N E D M A J O R M A I N-
the
T E N A N C E A C T I V I T I E S :
FASB issued FSP No. AUG AIR-1, “Accounting for
Planned Major Maintenance Activities,” which per-
mits the application of three alternative methods of
accounting for planned major maintenance activities:
the direct expense, built-in-overhaul, and deferral
methods. The FSP was effective for the first fiscal
Interna-
year beginning after December 15, 2006.
tional 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.

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-
“Accounting for
(FIN 48),
pretation No.
Uncertainty in Income Taxes, an Interpretation of
FASB Statement No. 109.” FIN 48 prescribes a
recognition threshold and measurement attribute for
the financial statement recognition and measure-
ment of a tax position taken or expected to be taken
in 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
measured as the largest amount of tax benefits that
exceed a 50% probability of being recognized.

This interpretation also expands income tax dis-
closure 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 million at the date of adop-
tion.

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
have a material
impact on the Company’s con-
solidated financial statements.

issued, or subject

LEGAL PROCEEDINGS

International Paper is subject to extensive federal
and state environmental regulation as well as similar
regulations internationally. Our continuing objectives
are to: (1) control emissions and discharges from our
facilities into the air, water and groundwater to avoid
adverse impacts on the environment, (2) make con-
tinual improvements in environmental performance,
and (3) maintain 100% compliance with applicable
laws and regulations. A total of $27 million was
spent in 2008 as planned for capital projects to con-
trol environmental releases into the air and water,
and to assure environmentally sound management
and disposal of waste. We expect to spend approx-
imately $45 million in 2009 for similar capital proj-
ects. The capital forecast for 2009 reflects increased
spending at recently acquired facilities ($8 million)
and completion of significant international environ-
mental improvement projects ($24 million).

2011. The EPA is continuing the development of new
programs and standards such as additional waste-
water discharge allocations, water intake structure
requirements and national ambient air quality stan-
dards. When regulatory requirements for new and
changing standards are finalized, we will add any
resulting future requirements to our expenditure
forecast.

landfills

International Paper has been named as a potentially
responsible party in environmental
remediation
actions under various federal and state laws, includ-
ing the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA). Most of
these proceedings involve the cleanup of hazardous
substances at
that
large commercial
received waste from many different sources. While
joint and several liability is authorized under CERCLA
and equivalent state laws, as a practical matter,
liability for CERCLA cleanups is allocated among the
many potential responsible parties. Based upon
previous experience with respect to the cleanup of
hazardous substances using presently available
information,
its
liability is not likely to be significant at 50 such sites,
and that its liability at 50 other 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 100 matters is approximately $44 million.

International Paper believes that

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

As of January 31, 2009, there were no other pending
judicial proceedings brought by government author-
ities against International Paper for alleged violations
of applicable environmental laws or regulations.

Climate Change Regulation

Amounts to be spent for environmental control proj-
ects in future years will depend on new laws and
regulations and changes in legal requirements and
environmental concerns. Taking these uncertainties
into account, our preliminary estimate for additional
environmental expenditures is approximately $36
million for 2010 and approximately $22 million for

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 international, national and
sub-national regulations proposed or implemented

focusing on greenhouse gas reduction. These actual
or proposed regulations do or will apply in countries
where we currently have, or may in the future have,
manufacturing facilities or investments.

In the United States, the U.S. Congress is consider-
ing legislation to reduce emissions of greenhouse
gases. In addition, several states have already taken
legal measures to require the reduction of emissions
of greenhouse gases by companies and public util-
ities, primarily through the planned development of
greenhouse gas 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 green-
house gas emissions from stationary sources under
certain Clean Air Act programs or other potential
regulations. Passage of climate control legislation or
other regulatory initiatives by Congress or various
U.S. states, 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
that we will not be dis-
States. We expect
proportionately affected by these measures com-
pared with 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 2009, although
they may have a material effect in the future. We
expect that we will not be disproportionately affected
by these measures compared with owners of com-
parable 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.

Other Legal Matters

The Company is involved in various inquiries, admin-
istrative proceedings and litigation relating to con-
tracts, sales of property,
intellectual property,
environmental permits, taxes, personal injury, labor
and employment and other matters, some of which
allege substantial monetary damages. While any
proceeding or
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 preliminary nature), or all of them com-
bined, will not have a material adverse effect on its
consolidated financial statements.

litigation has

EFFECT OF INFLATION

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

FOREIGN CURRENCY EFFECTS

International Paper has operations in a number of
Its operations in those countries also
countries.
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.

MARKET RISK

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 the implementation of any new regulations or our
costs of compliance.

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

energy hedge contracts at December 31, 2008 and
2007 was approximately a $75 million liability and a
$5 million liability, respectively. The potential loss in
fair value resulting from a 10% adverse change in the
underlying commodity prices would have been
approximately $18 million and $19 million at
December 31, 2008 and 2007, 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 by financing a portion
of our investments in overseas operations with bor-
rowings denominated in the same currency as the
operation’s functional currency, or by entering into
cross-currency and interest rate swaps, or foreign
exchange contracts. At December 31, 2008 and 2007,
the net
instruments with
exposure to foreign currency risk was approximately
a $2 million asset and a $111 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 $105 million and $91 million at
December 31, 2008 and 2007, respectively.

fair value of

financial

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 45 and 46, and under
Item 8. Financial Statements and Supplementary
Data in Note 14 of the Notes to Consolidated Finan-
cial Statements on pages 82 through 85.

for trading purposes. Information related to Interna-
tional Paper’s debt obligations is included in Note 13
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 14 of the Notes to Con-
solidated Financial Statements in Item 8. Financial
Statements and Supplementary Data.

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

Interest Rate Risk

Our exposure to market risk for changes in interest
rates relates primarily to short- and long-term debt
obligations and investments in marketable securities.
We invest in investment-grade securities of financial
institutions and industrial companies and limit
exposure to any one issuer. Our investments in
marketable securities at December 31, 2008 are
stated at cost, which approximates market due to
their short-term nature. Our
rate risk
exposure related to these investments was not
material.

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, 2008 and 2007, the net
fair value liability of
instruments with
exposure to interest rate risk was approximately $6.4
billion and $3.4 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, 2008 and 2007, respectively.

$366 million

$150 million

financial

and

Commodity Price Risk

The objective of our commodity exposure manage-
ment is to minimize volatility in earnings due to large
fluctuations in the price of commodities. Commodity
swap and option contracts have been used to man-
age risks associated with market
fluctuations in
energy prices. The net fair value of such outstanding

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 is determined by
aggregating sales from each segment based on sim-
ilar products or services. External sales are defined
as those that are made to parties outside Interna-
tional Paper’s consolidated group, whereas sales by
segment in the Net Sales table are determined using
a management approach and include intersegment
sales.

The Company also has a 50% equity interest in Ilim
Holding S.A. in Russia that is a separate reportable
industry segment. The Company recorded equity
earnings, net of taxes, of $54 million for Ilim in 2008.

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

2008

2007

2006

$ 6,810

$ 6,530

$ 6,700

7,690

3,195

7,970

200

–
(1,036)

5,245

3,015

7,320

485

135
(840)

4,925

2,685

6,785

765

935
(800)

Net sales

$24,829

$21,890

$21,995

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 / equity earnings

adjustment (b)

Corporate items, net

Restructuring and other charges

Insurance recoveries

Gain on sale of forestlands

Impairments of goodwill

Net gains (losses) on sales and

impairments of businesses

Reversals of reserves no longer

required

Earnings (Loss) From Continuing

Operations Before Income Taxes,

Equity Earnings and Minority

2008

2007

2006

$ 474

$ 839

$ 453

277

631

1,604

(521)

(276)

(300)

4,788

(759)

390

103

409

–

374

112

108

458

1,393

(492)

1,897

(297)

(206)

(95)

–

(2)

(103)

(179)

–

(1,777)

–

327

(1,381)

–

Interest

$(1,153)

$1,654

$ 3,188

RESTRUCTURING AND OTHER CHARGES

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate

Restructuring and Other Charges

ASSETS

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate and other (c)

2008

$153

–

2007

$41

–

2006

$ 54

–

179

$370

(3)

205

$95

$300

2008

2007

2006

$ 7,396

10,212

3,333

1,881

903

3,180

$ 8,650

$ 7,699

4,486

3,285

1,875

984

4,867

4,244

2,840

1,596

274

498

6,883

Assets

$26,913

$24,159

$24,034

CAPITAL SPENDING

LONG-LIVED ASSETS (h)

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Subtotal

Corporate and other

2008

2007

2006

In millions

2008

2007

2006

$ 383

$ 556

$ 523

United States

$11,336

$ 6,905

Europe

Pacific Rim

Americas, other than U.S.

Corporate

1,215

386

1,599

260

1,540

244

1,981

241

$6,837

1,481

214

574

146

Long-Lived Assets

$14,796

$10,911

$9,252

282

287

963

405

276

1,265

257

130

988

Total from Continuing Operations

$1,002

$1,288

$1,009

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

DEPRECIATION AND AMORTIZATION (d)

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

2008

2007

2006

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

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Specialty Businesses and Other (a)

Corporate

$ 517

$ 470

$ 484

452

218

–

136

240

211

–

137

233

228

126

Depreciation and Amortization

$1,347

$1,086

$1,158

minority interest for these subsidiaries is added here to present

consolidated earnings from continuing operations before

income taxes, equity earnings and minority interest.

sale.

(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 $1.6 billion in 2008,

EXTERNAL SALES BY MAJOR PRODUCT

$1.5 billion in 2007 and $1.4 billion in 2006.

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

and Equipment, net.

In millions

Printing Papers

Industrial Packaging

Consumer Packaging

Distribution

Forest Products

Other (e)

Net Sales

2008

2007

2006

$ 6,407

$ 6,216

$ 6,060

7,465

2,982

7,928

–

5,240

2,659

7,286

354

135

5,111

2,638

6,743

676

767

$24,829

$21,890

$21,995

INFORMATION BY GEOGRAPHIC AREA

NET SALES (f)

In millions

United States (g)

Europe

Pacific Rim

Americas, other than U.S.

Net Sales

2008

2007

2006

$19,501

$17,096

$17,811

3,177

827

1,324

2,986

678

1,130

3,030

308

846

$24,829

$21,890

$21,995

REPORT OF MANAGEMENT ON:
FINANCIAL STATEMENTS

financial

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

financial

environment,

As can be expected in a complex and dynamic busi-
ness
statement
some
amounts are based on estimates and judgments.
Even though estimates and judgments are used,
measures have been taken to provide reasonable
assurance of the integrity and reliability of the finan-
cial information contained in this annual report. We
have formed a Disclosure Committee to oversee this
process.

The accompanying consolidated financial statements
have been audited by the independent registered
public accounting firm, Deloitte & Touche LLP. Dur-
ing 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
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, 2008. 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, 2008,
the Company’s internal control over financial report-
ing is effective.

the

In August 2008, the Company completed the acquis-
ition of the Containerboard, Packaging and Recycling
Business (CBPR) from Weyerhaeuser Company. Due
to the timing of this acquisition, we have excluded
CBPR from our evaluation of the effectiveness of
internal control over financial reporting. For the
period ended December 31, 2008, CBPR net sales
and assets represented approximately 8% of total net
sales and 22% of total assets.

The Company’s
registered public
independent
accounting firm, Deloitte & Touche LLP, has issued
its report on the effectiveness of the Company’s
internal control over financial reporting. The report
appears on page 52.

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
business policies throughout
International Paper,
and an extensive program of internal audits with
management follow-up.

audit

internal

function

The Board of Directors, assisted by the Audit and
the
Finance Committee (Committee), monitors
integrity of the Company’s financial statements and
financial reporting procedures, the performance of
the Company’s
and
independent auditors, and other matters set forth in
its charter. The Committee, which currently consists
of five independent directors, meets regularly with
representatives of management, and with the
independent auditors and the Internal Auditor, with
and without management representatives in attend-
ance, to review their activities. The Committee’s
Charter takes into account
the New York Stock
Exchange rules relating to Audit Committees and the
SEC rules and regulations promulgated as a result of
the Sarbanes-Oxley Act of 2002. The Committee has
reviewed and discussed the consolidated financial
statements for the year ended December 31, 2008,
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

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,
2008 and 2007, 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, 2008. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to
express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting 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, 2008 and 2007,
and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting
principles generally accepted in the United States of
America.

As discussed in Notes 4 and 10 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 Note 4 to the con-
solidated financial statements, the Company adopted
Statement of
Financial Accounting Standards
No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and
132(R), effective December 31, 2006.

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, 2008,
based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of
Treadway
Sponsoring Organizations
Commission and our report dated February 25, 2009
expressed an unqualified opinion on the Company’s
internal control over financial reporting.

the

Memphis, Tennessee
February 25, 2009

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, 2008,
based on criteria established in Internal Control –
Integrated Framework issued by the Committee of
Treadway
Sponsoring Organizations
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 at
the Containerboard, Packaging, and Recycling busi-
ness which was acquired on August 4, 2008 and
whose financial statements constitute approximately
8% of total net sales and 22% of total assets of the
consolidated financial statement amounts as of and
for the year ended December 31, 2008. Accordingly,
our audit did not include the internal control over
financial reporting at the Containerboard, Packaging,
and Recycling business. The Company’s manage-
ment is responsible for maintaining effective internal
control over financial reporting and for its assess-
ment of the effectiveness of internal control over
included in the accompanying
financial reporting,
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.

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
effectiveness of the internal control over financial
reporting to future periods are subject to the risk that
the controls may become inadequate because of
changes in conditions, or that the degree of com-
pliance with the policies or procedures may deterio-
rate.

In our opinion, the Company maintained, in all mate-
rial respects, effective internal control over financial
reporting as of December 31, 2008, 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, 2008 of the Company and our report
dated February 25, 2009 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 25, 2009

2008

2006
$24,829 $21,890 $21,995

2007

18,742
1,947
1,347
1,286
182
(261)
370
–
(6)
1,777
106
–
492

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

(1,153)
162
49
3
(1,269)
(13)

3,188
1,889
–
17
1,282
(232)
$ (1,282) $ 1,168 $ 1,050

1,654
415
–
24
1,215
(47)

$ (3.02) $ 2.83 $ 2.69
(0.48)
$ (3.05) $ 2.72 $ 2.21

(0.11)

(0.03)

$ (3.02) $ 2.81 $ 2.65
(0.47)
$ (3.05) $ 2.70 $ 2.18

(0.03)

(0.11)

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
Gain on sale of mineral rights
Restructuring and other charges
Insurance recoveries
Gain on sale of forestlands (Note 7)
Impairments of goodwill (Note 9)
Net losses (gains) on sales and impairments of businesses
Reversals of reserves no longer required, net
Interest expense, net

E A R N I N G S ( L O S 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 ,

E Q U I T Y E A R N I N G S A N D M I N O R I T Y I N T E R E S T
Income tax provision
Equity earnings, net of taxes
Minority interest expense, net of taxes

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

Discontinued operations, net of taxes and minority interest

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

B A S I C E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E
Earnings (loss) from continuing operations
Discontinued operations, net of taxes and minority interest
Net earnings (loss)

D I L U T E D E A R N I N G S ( L O S S ) P E R C O M M O N S H A R E
Earnings (loss) from continuing operations
Discontinued operations, net of taxes and minority interest
Net earnings (loss)

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 $121 in 2008 and $95 in 2007
Inventories
Deferred income tax assets
Other current assets

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

L I A B I L I T I E S A N D C O M M O N S H A R E H O L D E R S ’ E Q U I T Y
Current Liabilities

Notes payable and current maturities of long-term debt
Accounts payable
Accrued payroll and benefits
Other accrued liabilities

Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Pension Benefit Obligation
Postretirement and Postemployment Benefit Obligation
Other Liabilities
Minority Interest
Commitments and Contingent Liabilities (Note 11)
Common Shareholders’ Equity

Common stock $1 par value, 2008-433.6 shares and 2007-493.6 shares
Paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less: Common stock held in treasury, at cost, 2008-6.1 shares and 2007-68.4 shares

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

International Paper

2008

2007

$ 1,144 $
3,288
2,495
261
172
7,360
14,202
594
1,274
2,027
1,456

905
3,152
2,071
213
394
6,735
10,141
770
1,276
3,650
1,587
$26,913 $24,159

828 $

2,119
445
1,363
4,755
11,246
1,957
3,260
663
631
232

267
2,145
400
1,030
3,842
6,353
2,919
317
709
1,119
228

434
5,845
1,430
(3,322)
4,387
218
4,169

494
6,755
4,375
(471)
11,153
2,481
8,672
$26,913 $24,159

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

International Paper

CONSOLIDATED STATEMENT OF CASH FLOWS

In millions for the years ended December 31

O P E R A T I N G A C T I V I T I E S

Net earnings (loss)
Discontinued operations, net of taxes and minority interest

Earnings (loss) from continuing operations
Depreciation, amortization, and cost of timber harvested
Deferred income tax (benefit) provision, 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 losses (gains) on sales and impairments of businesses
Equity earnings, net
Gain on sale of forestlands
Impairments of goodwill
Other, net
Voluntary pension plan contribution
Changes in current assets and liabilities
Accounts and notes receivable
Inventories
Accounts payable and accrued liabilities
Interest payable
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 or 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

Repurchase of common stock and payments of restricted stock tax withholding
Issuance 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 provided by (used for) financing activities – continuing operations

Cash provided by financing activities – discontinued operations

Cash Provided by (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

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

2008

2007

2006

$(1,282) $ 1,168
47

$ 1,050
232

(1,269)
1,347
(81)
370
–
(87)
–
123
106
(49)
(3)
1,777
118
–

451
48
(317)
(31)
166

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

(141)
(82)
(212)
122
(226)

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

(39)
(43)
(140)
(62)
(70)

2,669

1,948

1,010

–

(61)

213

2,669

1,887

1,223

(1,002)
–
(6,086)
14
(21)
–
–
(102)

(7,197)

(1,288)
(4)
(239)
1,675
(578)
–
–
–

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

(434)

1,107

–

(12)

(73)

(7,197)

(446)

1,034

(47)
1
6,024
(696)
–
(36)
(428)
41

(1,224)
128
78
(875)
–
77
(436)
–

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

4,859

(2,252)

(2,325)

–

4,859

(2,252)

(2,304)

(92)

–

239

–

(719)

(17)

905

1,624

1,641

$ 1,144

905

$ 1,624

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)

In millions, except shares in thousands and per share
amounts

BALANCE, JANUARY 1, 2006
Issuance of stock for various plans, net
Repurchase of stock
Cash dividends – Common stock ($1.00 per share)
Comprehensive income (loss):

Net earnings
Minimum pension liability adjustment:

U.S. plans (less tax of $309)
Non-U.S. plans (less tax of $6)
Change in cumulative foreign currency

translation adjustment (less tax of $11)

Net gains on cash flow hedging derivatives:

Net gain arising during the period (less tax

of $0)

Less: Reclassification adjustment for gains
included in net earnings (less tax of $0)

Total comprehensive income
Adoption of SFAS No. 158 (less tax of $309)

(Note 4)

490,501
2,839
–
–

$491
2
–
–

$6,627
108
–
–

–

–
–

–

–
–

–

–
–

–

$ 3,172
–
–
(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 $72)
Pension and postretirement liability

adjustments:
U.S. plans (less tax of $228)
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 earnings (less tax of $3)

Total comprehensive income

Adoption of FIN 48 (Note 4)

216
–
–

–

–
–

–

1
–
–

–

–
–

–

20
–
–

–

–
–

–

–
–
(436)

1,168

–

–
–

–

(94)

BALANCE, DECEMBER 31, 2007

493,556

494

6,755

4,375

Issuance of stock for various plans, net
Repurchase of stock
Retirement of treasury stock
Cash dividends – Common stock ($1.00 per share)
Comprehensive income (loss):
Net earnings (loss)
Amortization of pension and postretirement prior

service costs and net loss:

U.S. plans (less tax of $58)

Pension and postretirement liability adjustments:

U.S. plans (less tax of $1,128)
Non-U.S. plans (less tax of $1)

Change in cumulative foreign currency translation

adjustment (less tax of $0)

Net losses on cash flow hedging derivatives:

Net losses arising during the period (less tax of $61)
Less: Reclassification adjustment for gains

included in net earnings (less tax of $16)

Total comprehensive income (loss)

–
–
(60,000)
–

–
–
(60)
–

(34)
–
(876)
–

–

–
–

–

–
–

–

–
–

–

–
–
(1,231)
(432)

(1,282)

–

–
–

–

$(1,935)
–
–
–

–

496
15

220

(12)

(350)

(1,564)

–
–
–

–

367
26

591

(22)

–

(471)

–
–
–
–

–

(1,857)
(26)

(889)

(106)

(55)

Treasury Stock

Shares Amount

112 $

46
39,686
–

4
1
1,433
–

–

–
–

–

–
–

–

39,844

1,438

(4,991)
33,583
–

(181)
1,224
–

–

–
–

–

–
–

–

68,436

2,481

(3,840)
1,462
(60,000)
–

(143)
47
(2,167)
–

–

–
–

–

–
–

–

Total
Common
Shareholders’
Equity

$ 8,351
109
(1,433)
(485)

1,050

496
15

220

(12)

1,771

(350)

7,963

202
(1,224)
(436)

1,168

367
26

591

(22)

2,261
(94)

8,672

109
(47)
–
(432)

(1,282)

(1,857)
(26)

(889)

(106)

(55)

(4,133)

$ 4,169

BALANCE, DECEMBER 31, 2008

433,556

$434

$5,845

$ 1,430

$(3,322)

6,058 $

218

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

SHIPPING AND HANDLING COSTS

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.

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

ANNUAL MAINTENANCE COSTS

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.

CONSOLIDATION

TEMPORARY INVESTMENTS

The consolidated financial statements include the
accounts of
International Paper and its wholly-
owned, controlled majority-owned and financially
controlled subsidiaries. All significant intercompany
balances and transactions are eliminated.

Investments in affiliated companies where the
Company has significant influence over their oper-
ations are accounted for by the equity method.
International Paper’s share of affiliates’ earnings
totaled $49 million, $1 million and $12 million in
2008, 2007 and 2006, respectively.

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.

REVENUE RECOGNITION

PLANTS, PROPERTIES AND EQUIPMENT

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.

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

IMPAIRMENT OF LONG-LIVED ASSETS

At December 31, 2008, International Paper and its
subsidiaries owned or managed about 200,000 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 2006 Transformation Plan,
approximately 5.6 million acres of forestlands in the
United States were sold under various agreements
for proceeds 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 as of the begin-
ning of the fourth quarter of each year, with addi-
tional interim testing performed when management
believes that it is more likely than not, that events or
circumstances have occurred that would result in the
impairment of a reporting unit’s goodwill.

In performing this testing, the Company estimates
the fair value of its reporting units using the pro-
jected future cash flows to be generated by each unit
over the estimated remaining useful operating lives
of the unit’s assets, discounted using the estimated
cost of capital for each reporting unit. These esti-
mated fair values are then analyzed for reason-
ableness by comparing them to historic market
transactions for businesses in the industry, and by
comparing the sum of the reporting unit fair values
and other corporate assets and liabilities divided by
diluted common shares outstanding to the Compa-
ny’s traded stock price on the testing date. For
reporting units whose recorded value of net assets
is in excess of their estimated fair
plus goodwill
values, the fair values of the individual assets and
liabilities of the respective reporting units are then
determined to calculate the amount of any goodwill
impairment charge required (see Note 9).

Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circum-
stances that indicate that the carrying value of the
assets may not be recoverable, as measured by
comparing their net book value to the projected
undiscounted future cash flows generated by their
use. Impaired assets are recorded at their estimated
fair value (see Note 7).

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 enacted tax rates expected to apply
to taxable income in the years in which those
temporary differences are expected to be recovered
or settled. Deferred tax assets and liabilities are
remeasured 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

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.

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.

STOCK-BASED COMPENSATION

In accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), “Share-Based Payment,” Interna-
tional Paper records costs resulting from all stock-
based compensation transactions in the financial
statements. The amount of compensation cost
recorded is measured based on the grant-date fair
value of the equity or liability instruments issued. In
addition,
liability awards are remeasured each
reporting period. Compensation cost is recognized
over the period that an employee provides service in
exchange for the award. See Note 18 for a further
discussion of stock-based compensation plans.

ENVIRONMENTAL REMEDIATION COSTS

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
landfills.
principally relate to closure costs for

In connection with potential future closures or rede-
signs of certain production facilities, it is possible
that the Company may be required to take steps to
remove certain materials from these facilities. Appli-
cable regulations and standards provide that the
removal of certain materials would only be required
if the facility were to be demolished or underwent
major renovations. At this time, any such obligations
have an indeterminate settlement date, and the
Company believes that adequate information does
not exist to apply an expected-present-value tech-
nique to estimate any such potential obligations.
Accordingly, the Company does not record a liability
for such remediation until a decision is made that
allows reasonable estimation of the timing of such
remediation.

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 loss.

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 basic 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

2008

2007

2006

Earnings (loss) from continuing operations

$(1,269)

$1,215

$1,282

Effect of dilutive securities (a)

–

Earnings (loss) from continuing

operations - assuming dilution

$(1,269)

$1,215

$1,295

Average common shares outstanding

421.0

428.9

476.1

Effect of dilutive securities restricted

performance share plan (a)

Stock options (b)

Contingently convertible debt

Average common shares outstanding -

–

3.7

0.4

–

3.0

0.2

9.4

assuming dilution

421.0

433.0

488.7

NOTE 4 RECENT ACCOUNTING
DEVELOPMENTS

ASSET TRANSFERS, VARIABLE INTEREST ENTITIES

AND QUALIFYING SPECIAL PURPOSE ENTITIES:

In December 2008, the Financial Accounting Stan-
dards Board (FASB) issued FSP FAS 140-4 and FIN
46(R)-8, which requires public companies to provide
additional disclosures about transfers of financial
assets and an enterprise’s involvement with variable
interest entities, including qualifying special purpose
entities. The disclosures required by this FSP must
be provided in financial statements for the first
reporting period ending after December 15, 2008
(calendar year 2008). The Company included the
requirements of this FSP in the preparation of the
accompanying financial statements.

Basic earnings (loss) per common share

ACCOUNTING FOR CONVERTIBLE DEBT SECURITIES:

from continuing operations

$ (3.02)

$ 2.83

$ 2.69

Diluted earnings (loss) per common share

from continuing operations

$ (3.02)

$ 2.81

$ 2.65

(a) Securities are not included in the table in periods when anti-

dilutive.

(b) Options to purchase 25.1 million, 17.5 million and 30.1 million

shares for the years ended December 31, 2008, 2007 and 2006,

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

stock for each respective reporting date.

NOTE 3 INDUSTRY SEGMENT INFORMATION

Financial information by industry segment and geo-
graphic area for 2008, 2007 and 2006 is presented on
pages 47 and 48. Effective January 1, 2008, the
Company changed its method of allocating corpo-
rate overhead expenses to its business segments to
increase the expense amounts allocated to these
businesses in reports reviewed by its chief executive
officer to facilitate performance comparisons with
other companies. Accordingly, the Company has
revised its presentation of industry segment operat-
ing profit to reflect this change in allocation method,
and has adjusted all comparative prior period
information on this basis, reducing reported industry
segment operating profits for the two years ended
December 31, 2007 and 2006, by $526 million and
$470 million, respectively, with no effect on reported
net income.

the FASB issued FSP APB 14-1,
In May 2008,
“Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement).” This FSP specifies that
issuers that have convertible debt instruments that
may be settled in cash upon conversion (including
partial cash settlement) should separately account
for the liability and equity components in a manner
that will reflect the entity’s nonconvertible debt bor-
rowing rate when interest cost is recognized in sub-
sequent periods. This FSP is effective for financial
statements issued in fiscal years (and interim peri-
ods) beginning after December 15, 2008 (calendar
year 2009), and should be applied retrospectively to
all past periods presented even if the instrument has
matured, has been converted, or has otherwise been
extinguished as of the FSP’s effective date. The
Company has no convertible debt instruments that
may be settled in cash upon conversion.

INTANGIBLE ASSETS:

the Useful Life of

the FASB issued FSP FAS 142-3,
In April 2008,
“Determination of
Intangible
Assets,” which amends the factors that should be
considered in developing renewal or extension
assumptions used in determining the useful life of a
recognized intangible asset. This FSP is effective for
financial statements issued for fiscal years (and
interim periods) beginning after December 15, 2008
(calendar year 2009). The Company is currently
evaluating the provisions of this FSP.

DERIVATIVE INSTRUMENTS AND HEDGING

ACTIVITIES:

In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and
Hedging Activities – An Amendment of FASB State-
ment No. 133.” This statement requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value
amounts of, and gains and losses on, derivative
instruments, and disclosures about credit-risk-related
contingent
agreements.
Statement No. 161 is effective for fiscal years (and
interim periods) beginning after November 15, 2008
(calendar year 2009). The Company intends to pro-
vide these disclosures beginning in the first quarter
of 2009.

in derivative

features

BUSINESS COMBINATIONS:

2007,

In December
FASB issued SFAS
the
No. 141(R), “Business Combinations.” Statement
141(R) establishes principles and requirements for
how an acquiring entity in a business combination
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 reporting
period beginning on or after December 15, 2008
(calendar year 2009). The Company is currently
evaluating the provisions of this statement.

NONCONTROLLING INTERESTS IN CONSOLIDATED

FINANCIAL STATEMENTS:

clarifies

statement

In December 2007,
the FASB also issued SFAS
No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – An Amendment of ARB 51.”
that a noncontrolling
This
(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-

for

fiscal

years

beginning

spectively
after
December 15, 2008 (calendar year 2009), with pre-
sentation and disclosure requirements applied retro-
spectively to comparative financial statements. The
Company will apply the provisions of this standard
in the first quarter of 2009, and does not anticipate
this will have a material effect on its consolidated
financial statements.

FAIR VALUE OPTION FOR FINANCIAL ASSETS AND

FINANCIAL LIABILITIES:

may

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 finan-
cial 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
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 eliminate the disclosure
requirements of other accounting standards. This
statement was effective January 1, 2008. The Com-
pany elected not to apply the fair value option to any
of its financial assets or liabilities.

elected

EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT

PENSION AND OTHER POSTRETIREMENT PLANS:

In December 2008,
the FASB issued FSP FAS
132(R)-1 which amends Statement 132(R) to require
more detailed disclosures about employers’ plan
assets, including employers’ investment strategies,
major categories of plan assets, concentrations of
risk within plan assets, and valuation techniques
used to measure the fair value of plan assets. The
disclosures required by this FSP must be provided in
financial statements for fiscal years ending after
December 15, 2009 (calendar year 2009). The Com-
pany is currently evaluating the provisions of the
FSP.

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 fiscal years end-
ing after December 15, 2008. The Company adopted
the provisions of this standard as of December 31,
2006, recording an additional liability of $492 million
and an after-tax charge to Accumulated other com-
prehensive income of $350 million for its defined
benefit and postretirement benefit plans.

FAIR VALUE MEASUREMENTS:

In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements,” which provides a single
definition of fair value, together with a framework for
measuring it, and requires additional disclosure
about the use of fair value to measure assets and
liabilities.
It also emphasizes that fair value is a
market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy
with the highest level being quoted prices in active
markets. In February 2008, the FASB issued FSP FAS
157-2 which delays the effective date of Statement
No. 157 for all nonrecurring fair value measurements
of nonfinancial assets and liabilities until fiscal years
beginning after November 15, 2008 (calendar year
2009). The Company partially adopted the provisions
of SFAS No. 157 with respect to its financial assets
and liabilities that are measured at fair value effec-
tive January 1, 2008 (see Note 14). In October 2008,
FASB issued FSP FAS 157-3, which clarifies the
application of SFAS No. 157 in cases where the
market for the asset is not active. FSP FAS 157-3 is
effective upon issuance. The Company considered
the guidance provided by this FSP in the preparation
of
the accompanying financial statements. The
Company is currently evaluating the effects of the
remaining provisions of SFAS No. 157.

ACCOUNTING FOR PLANNED MAJOR MAINTENANCE

ACTIVITIES:

In September 2006, the FASB issued FASB Staff Posi-
tion (FSP) No. AUG AIR-1, “Accounting for Planned
Major Maintenance Activities,” which permits the
application of three alternative methods of account-
ing for planned major maintenance activities: the
direct expense, built-in-overhaul, and deferral meth-
ods. The FSP was effective for the first fiscal year
International
beginning after December 15, 2006.
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.

ACCOUNTING FOR UNCERTAINTY IN INCOME

TAXES:

In June 2006, the FASB issued FASB Interpretation
No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement
No. 109.” FIN 48 prescribes a recognition threshold
and measurement attribute for the financial state-
ment recognition and measurement of a tax position
taken or expected to be taken in tax returns. Specifi-
cally, 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
the tax position will be sustained upon
merits,
examination by the relevant
tax authority. The
amount recognized shall be measured as the largest
amount of tax benefits that exceed a 50% probability
of being recognized. This interpretation also expands
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.

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 otherwise be
required to be bifurcated from its host contract in
accordance with SFAS No. 133. This statement
allows an entity to make an irrevocable election to
measure such a hybrid financial instrument at fair
value in its entirety, with changes in fair value
recognized in earnings. This statement was effective
for International Paper for all financial instruments
acquired,
issued, or subject 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 consolidated financial
statements.

NOTE 5 ACQUISITIONS, EXCHANGES AND
JOINT VENTURES

ACQUISITIONS:

2 0 0 8 : On August 4, 2008, International Paper com-
pleted the acquisition of the assets of Weyerhaeuser
Company’s
and
Recycling (CBPR) business for approximately $6 bil-

Containerboard,

Packaging

lion in cash, subject to post-closing adjustments. In
June 2008, the Company had issued $3 billion of
unsecured senior notes in anticipation of the acquis-
ition. The remainder of
the purchase price was
financed though borrowings under a $2.5 billion
bank term loan, $0.4 billion of borrowings under a
receivables securitization program and existing cash
balances. The CBPR operating results are included in
International Paper’s North American Industrial
Packaging business from the date of acquisition.

The following table summarizes the preliminary allo-
cation of the fair value of the assets and liabilities
acquired at December 31, 2008. The final allocation is
expected to be completed during the first half of
2009.

Additionally, Selling and administrative expenses for
the 2008 third and fourth quarters included $45 mil-
lion in charges before taxes ($28 million after taxes)
for integration costs associated with the acquisition.

2 0 0 7 : On August 24, 2007, International Paper com-
pleted the acquisition of Central Lewmar LLC, a 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 within its multiple brand
strategy.

During the first quarter of 2008, the Company final-
ized the allocation of the purchase price to the fair
value of the assets and liabilities acquired as follows:

In millions

Cash and temporary investments

Accounts and notes receivable, net

Inventory

Other current assets

Plants, properties and equipment, net

Goodwill

Other intangible assets

Deferred charges and other assets

Total assets acquired

Accounts payable and accrued liabilities

Deferred income taxes

Other liabilities

Total liabilities assumed

Net assets acquired

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

Other liabilities

Total liabilities assumed

Net assets acquired

655

566

4,947

306

6,612

450

543

$6,069

$116

272

$189

The identifiable intangible assets acquired in
connection with the CBPR acquisition included the
following:

The identifiable intangible assets acquired in
connection with the Central Lewmar acquisition
included the following:

In millions

Asset Class:

Tradenames

Patented technology

Proprietary software

Power agreements

Water rights

Total

Estimated
Fair Value

Average
Remaining
Useful Life

4 – 12 years

4 – 5 years

1 – 7 years

Indefinite

$ 8

$65

In connection with the preliminary purchase price
allocation, inventories were written up by approx-
imately $39 million before taxes ($24 million after
taxes) to their estimated fair value. As the related
inventories were sold during the 2008 third quarter,
this amount was included in Cost of products sold
for the quarter.

In millions

Asset Class:

Customer lists

Non-compete covenants

Tradenames

Total

Average
Remaining
Useful Life
(at acquisition
date)

13 years

5 years

15 years

Estimated
Fair Value

$18

$33

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.

On July 31, 2007, International Paper purchased the
remaining shares of Compagnie Marocaine des
in Morocco for
Cartons et des Papiers (CMCP)
the
approximately $40 million.

In October 2005,

Company had acquired approximately 65% of CMCP
for approximately $80 million in cash plus assumed
debt of approximately $40 million. The Moroccan
packaging company is now wholly owned by
International Paper and managed as part of the
Company’s European Container business.

The identifiable intangible assets acquired in
connection with both of the CMCP acquisitions
included the following:

In millions

Asset Class:

Trademarks and tradenames

Customer lists

Total

EXCHANGES:

Average
Remaining
Useful Life
(at acquisition
date)

3 years

23 years

Estimated
Fair Value

$ 2

$24

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

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

Average
Remaining
Useful Life
(at acquisition
date)

2 years

10 – 20 years

Estimated
Fair Value

$ 10

144

$154

The following unaudited pro forma information for
the years ended December 31, 2008, 2007 and 2006
presents the results of operations of International
Paper as if the CBPR and Central Lewmar acquis-
itions, and the Luiz Antonio asset exchange, had
occurred on January 1, 2006. This pro forma
information does not purport to represent Interna-
tional Paper’s actual results of operations if the
transactions described above would have occurred
on January 1, 2006, nor is it necessarily indicative of
future results.

In millions, except per share amounts

2008

2007

2006

Net sales

$27,920

$27,489

$27,923

Earnings (loss) from continuing

operations

Net earnings (loss)

Earnings (loss) from continuing

operations per common share

Net earnings (loss) per common share

(1,348)

(1,361)

1,083

1,052

(3.20)

(3.23)

2.50

2.43

1,218

986

2.49

2.02

OTHER ACQUISITIONS:

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
in IPPM (now renamed
50% third-party interest
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
have been included in International Paper’s con-
solidated financial statements from the date of
acquisition in 2005.

JOINT VENTURES:

International Paper and Ilim
On October 5, 2007,
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 13), and contributed an additional $21 million in
2008. The Company’s investment
in Ilim totaled
approximately $660 million at December 31, 2008,
which is approximately $350 million higher than the
Company’s share of the underlying net assets of Ilim.
Based on current estimates, approximately $270 mil-
lion of this basis difference, principally related to the
estimated fair value write-up of Ilim plant, property
and equipment, is being amortized as a reduction of
reported net income over the estimated remaining
useful lives of the related assets. Approximately $84
million of
the difference represents estimated
goodwill.

A key element of the proposed joint venture 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 three mills over
approximately five years. This planned investment in
the Russian pulp and paper industry will be used to
upgrade equipment,
increase production capacity
and allow for new high-value uncoated paper, pulp
and corrugated packaging product development.
Due to the recent economic downturn, this capital
expansion strategy will
likely be initiated when
market conditions improve.

International Paper is accounting for its investment
in Ilim using the equity method of accounting. Due to
the complex structure of Ilim’s operations, and the
extended time required for Ilim to prepare con-
solidated financial information in accordance 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
the year ended
statement of operations
December 31, 2008 includes the Company’s share of
Ilim’s operating results for the twelve months ended
September 30, 2008 under the caption Equity earn-
ings, net of taxes.

for

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 that was completed and began operations
in the third quarter of 2008. The financial position
and results of operations of this joint venture have
been included in International Paper’s consolidated
financial statements from the date of acquisition in
2006. The operating results of these ventures did not
have a material effect on the Company’s con-
solidated results of operations in 2008, 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, 2008. It includes a summary of activity
for each year, a rollforward associated with sev-
erance and other cash costs arising in each year, and
tables presenting details of the 2008, 2007 and 2006
organizational restructuring programs.

2 0 0 8 : During 2008, total restructuring and other
charges of $370 million before taxes ($227 million
after taxes) were recorded. These charges included:

(cid:129)

a $123 million charge before taxes ($75 million
the
after taxes) related to the shutdown of
Company’s Bastrop, Louisiana mill,

(cid:129)

a $30 million charge before taxes ($18 million
after taxes) related to the shutdown of a paper
machine at
the Company’s Franklin, Virginia
mill,

erated depreciation charges and $1 million of other charges

related to the reorganization of the Company’s Shorewood

operations.

a $53 million charge before taxes ($32 million
after taxes) related to a 2008 initiative to reduce
its overhead cost structure and reduce its global
salaried workforce by approximately 1,000 to
1,500 employees by the end of 2009,

Included in the $370 million of organizational
restructuring and other charges is $38 million of
severance charges and $15 million of related benefits
related to the Company’s 2008 overhead cost reduc-
tion initiative.

a $53 million charge before taxes ($33 million
after taxes) to write-off all supply chain initiative
development costs for U.S. container operations
that will not be implemented due to the CBPR
acquisition,

a $75 million charge before taxes ($47 million
after taxes) for adjustments of legal reserves
(see Note 11),

a $30 million charge before taxes ($19 million
after taxes) related to the restructuring of the
Company’s Shorewood operations in Canada,

a pre-tax charge of $8 million ($5 million after
taxes) for closure costs associated with the Ace
Packaging business, and

a $2 million credit before taxes ($2 million credit
after taxes) for organizational restructuring pro-
grams, principally associated with the Compa-
ny’s 2006 Transformation Plan.

The following table presents a detail of the $370 mil-
lion restructuring and other charges by business:

In millions

Printing Papers
Industrial

Packaging

Consumer

Packaging

Corporate

Total

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total

$ –

$153(a)

$153

–

5(c)

$42

–

13(c)

–

$13

–

8(c)

$97

8(b)

4(c)

179

$218

$370

(a) Includes $71 million of accelerated depreciation charges, $32

million of severance charges, $11 million of environmental

expenses, and $9 million of other charges related to the shut-

down of the Bastrop, Louisiana mill, and $23 million of accel-

erated depreciation charges, $6 million of severance charges,

and $1 million of other charges related to the shutdown of a

paper machine at the Franklin, Virginia mill.

(b) Includes $2 million of severance charges, $2 million of accel-

erated depreciation charges and $4 million of other charges

related to the closure of the Ace Packaging business.

The following table presents a roll forward of the
severance and other costs for approximately 1,675
employees included in the 2008 restructuring charg-
es:

In millions

Opening balance (first quarter 2008)

Additions (second quarter 2008)

Additions (third quarter 2008)

Additions (fourth quarter 2008)

2008 activity

Cash charges

Balance, December 31, 2008

Severance
and Other

$ 7

(24)

$ 96

As of December 31, 2008, 448 employees had left
the Company under these 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)

a $30 million charge before taxes ($19 million
after taxes) for organizational restructuring pro-
grams, principally associated with the Compa-
ny’s 2006 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 which was shut down as
part of the 2006 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
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 of restructuring and other charges by business:

In millions

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total

Printing Papers

$14(a)

$12(a)

$ 4

$ 11(a)

$41

Industrial

Packaging

Consumer

Packaging

Forest Products

Distribution

Corporate

Total

–

12(b)

37(b)

–

(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 2006 Transformation Plan. As of
December 31, 2008, all 449 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

2008 activity

Cash charges

Balance, December 31, 2008

Severance
and Other

$ 6

(23)

(7)

$ –

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 2006 Transformation Plan,

(cid:129)

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

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

taxes)

for

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

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

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

In millions

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Total

Printing Papers

$ 4

$26(a,b)

$12(b)

$ 54

Industrial

Packaging

Consumer

Packaging

Forest Products

Distribution

Corporate

Total

$18

$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 2006 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

Total

Asset
Write-downs

Severance
and Other

$27

$ 27

–

Total

$ 54

$32

$125

$157

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

In millions

Opening balance (first quarter 2006)

Additions (second quarter 2006)

Additions (third quarter 2006)

Additions (fourth quarter 2006)

2006 Activity

Cash charges

Reclassifications:

Pension and postretirement curtailments and

termination benefits

2007 Activity

Cash charges

Balance, December 31, 2007

Severance
and Other

$ 18

(50)

(19)

(56)

$ –

The severance charges recorded in 2006 related to
1,669 employees. As of December 31, 2008, all 1,669
employees had been terminated.

NOTE 7 BUSINESSES HELD FOR SALE,
DIVESTITURES AND IMPAIRMENTS

DISCONTINUED OPERATIONS:

2 0 0 8 : During the fourth quarter of 2008, the Com-
pany recorded pre-tax gains of $9 million ($5 million
after taxes) for adjustments to reserves associated
with the sale of discontinued operations.

During the first quarter of 2008,
the Company
recorded a pre-tax charge of $25 million ($16 million
after taxes) related to the final settlement of a post-
closing adjustment to the purchase price received by
the Company for the sale of its Beverage Packaging
business, and a $3 million charge before taxes ($2
million after taxes) for 2008 operating losses related
to certain wood products facilities.

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 additional taxes associated with the sale of the
Company’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. The sale of the North American Bever-
age Packaging operations subsequently 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 2006 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 mil-
lion, 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 Company determined that
the accounting
requirements under SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets,”
as discontinued operations were met. Accordingly,
net pre-tax charges of $18 million ($11 million after
taxes) for the Beverage Packaging business and $104
million ($69 million after taxes) for the Wood Prod-
ucts business (including $58 million for pension and
postretirement termination benefits) were recorded
in the fourth quarter as discontinued operations
charges to adjust the carrying value of these busi-
nesses to their estimated fair value less costs to sell.

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 before and 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
included a coated paper mill and lumber mill
in
Arapoti, 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 business
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 defini-
tive agreement to sell this business for approx-

imately $155 million in cash, subject to certain clos-
ing and post-closing adjustments, and two additional
payments totaling up to $60 million payable five
years from the date of closing, contingent upon
business performance. A $16 million pre-tax charge
($11 million after taxes) was recorded during the
second quarter to further reduce the carrying value
of the assets of the Kraft Papers business based on
the terms of this definitive agreement. The sale of
this business was subsequently completed on Jan-
uary 2, 2007.

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
and 2006 were as follows:

In millions, except per share amounts

Revenues

Loss from discontinued operations
(Loss) earnings from operations

Income tax benefit (expense)

(Loss) earnings from operations, net of taxes

Loss on sales and impairments

Income tax (expense) benefit

Loss on sales and impairments, net of taxes

2007

2006

$ 394

$2,191

$ (19)

$ 136

(11)

(4)

(32)

(36)

(51)

(406)

(317)

Loss from discontinued operations, net of taxes

$ (47)

$ (232)

(Loss) earnings per common share from

discontinued operations - assuming dilution
(Loss) earnings from operations

Loss on sales and impairments

Loss per common share from discontinued

operations, net of taxes and minority interest -

$(0.03)

$ 0.19

(0.08)

(0.66)

assuming dilution

$(0.11)

$ (0.47)

FORESTLANDS:

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 (see Note 8). Additionally, the Com-
pany entered into fiber supply agreements with cer-
tain purchasers of these forestlands providing for the
future delivery of pulpwood to specified Company
facilities at market prices at time of delivery (see
Note 11). The first of these transactions completed in
the second quarter of 2006 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
installment notes, resulting in a
$136 million of
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 normal, 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 caption Gain on sale of forestlands.

OTHER DIVESTITURES AND IMPAIRMENTS:

2 0 0 8 : During the third quarter of 2008, based on a
current strategic plan update of projected future
operating results of the Company’s Inverurie, Scot-
land mill, a determination was made that the current
book value of the mill’s long-lived assets exceeded
their estimated fair value, calculated using the
probability-weighted present value of projected
future cash flows. As a result, a $107 million pre-tax
charge ($84 million after taxes) was recorded in the
to
Company’s Printing Papers industry segment
write down the long-lived assets of the mill to their
estimated fair value. This charge is included in Net
losses (gains) on sales and impairments of busi-
nesses in the accompanying consolidated statement
of operations. In February 2009, a decision was made
to close the mill by the end of March 2009.

During the first quarter of 2008, a $1 million pre-tax
credit ($1 million after taxes) was recorded to adjust
previously estimated gains/losses of businesses
previously sold.

The net 2008 pre-tax losses totaling $106 million
discussed above are included in Net losses (gains)
on sales and impairments of businesses in the
accompanying consolidated statement of operations.

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
million pre-tax credit ($4 million after taxes) was
recorded to adjust previously estimated gains/
losses of businesses previously sold.

The net 2007 pre-tax gains totaling $122 million dis-
cussed above are included, along with the $205 mil-
lion gain on the exchange for the Luiz Antonio mill in
Brazil (see Note 5), in Net losses (gains) 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.
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 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 were
held for sale.

At the end of the 2006 first quarter, the Company
reported its Coated and Supercalendered Papers
business as a discontinued operation based on a
plan to sell the business. In the second quarter of
2006, the Company signed a definitive agreement to
this business for approximately $1.4 billion,
sell
subject
to certain post-closing adjustments, and
agreed to acquire a 10 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

in the operations of

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.

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).

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

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 Gains 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
simultaneously sold its Class A interest
in the
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 held Class B interests in the Borrower
Entities and Class B interests in the Investor entities
valued at approximately $5.0 billion.
International
Paper has no obligation to make any further capital
contributions to these entities and did not provide
financial or other support during 2008 or 2007 that
was not previously contractually required. Based on
an analysis of these entities under the provisions of
FIN 46(R) that considers the potential magnitude of
the variability in the structure and which party bears
a majority of the gains or losses, International Paper
determined that it is not the primary beneficiary of
these entities, and therefore, should not consolidate
It was also
its investments in these entities.
determined that the source of variability in the struc-
ture comes from changes in the value of the Timber
Notes. The credit quality of the Timber Notes are
enhanced by irrevocable letters of credit which are
100% cash collateralized to loss as a result of its
involvement with the structure.

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.
Accordingly,
for financial reporting purposes, as
allowed under the provisions of FASB Interpretation
No. 39, International Paper has offset approximately
$5.1 billion of Class B interests in the entities against
$5.1 billion of International Paper debt obligations
held by these entities at December 31, 2008 and
2007. The remaining $154 million of debt obligations
is included in floating rate notes due 2009 – 2016 in
the summary of long-term debt in Note 13.

International Paper also holds variable interests in
two financing entities that were used to monetize
long-term notes received from the sale of forestlands
International Paper transferred
in 2002 and 2001.
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 in 2008, 2007 or 2006 because it is not the
primary beneficiary of the entities. At December 31,

2008,
International Paper’s $553 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 $476
million of debt obligations, $458 million is included
in floating rate notes due 2009 – 2016 and $18 million
in commercial paper and bank notes in the summary
of long-term debt in Note 13.

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, 2008, 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 $10 million, $13 million and
$13 million in 2008, 2007 and 2006, respectively. The
expense related to these preferred securities is
shown in minority interest expense in the accom-
panying consolidated statement of operations.

NOTE 9 GOODWILL

The following tables present changes in the goodwill
balances as allocated to each business segment for
the years ended December 31, 2008 and 2007:

Balance
January 1,
2008

Reclassifi-
cations
and
Other (a)

Additions/
Reductions

Balance
December 31,
2008

$2,043

$(140)

$(1,366)(b)

$ 537

683

530
394

(2)

6
–

308(c)

(434)(d)
5

989

102
399

In millions

Printing

Papers

Industrial

Packaging

Consumer

Packaging

Distribution

Total

$3,650

$(136)

$(1,487)

$2,027

(a) Represents the effects of foreign currency translations and

reclassifications.

(b) Reflects a reduction from tax benefits generated by the

deduction of goodwill amortization for tax purposes in Brazil

and charges of $1.3 billion related to the interim impairment

testing of the U.S. Printing Papers business.

related to the CBPR acquisition, and a $2 million purchase

accounting adjustment related to the Compagnie Marocaine

des Cartons et des Papiers (CMCP) exchange.

(d) Reflects $4 million of additional goodwill related to joint ven-

tures in China, and charges of $438 million related to the

impairment testing of the U.S. and European Coated Paper-

board businesses.

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

–

8(d)

14(e)

86(f)

683

530

394

In millions

Printing

Papers

Industrial

Packaging

Consumer

Packaging

Distribution

Total

$2,929

$115

$606

$3,650

(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.

represented indicators that

Company determined that
this decline, and the
deterioration during the fourth quarter in economic
conditions,
required
interim testing at year end for possible additional
goodwill impairment. As a result, the Company per-
formed an interim test as of December 31, 2008 and
recalculated the estimated fair value of its reporting
units as of that date using updated future cash flow
projections and higher cost-of-capital discount rate
assumptions, which resulted in the goodwill for two
additional business units, the Company’s U.S. Print-
ing Papers business and its U.S. Coated Paperboard
business, being potentially impaired. Based on
management’s preliminary estimates, an additional
goodwill
impairment charge of $379 million was
recorded, representing all of the goodwill for the U.S.
Coated Paperboard business, as this was manage-
ment’s best estimate of the minimum impairment
charge that would be required upon the completion
of a detailed allocation of the business unit fair val-
ues to the individual assets and liabilities of each of
In February 2009,
the respective reporting units.
based on additional work performed to date, man-
agement determined that it was probable that all of
the $1.3 billion of recorded goodwill for the U.S.
Printing Papers business would be impaired when
testing was completed. Accordingly, an additional
goodwill
impairment charge of $1.3 billion was
recorded as a charge to operating results for the year
ended December 31, 2008. Due to the complexity of
the businesses involved, it is expected that testing
will be finalized for these businesses by the end of
the first quarter of 2009.

NOTE 10 INCOME TAXES

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

In millions

Earnings (loss)

U.S.

Non-U.S.

2008

2007

2006

$(1,365)

$ 801

$3,166

212

853

Earnings (loss) from continuing

operations before income taxes,
equity earnings and minority interest

$(1,153)

$1,654

$3,188

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

The tax effects of significant temporary differences,
representing deferred tax assets and liabilities at
December 31, 2008 and 2007, were as follows:

In millions

Deferred tax assets:

Postretirement benefit accruals
Pension obligations
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

2008

2007

$ 376
1,275
398
604
176
16
286

$ 410
79
398
406
256
21
273

3,131
(72)

1,843
(86)

$ 3,059

$ 1,757

$(2,317)
(1,990)
–

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

$(4,307)

$(4,078)

$(1,248)

$(2,321)

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 2008 in
deferred tax assets principally relates to the tax
impact of changes in recorded qualified pension
liabilities. The increase in deferred income tax
liabilities principally relates to additional deprecia-
tion taken on the Company’s assets purchased in
2008.

The valuation allowance for deferred tax assets as of
December 31, 2007 was $86 million. The net change
in the total valuation allowance for the year ended
December 31, 2008, was a decrease of $14 million.

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.

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.

Income tax provision

2008

2007

2006

$159

$ 67

$ 125

(2)

107

$243

$183

$ 270

$ (26)

$163

$1,583

(16)

(39)

(17)

172

(136)

$ (81)

$232

$1,619

$162

$415

$1,889

The Company’s deferred income tax provision
(benefit) includes a $14 million provision, a $2 mil-
lion provision and a $1 million provision for 2008,
2007 and 2006, respectively, for the effect of changes
in non-U.S. and state tax rates.

International Paper made income tax payments, net
of refunds, of $131 million, $328 million and $249
million in 2008, 2007 and 2006, respectively.

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

In millions

2008

2007

2006

Earnings (loss) from continuing

operations before income taxes,
equity earnings and minority interest

Statutory U.S. income tax rate
Tax (benefit) 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 and
manufacturing activities

Non-deductible business expenses
Sales of non-strategic assets and

goodwill impairments
Retirement plan dividends
Tax credits
Medicare subsidy
Tax audit
Other, net

Income tax provision

Effective income tax rate

$(1,153)

$1,654

$3,188

35%

(404)
(12)

579
2

1,116
136

(30)
46

(13)
4

622
(3)
(22)
(8)
(4)
(14)

(124)
13

(3)
5

9
(6)
(10)
(8)
(36)
(6)

(19)
33

(6)
15

646
(7)
(14)
(11)
–
–

$ 162

$ 415

$1,889

(14)%

25%

59%

A reconciliation of the beginning and ending amount
of unrecognized tax benefits is as follows:

In millions

Balance at January 1

Additions based on tax positions related to current

year

Additions for tax positions of prior years

Reductions for tax positions of prior years

Settlements

Expiration of statutes of limitations

Currency translation adjustment

2008

2007

$(794)

$(919)

(14)

(66)

352

(12)

(30)

112

(24)

Balance at December 31

$(435)

$(794)

Included in the balance at December 31, 2008 and
2007 are $9 million and $340 million, respectively, for
tax positions for which the ultimate benefits are
highly certain, but for which there is uncertainty
about the timing of such benefits. However, except
for the possible effect of any penalties, any dis-
allowance 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, are recognized as a component of
income tax expense. The Company had approx-
imately $74 million and $91 million accrued for the
payment of estimated interest and penalties asso-
ciated with
at
December 31, 2008 and 2007, respectively.

unrecognized

benefits

tax

The major jurisdictions where the Company files
income tax returns are the United States, Brazil,
France, Poland and Russia. Generally, tax years 2002
through 2008 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 2004 and 2005. 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 $206 million during the next twelve
months. At December 31, 2007,
the Company
believed it was reasonably possible that a decrease
of up to $365 million in unrecognized tax benefits
would occur during the year ended December 31,
2008. During 2008, unrecognized tax benefits actually
decreased by $359 million. While the Company

believes that it is adequately accrued for possible
these
audit adjustments,
examinations cannot be determined at this time and
could result in final settlements that differ from cur-
rent estimates.

the final resolution of

for

The 2008 income tax provision of $162 million
included a $207 million benefit related to special
items which included a $175 million tax benefit
related to restructuring and other charges, a $23 mil-
lion tax benefit
the impairment of certain
non-U.S. assets, a $29 million tax expense for U.S.
taxes on a gain in the Company’s Ilim joint venture, a
$40 million tax benefit related to the restructuring of
the Company’s international operations, and $2 mil-
lion of other expense. Excluding the impact of spe-
cial items, the tax provision was $369 million, or
31.5% of pre-tax earnings before equity earnings and
minority interest.

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 equity earnings
and 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 special tax adjustments. Excluding the
impact of special items, the tax provision was $272
million, or 29% of pre-tax earnings before equity
earnings and minority interest.

for

International Paper has U.S. federal and non-U.S. net
operating loss carryforwards of approximately $488
million that expire as follows: 2009 through 2018 –
$16 million, years 2019 through 2028 – $109 million
and indefinite carryforwards of $363 million. Interna-
tional Paper has tax benefits from net operating loss
carryforwards
state taxing jurisdictions of
approximately $274 million that expire as follows:
2009 through 2018 – $108 million and 2019 through
2028 – $166 million. International Paper also has U.S.
federal, non-U.S. and state tax credit carryforwards
that expire as follows: 2009 through 2018 –
$57 million, 2019 through 2028 – $90 million, and
indefinite carryforwards – $337 million. Further,
International Paper has state capital loss carryfor-
wards that expire as follows: 2009 through 2018 –
$7 million.

Deferred income taxes are not provided for tempo-
rary differences of approximately $2.6 billion, $3.7
billion and $2.7 billion as of December 31, 2008, 2007
and 2006, 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 11 COMMITMENTS AND CONTINGENT
LIABILITIES

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

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

At December 31, 2008,
future minimum
commitments under existing non-cancelable operat-
ing leases and purchase obligations were as follows:

total

In millions

2009 2010 2011 2012 2013 Thereafter

Lease obligations

$ 174 $147 $124 $106 $ 86

$ 139

Purchase obligations (a)

2,570

630

585

575

530

4,030

Total

$2,744 $777 $709 $681 $616

$4,169

(a) Includes $2.9 billion relating to fiber supply agreements

entered into at the time of the 2006 Transformation Plan forest-

land sales.

Rent expense was $205 million, $168 million and
$217 million for 2008, 2007 and 2006, 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,
equipment, forestlands and other assets,
Interna-
tional Paper commonly makes representations and
warranties relating to such businesses or assets, and

liabilities,

environmental

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.

breaches

In May 2008, a recovery boiler at the Company’s
Vicksburg, Mississippi facility exploded, resulting in
one fatality and injuries to employees of contractors
working on the site. The Company has been served
with several lawsuits and is on notice of additional
claims, and currently believes that it has adequate
insurance to cover these lawsuits and other claims.
The Company believes that the settlement of these
lawsuits will not have a material adverse effect on its
consolidated financial statements. Additionally, the
Company has received insurance proceeds in 2008
that substantially covered, after deductible and
retention amounts of $20 million,
the property
damage and business interruption losses resulting
from this event.

EXTERIOR SIDING AND ROOFING SETTLEMENTS

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. The
period to file claims under each of these settlements
(further described below) has now expired.

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 class consisted of all U.S. property
owners having Masonite hardboard siding installed
on and incorporated into buildings between Jan-
uary 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,
the deadline for filing claims expired 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
class consisted of all U.S. property owners having
Omniwood siding installed on and incorporated into
buildings from January 1, 1992, to January 6, 1999.
The deadline for filing claims expired 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 class
consisted of all U.S. property owners who had
incorporated and installed Woodruf roofing from
January 1, 1980, to January 6, 1999. For roofing that
was installed between January 1, 1980, and
December 31, 1989, the deadline for filing claims
expired January 6, 2006, and for roofing installed
between January 1, 1990, and January 6, 1999, the
deadline for filing claims expired January 6, 2009.

All of the settlements provided for monetary compen-
sation to class members meeting the settlement
requirements on a claims-made basis, and also pro-
vide for payment of certain attorneys’ fees.

CLAIMS FILING AND EVALUATION

for product

replacement,

For all of
the settlements, once a claim was
determined to be valid, the amount of the claim was
determined by reference to a negotiated compensa-
tion formula based on (1) the average cost per
square foot
including
material and labor as calculated by industry stan-
dards, 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 “Means
Price Data,” as published by R.S. Means Company,
and updated annually for inflation. Persons receiving
compensation pursuant to this formula also agreed
to release the Company and Masonite from all other
property damage claims relating to the product in
question.

Persons who were class members under the settle-
ments who did not pursue remedies may have
recourse to warranties depending on the type of
product and the date of purchase. The warranty
period generally extends for 25 years following the
purchase 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 for defective siding covered under
the terms of the applicable warranty.

CLAIMS PAYMENT DATA

Through December 31, 2008, net settlement pay-
ments totaled approximately $1.3 billion ($994 mil-
lion for the Hardboard Settlement, $202 million for
the Omniwood Settlement and $59 million for the
including $145 million of
Woodruf Settlement),
non-refundable attorneys’ fees.

The average settlement cost per claim for the years
ended December 31, 2008, 2007 and 2006 for the
Hardboard, Omniwood and Woodruf Settlements
are set forth in the table below:

AVERAGE SETTLEMENT COST PER CLAIM

In thousands

December 31, 2008
December 31, 2007

December 31, 2006

Hardboard

Omniwood

Woodruf

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

$2.2
$2.2

$2.2

$2.6
$2.6

$3.4

$4.3
$4.2

$4.6

$6.7
$1.6

$3.0

$4.0
$3.9

$4.4

$4.7
$2.1

$3.7

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

The following table shows an analysis of claims activity related to the Hardboard, Omniwood and Woodruf
Settlements for the years ended December 31, 2008, 2007 and 2006:

In thousands

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

No. of Claims Filed

No. of Claims Paid

No. of Claims Dismissed

December 31, 2008

CLAIMS ACTIVITY

Hardboard

Omniwood

Woodruf

Total

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

Single
Family

Multi-
Family

20.2

18.3

(12.7)

(4.0)

21.8

28.5

(16.0)

(4.5)

29.8

8.7

(17.2)

(18.3)

3.0

3.2

0.6

(1.6)

(0.1)

2.1

1.3

(1.0)

(0.2)

2.2

1.5

(1.2)

(0.3)

2.2

2.4

5.4

(4.3)

(0.8)

2.7

6.1

(4.7)

(1.0)

3.1

6.6

(4.4)

(1.2)

4.1

0.5

0.3

(0.2)

–

0.6

0.2

0.8

0.6

(0.4)

(0.2)

0.8

0.4

(0.2)

(0.4)

–

0.6

0.2

(0.2)

(0.1)

0.5

0.2

1.0

1.4

(0.5)

(0.4)

1.5

0.3

–

0.3

–

0.3

–

0.3

23.4

24.3

(17.4)

(5.0)

25.3

35.0

(21.1)

(5.3)

33.9

16.7

(22.1)

(19.9)

8.6

4.0

0.9

(1.8)

(0.1)

3.0

1.5

(1.2)

(0.2)

3.1

1.7

(1.4)

(0.4)

3.0

Total

27.4

25.2

(19.2)

(5.1)

28.3

36.5

(22.3)

(5.5)

37.0

18.4

(23.5)

(20.3)

11.6

At December 31, 2008, there were $17 million of
payments due for claims that have been determined
to be valid ($4 million for Hardboard, $10 million for
Omniwood and $3 million for Woodruf) and an esti-
mated $4 million of payments associated with claims
currently under evaluation ($2 million for claims
related to the Hardboard Settlement and $2 million
for claims related to the Omniwood Settlement). In
addition, there was approximately $5 million of costs
associated with administrative and legal fees incurred
but not paid prior to year-end.

At December 31, 2008, net reserves for the settle-
ments discussed above totaled $41 million, of which
$6 million is attributable to the Hardboard Settlement,
$29 million to the Omniwood Settlement and $6 mil-
lion to the Woodruf Settlement.

RESERVE FOR SIDING AND ROOFING SETTLEMENTS

Balance, December 31, 2007

The following table presents an analysis of the net
reserve activity related to the Hardboard, Omniwood
the years ended
and Woodruf Settlements for
December 31, 2008, 2007 and 2006:

In millions

Hard-
board

Omni-
wood Woodruf

Balance, December 31, 2005

$ 34

$ 74

$ 5

Additional provision

Payments

Balance, December 31, 2006

Payments

Additional provision

Payments

(52)

(59)

–

(25)

(24)

(25)

–

(2)

(3)

Total

$113

(79)

124

(78)

(87)

Balance, December 31, 2008

$ 6

$ 29

$ 6

$ 41

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.

During the first quarter of 2008, based on a current
estimate of payments to be made for all claims
received to date and projected future claim filings
through the expiration of the claims filing periods, an

additional charge of $40 million was recorded to
increase the reserve to management’s best estimate
of the amount required for future payments. During
the third quarter of 2008, the Company completed a
revised claims projection taking into account current
actual claim settlement costs, recent claim filing
activity, and updated projections of claims activity
through the end of the settlement period. Based on
these projections, the Company recorded a $42 mil-
lion increase in the reserve balance in the 2008 third
quarter to increase the reserve to management’s
best estimate of the amount required for future
payments. This increase, together with a $7 million
reduction of a related liability, was recorded in
Restructuring and other charges in the accompany-
ing consolidated statement of operations in the third
quarter of 2008.

Since the claims filing periods for all of these settle-
ments expired in or prior to January 2009,
the
Company believes that the aggregate reserve balan-
ces at December 31, 2008 are adequate to cover the
final settlement of the remaining claims.

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.

Cumulative net cash settlements received totaled
$495 million through December 31, 2008. Approx-
imately $42 million of additional cash will be col-
lected in 2009 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 capped amount. As of December 31,
2008,
International Paper had paid approximately
$88 million, fulfilling its obligation under this settle-
ment.

SUMMARY

The Company is also involved in various other
inquiries, administrative proceedings and litigation
relating to contracts, sales of property, intellectual
tax, antitrust,
property, environmental protection,
personal injury, labor and employment and other
matters, some of which allege substantial monetary
damages. While any proceeding or litigation has the
element of uncertainty, the Company believes that
the outcome of any of the lawsuits or claims that are
pending or threatened, or all of them combined, will
not have a material adverse effect on its consolidated
financial statements.

NOTE 12 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

2008

2007

$ 405

$ 320

1,658

1,413

379

308

$2,495

$2,071

The last-in, first-out inventory method is used to
value most of International Paper’s U.S. inventories.
Approximately 64% of total raw materials and fin-
ished products inventories were valued using this
method, including inventories acquired in the CBPR
acquisition in August 2008. If the first-in, first-out
method had been used, it would have increased total
inventory balances by approximately $313 million
and $213 million at December 31, 2008 and 2007,
respectively.

Plants, properties and equipment by major
classification were:

In millions at December 31

Pulp, paper and packaging facilities

Mills
Packaging plants

Other plants, properties and equipment

Gross cost
Less: Accumulated depreciation

2008

2007

$21,819
6,485
1,511

29,815
15,613

$18,579
5,205
1,262

25,046
14,905

Plants, properties and equipment, net

$14,202

$10,141

The gross carrying amount of Intangible Assets,
excluding goodwill, was $284 million ($246 million
net of accumulated amortization) and $263 million
($241 million net of accumulated amortization) at
December 31, 2008 and 2007, respectively. The
Company recognized amortization expense of

intangible assets of approximately $36 million, $27
million and $15 million in 2008, 2007 and 2006,
respectively. Based on current intangibles subject to
amortization, estimated amortization expense for
each of the succeeding years is as follows: 2009—
$35 million, 2010—$27 million, 2011—$24 million,
2012—$21 million, 2013—$16 million , and cumu-
latively thereafter—$123 million.

Interest costs related to the development of certain
long-term assets are capitalized and amortized over
lives. Cap-
the related assets’ estimated useful
italized net interest costs were $27 million in
2008, $30 million in 2007 and $21 million in 2006.
Interest payments made during 2008, 2007 and
2006 were $597 million, $452 million and $734 mil-
lion, respectively. Total interest expense was $572
million in 2008, $451 million in 2007 and $651 million
in 2006. Interest income was $80 million, $154 mil-
lion and $130 million in 2008, 2007 and 2006,
respectively. Interest expense and interest income in
2008 and 2007 exclude approximately $233 million
and $340 million, respectively, related to investments
in and borrowings from variable interest entities for
which the Company has a legal right of offset (see
Note 8).

Equity earnings, net of
taxes includes the
Company’s share of earnings from its investment in
Ilim Holding S.A. ($54 million for the year ended
December 31, 2008) and certain other smaller
investments.

The following table presents changes in minority
interest balances for the years ended December 31,
2008 and 2007:

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

2008

2007

$228

–

$213
(28)

25(a)

(10)

$232

$228

(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 13 DEBT AND LINES OF CREDIT

In August 2008, International Paper borrowed $2.5
billion of long-term debt with an initial interest rate
of LIBOR plus a margin of 162.5 basis points. The
margin can vary depending upon the credit rating of
the Company. The debt requires quarterly principal
payments starting in the fourth quarter of 2008 and
has a final maturity in August 2013. Debt issuance
costs of approximately $50 million related to this
borrowing were recorded in Deferred charges and
other assets in the accompanying consolidated bal-
ance sheet and are being amortized over the term of
the loan. Also in August 2008, International Paper
its
borrowed approximately $395 million under
receivables
of
December 31, 2008, all of the borrowings under the
receivables securitization program were repaid.

securitization

program.

The above funds, together with the $3 billion from
the unsecured senior notes borrowed in the second
quarter discussed below and other available cash,
were used for the CBPR business acquisition in
August 2008. A $500 million bridge loan that was
available to fund the acquisition was not used by the
Company and was cancelled upon the completion of
the acquisition.

Also in the third quarter of 2008, International Paper
repaid $125 million of the $2.5 billion long-term debt,
and repurchased $63.5 million of notes with interest
rates ranging from 4.25% to 8.70% and original
maturities from 2009 to 2038.

The Company also entered into a series of forward-
starting floating-to-fixed interest rate swap agree-
ments with a notional amount of $1.5 billion in
anticipation of borrowing against
the $3 billion
committed bank credit agreement for the purchase
of the CBPR business. The floating-to-fixed interest
rate swaps were effective September 2008 and
mature in September 2010. These forward-starting
interest rate swaps are being accounted for as cash
flow hedges in accordance with SFAS No. 133 as
hedges of the benchmark interest rate of future
interest payments related to borrowings under the
bank credit agreement.

In the fourth quarter of 2008,
International Paper
terminated $550 million of these floating-to-fixed
interest rate swaps resulting in a loss of approx-
imately $17 million recorded in Other comprehensive
loss in the accompanying consolidated balance sheet
(see Note 14).

In the second quarter of 2008, International Paper
issued $3 billion of unsecured senior notes consist-
ing of $1 billion of 7.4% notes due in 2014, $1.7 bil-
lion of 7.95% notes due in 2018 and $300 million of
8.7% notes due in 2038. Debt issuance costs of
approximately $20 million related to this debt were
recorded in Deferred charges and other assets in the
accompanying consolidated balance sheet and will
be amortized over the term of the notes.

Also in the second quarter of 2008,
International
Paper entered into a series of fixed-to-floating inter-
est rate swap agreements with a notional amount of
$1 billion and maturities ranging from 2014 to 2018
to manage interest rate exposures associated with
the new $3 billion of unsecured senior notes. These
interest rate swaps are being accounted for as fair
value hedges in accordance with SFAS No. 133.

including some of

In 2008, International Paper terminated $1.8 billion of
interest rate swap agreements designated as fair
value hedges,
the above
fixed-to-floating interest rate swaps, resulting in a
gain of $127 million that was deferred and recorded
in Long-term debt in the accompanying consolidated
balance sheet. This gain will be amortized over the
life of the related debt through June 2018 (see Note
14).

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.a.r.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

7.95% debentures - due 2018

7.4% debentures - due 2014
6 7⁄8% notes - due 2023 - 2029
6.75% notes - due 2011

6.65% notes - due 2037

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 2009 - 2010

Zero-coupon convertible debentures

Medium-term notes - due 2009 (a)

2008

2007

298

1,700

998

130

195

258

249

832

121

776

–

130

195

256

251

841

115

913

Floating rate notes - due 2009 - 2016 (b)

3,897

1,663

Environmental and industrial development bonds -

due 2009 - 2033 (c)

Commercial paper and bank notes (d)

Other (e)

Total (f)

Less: current maturities

Long-term debt

1,947

1,889

260

335

12,074

828

149

119

6,620

267

$11,246

$6,353

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

2008 and 2007.

(b) The weighted average interest rate on these notes was 3.9% in

2008 and 5.7% in 2007.

2008 and 5.4% in 2007.

(d) The weighted average interest rate was 5.3% in 2008 and 6.1%

in 2007. Includes $165 million and $118 million of non-U.S.

denominated borrowings with a weighted average interest rate

of 6.2% in 2008 and 2007, respectively.

(e) Includes $24 million at December 31, 2008 and $38 million at

December 31, 2007 related to interest rate swaps treated as fair

value hedges and $125 million at December 31, 2008 related to

unamortized gains on interest rate swap unwinds (see Note

14).

(f) The fair market value of long-term debt was approximately

$10.4 billion at December 31, 2008 and $6.6 billion at

December 31, 2007.

In addition to the long-term debt obligations shown
above, International Paper has $5.7 billion of debt
obligations payable to non-consolidated variable
interest entities having principal payments of $511
million due in 2010, $42 million due 2011 and $5.1
billion 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 accompanying consolidated
balance sheet, as allowed under the provisions of

FASB Interpretation No. 39, International Paper has
offset the $5.7 billion of debt obligations with $5.7
billion of Class B interests in these entities as of
December 31, 2008 (see Note 8).

Total maturities of long-term debt over the next five
years are 2009 - $828 million; 2010 - $1.3 billion; 2011
- $1.4 billion; 2012 - $967 million; and 2013 - $1.5 bil-
lion. At December 31, 2008 and 2007, International
Paper classified $796 million and $112 million,
respectively, of commercial paper and bank notes
and Current maturities of long-term debt as Long-
term debt.
International Paper has the intent and
ability to renew or convert these obligations, as
evidenced by the available bank credit agreements
described below.

At December 31, 2008, 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 committed
commercial paper-based financings based on eligi-
ble
at
December 31, 2008) under a receivables securitiza-
tion program that expire in October 2009 with a
facility fee of 0.10%. At December 31, 2008, there
were no borrowings under either the bank credit
agreements or receivables securitization program.

($820 million

receivable

balances

On January 23, 2009, the Company amended the
receivables securitization program to extend the
maturity date from October 2009 to January 2010.
The amended agreement has a facility fee of 0.75%
payable quarterly.

At December 31, 2008, outstanding debt included
approximately $260 million of commercial paper and
bank notes with interest rates that fluctuate based on
market conditions and the Company’s credit rating.

NOTE 14 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-
in Other current
priate valuation methodologies,
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.
The ineffective portion of a financial
instrument’s
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.
These instruments are evaluated at
inception to
determine if they qualify for hedge accounting, in
accordance with SFAS No. 133. Interest rate swap
agreements with a total notional amount at
December 31, 2008, of approximately $8 million and
maturities within one year do not qualify as hedges
under SFAS No. 133. For
the years ended
December 31, 2008, 2007 and 2006, the change in fair
value of these swaps was immaterial. The fair value
of the swap contracts as of December 31, 2008, is
immaterial.

At December 31, 2008 and 2007, the outstanding
notional amounts of interest rate swap agreements
that qualify as fully effective fair value hedges under
SFAS No. 133 were approximately $484 million and
$1.4 billion, respectively. The fair values of these
swaps were net assets of approximately $27 million
and $38 million at December 31, 2008 and 2007,
respectively.

During 2008, interest rate contracts designated as fair
value hedges with a notional value of $1.8 billion
were terminated, including $41 million that related to
early debt retirements, resulting in a $1 million gain
that was recorded in earnings. Gains totaling $127
million not related to early debt retirements were
recorded in Long-term debt and will be amortized as
an adjustment of interest expense over the life of the
underlying debt through June 2018.

At December 31, 2008,
the outstanding notional
amounts of interest rate swap agreements that qual-
ify as cash flow hedges under SFAS No. 133 were
approximately $1 billion. There were no similar cash
flow hedges outstanding at December 31, 2007. The
fair value of these swaps was a net liability of
approximately $38 million at December 31, 2008.

In the second quarter of 2008, the Company entered
into a series of
forward-starting floating-to-fixed
interest
rate swap agreements with a notional
amount of $1.5 billion in anticipation of borrowing
against the $3 billion committed bank credit agree-
ment for the purchase of the CBPR business. The
floating-to-fixed interest rate swaps were effective
September 2008 and mature in September 2010.
These forward-starting interest rate swaps were
designated as cash flow hedges of the benchmark
interest rate of future interest payments related to
any borrowings under the bank credit agreement. In
the fourth quarter of 2008, interest rate swap agree-
ments designated as cash flow hedges with a
notional value of $550 million were terminated.
These terminations were not in connection with early
debt retirements. The resulting loss of approximately
$17 million was recorded in Other comprehensive
loss and will be amortized as an adjustment of inter-
est expense over the life of the underlying debt
through 2010.

$1.4

terminated,

In 2006, interest rate swap hedges with a notional
or
value
billion were
undesignated as an effective fair value hedge,
in
connection with various early retirements of debt.
The resulting gain of approximately $17 million is
included in Restructuring and other charges in the
accompanying consolidated statement of operations
(see Note 6).

In connection with International Paper’s debt tender
offer 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 the 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. The reclassifications to earnings were an
after-tax gain of $4 million for the year ended
December 2008 and after-tax losses of $8 million and
$7 million for the years ended December 31, 2007
and 2006, respectively, representing the after-tax
cash settlements on maturing energy hedge con-
tracts. Unrealized after-tax losses of $38 million and
$13 million for 2008 and 2006, respectively, were
recorded in OCI. In 2007, the unrealized after-tax loss
recorded in OCI was immaterial. After-tax losses of
approximately $27 million as of December 31, 2008,
are expected to be reclassified to earnings in 2009.
The net fair value of these energy hedge contracts
were net liabilities of approximately $75 million and
$5 million at December 31, 2008 and 2007,
respectively.

FOREIGN CURRENCY RISK

International Paper hedges certain investments in
non-U.S. operations through borrowings denomi-
nated in the same currency as the operation’s func-
tional currency, or by entering into currency swaps
or
forward exchange contracts. These financial
instruments are effective as hedges against fluctua-
tions in currency exchange rates. Gains or losses
from changes in the fair value of these instruments,
which are offset in whole or in part by translation
gains and losses on the non-U.S. operation’s net
assets hedged, are recorded as translation adjust-
ments in OCI. Upon liquidation or sale of the foreign
investments, the accumulated gains or losses from
the revaluation of the hedging instruments, together
with the translation gains and losses on the net

assets, are included in earnings. International Paper
did not have hedges of this type in 2008 or 2007. For
the year ended December 31, 2006, the cumulative
translation adjustment relating to derivative and debt
instruments hedging foreign net investments was an
after-tax loss of $11 million.

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 one year or less as of December 31, 2008. For the
year ended December 31, 2008, net unrealized losses
after taxes totaling $34 million were recorded in OCI.
For the years ended December 31, 2007 and 2006,
net unrealized gains after taxes totaling $33 million
and $18 million, respectively, were recorded in OCI.
Net after-tax gains of $51 million, $30 million and $20
million were reclassified to earnings. As of
December 31, 2008, losses of $8 million after taxes
are expected to be reclassified to earnings in 2009.
the earnings
Other contracts are used to offset
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.

income approach, which consists of a discounted
cash flow model that takes into account the present
value of future cash flows under the terms of the
contracts using current market information as of the
reporting date, such as prevailing interest rates and
foreign currency spot and forward rates. The follow-
ing table provides a summary of the inputs used to
develop these estimated fair values under the hier-
archy defined in SFAS No. 157:

Fair Value Measurements at December 31, 2008 Using

Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)

Total

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

In millions

Assets:

Interest rate swaps (a)

$ 27

$–

$ 27

Foreign currency forward

contracts (b)

Embedded derivatives (c)

Total

Liabilities:

–

$102

$–

$102

Interest rate swaps (d)

$ 47

$–

$ 47

Commodity forward

contracts (e)

Foreign currency forward

contracts (f)

–

Total

$188

$–

$188

$–

–

$–

–

$–

(a) Includes $2 million recorded in Other current assets, $3 million

recorded in Accounts and notes receivable and $22 million

recorded in Deferred charges and other assets in the accom-

panying consolidated balance sheet.

(b) Includes $67 million recorded in Other current assets in the

accompanying consolidated balance sheet.

assets in the accompanying consolidated balance sheet.

(d) Includes $47 million recorded in Other liabilities in the accom-

panying consolidated balance sheet.

(e) Includes $47 million recorded in Other accrued liabilities and

$28 million recorded in Other liabilities in the accompanying

FAIR VALUE MEASUREMENTS

consolidated balance sheet.

In accordance with the provisions of FASB Staff Posi-
tion FAS 157-2, the Company has partially applied
the provisions of SFAS No. 157 only to its financial
assets and liabilities recorded at fair value, which
consist of derivative contracts, including interest rate
swaps, foreign currency forward contracts, and other
financial
instruments that are used to hedge
exposures to interest rate, commodity and currency
risks. For these financial instruments, fair value is
determined at each balance sheet date using an

(f) Includes $66 million recorded in Other accrued liabilities in the

accompanying consolidated balance sheet.

International Paper evaluates credit risk by monitor-
ing its exposure with each counterparty to ensure
that exposure stays within the Company’s policy
limits. Credit risk is also mitigated by contractual
provisions with the majority of our banks. Most of
the contracts include a credit support annex that
requires the posting of collateral by the counterparty
or International Paper based on each party’s rating

and level of exposure. In addition, the Company’s
derivative contracts provide for netting across all
derivative positions in the event a counterparty
defaults on a payment obligation. International Paper
currently does not expect any of the counterparties
to default on their obligations.

NOTE 15 CAPITAL STOCK

The authorized capital stock at both December 31,
2008 and 2007, 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 2006 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 Company 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 bil-
lion. Following the completion of
these share
repurchases, International Paper had 425.1 million
shares of common stock issued and outstanding at
December 31, 2007.

In December 2008, the Company retired 60 million
shares of its common stock held in treasury.

NOTE 16 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. Sal-
aried employees hired after June 30, 2004, are not
eligible for these pension plans but receive an addi-
tional company contribution to their savings plan
(see “Other Plans” on page 89). The plans provide
defined benefits based on years of credited service
and
(salaried
average
employees), hourly job rates or specified benefit
rates (hourly and union employees).

earnings

either

final

amounts

The Company makes required minimum funding
contributions to its qualified defined benefit pension
plans to meet legal funding requirements, plus any
additional
the Company may
that
determine to be appropriate considering the funded
status of the plans, tax deductibility, cash flow gen-
erated by the Company, and other factors. The
Company expects that no cash funding contribution
will be required for this plan in 2009, and no con-
tributions were made in 2008 or 2007. International
Paper made a voluntary cash contribution of $1.0 bil-
lion in 2006. The Company continually reassesses
the amount and timing of any discretionary con-
tributions.

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 totaled $24 million,
$29 million and $27 million in 2008, 2007 and 2006,
respectively, and which are expected to be $24 mil-
lion in 2009.

An additional plan was acquired in 2008 with the
acquisition of CBPR. The plan covers hourly workers
at the Albany plant and is currently overfunded.

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

2008

$ 105

540

(672)

121

2007

$ 113

520

(633)

190

2006

$ 141

506

(540)

243

Net periodic pension expense (a)

$ 123

$ 210

$ 377

(a) Excludes $1.1 million, $1.9 million and $9.1 million in 2008,

2007 and 2006, respectively, in curtailment losses, and $13.9

million, $1.9 million and $8.7 million in 2008, 2007 and 2006,

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

in 2006 in curtailment losses, and $18.6 million of termination

benefits in 2006 related to certain divestitures recorded in Net

losses (gains) on sales and impairments of businesses in the

consolidated statement of operations.

The decrease in 2008 pension expense reflects an
increase in the assumed discount rate to 6.20% in
2008 from 5.75% in 2007 and lower amortization of
unrecognized actuarial loss.

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 2008, 2007 and 2006 were as
follows:

Discount rate

Expected long-term rate of return on plan assets

Rate of compensation increase

2008

2007

2006

6.20% 5.75% 5.50%
8.50% 8.50% 8.50%
3.75% 3.75% 3.25%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2008 and
2007 were as follows:

Discount rate

Rate of compensation increase

2008

2007

6.00% 6.20%
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 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 2009, the
Company will use an expected long-term rate of
return on plan assets of 8.25%, a discount rate of
6.00% and an assumed rate of compensation
increase of 3.75%. The Company estimates that it
will record net pension expense of approximately
$245 million for its U.S. defined benefit plans in 2009,
with the increase from expense of $123 million in
2008 reflecting the additional employees of the CBPR
business acquired in 2008, a lower expected rate of
return on plan assets, higher amortization of actua-
rial losses and a decrease in the assumed discount
rate.

The following illustrates the effect on pension
expense for 2009 of a 25 basis point decrease in the
above assumptions:

In millions

Expense/(Income):

Discount rate

Expected long-term rate of return on plan assets
Rate of compensation increase

Investment Policy / Strategy

2009

$29

19
(4)

Plan assets are invested to maximize returns within
prudent levels of risk. The target allocations by asset
class are summarized in the following table. Invest-
ments are diversified across classes and within each
class to minimize risk. In 2006, International Paper
modified its investment policy to use interest rate
swap agreements to extend the duration 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 interest rates
change. Thus, when interest rates fall, the value of
the swap agreements increases with increases in the
pension obligation. The use of these swap agree-

ments was discontinued in 2008 due to market con-
Investment plans for 2009 are still being
ditions.
evaluated. Periodic reviews are made of investment
policy objectives and investment manager perform-
ance.

respectively. In 2008, in conjunction with the CBPR
business acquisition, the Company acquired a small
overfunded pension plan. For this plan, the Company
recorded an after-tax charge to OCI of $13 million at
December 31, 2008.

International Paper’s pension plan asset allocations
by type of fund at December 31, 2008 and 2007, and
target allocations by asset category are as follows:

The accumulated benefit obligation for all defined
benefit plans was $9.0 billion and $8.5 billion at
December 31, 2008 and 2007, respectively.

Percentage of

Plan Assets at

December 31,

2008

39%

10%

12%

2007

59%

31%

100% 100%

Target
Allocations

40% - 51%

30% - 40%

7% - 13%

9% - 18%

Asset Category

Equity securities

Debt securities

Real estate

Other

Total

There were no International Paper shares included in
plan assets for 2008 and 2007.

At December 31, 2008, projected future pension
benefit payments, excluding any termination bene-
fits, are as follows:

In millions

2009

2010

2011

2012

2013

2014 – 2018

$ 579

578

584

593

604

3,213

Pension Plan Asset / Liability

As required by SFAS No. 158, the pension plan
funded status must be recorded on the consolidated
balance sheet. Therefore, pension plan gains or
losses and prior service costs not yet recognized in
net periodic cost are recognized on a net-of-tax basis
in OCI. These amounts will be subject to amor-
tization in the future. At December 31, 2008, the fair
value of plan assets for the domestic qualified pen-
sion plan was less than the projected benefit obliga-
tion (PBO), resulting in an increase in the recorded
minimum pension obligation of $2.9 billion and an
after-tax charge to OCI of $1.8 billion. An after-tax
credit to OCI of $361 million and $484 million had
been recorded for 2007 and 2006, respectively. For
the unfunded nonqualified plans, changes in the
liabilities resulted in an after-tax charge to OCI of
$5.3 million in 2008 and after-tax credits to OCI of
$10 million and $12 million in 2007 and 2006,

The following table summarizes information for
pension plans with an accumulated benefit obliga-
tion in excess of plan assets at December 31, 2008
(the qualified and nonqualified plans) and 2007 (the
nonqualified plan).

In millions

Projected benefit obligation

Accumulated benefit obligation

Fair value of plan assets

2008

2007

$9,225

8,945

6,003

$307

261

–

In 2007, the qualified plan’s projected benefit obliga-
tion, accumulated benefit obligation and fair value of
plan assets totaled $8,476 million, $8,237 million and
$8,540 million, respectively.

Unrecognized Actuarial Losses

SFAS No. 87 provides for delayed recognition of
actuarial gains and losses, including amounts arising
from changes in the estimated projected plan benefit
obligation due to changes in the assumed discount
rate, differences between the actual and expected
return on plan assets and other assumption changes.
These net gains and losses are recognized pro-
spectively over a period that approximates the aver-
age remaining service period of active employees
expected to receive benefits under
the plans
(approximately 9 years as of December 31, 2008) 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
$176 million and $29 million, respectively.

The following table shows the changes in the benefit
obligation and plan assets for 2008 and 2007, and the
plans’ funded status. The benefit obligation as of
December 31, 2008 increased by $492 million,
principally as a result of a decrease in the discount
rate assumption used in computing the estimated
benefit obligation. Plan assets decreased by $2.5 bil-
lion, reflecting the economic downturn experienced
through the end of 2008. The fair value of plan assets
is determined using quoted closing market prices for
publicly traded securities, where available.
Invest-
ments without readily determinable market prices
are valued at their estimated fair values.

2008

2007

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

2008

2007

2006

$ 7

$ 8

$ 13

(13)

(1)

(13)

(1)

(13)

Net periodic pension expense (a)

$ 4

$ 5

$ 17

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

related to the sale of Beverage Packaging and Arizona Chem-

ical. Also excludes $10 million of curtailment losses in 2006

related to multiple divestitures including the sale of Beverage

Packaging, Coated Papers, Polyrey and U.K. Container

recorded in Net losses (gains) on sales and impairments of

businesses in the consolidated statement of operations.

Weighted average assumptions used to determine
net pension expense for 2008, 2007 and 2006 were as
follows:

Discount rate

Expected long-term rate of return on plan assets

Rate of compensation increase

2008

2007

2006

6.40% 5.66% 4.86%
8.87% 8.37% 6.80%
3.55% 3.52% 3.39%

Weighted average assumptions used to determine
benefit obligations as of December 31, 2008 and
2007, were as follows:

Discount rate
Rate of compensation increase

2008

2007

6.37%

3.81%

5.77%
3.45%

In millions

Change in projected benefit obligation:

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

$ 8,783
105
540
327
(580)
71
(2)
14
17

$9,237
113
520
(599)
(575)
–
1
2
84

Benefit obligation, December 31

$ 9,275

$8,783

Change in plan assets:

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

Fair value of plan assets, December 31

Funded status, December 31

$ 8,540
(2,001)
25
(580)
95

$8,366
720
29
(575)
–

$ 6,079

$8,540

$(3,196)

$ (243)

Amounts recognized in the consolidated balance sheet:
$

Non-current asset
Current liability
Non-current liability

26
(24)
(3,198)

64
(27)
(280)

Amounts recognized in accumulated other

comprehensive income under SFAS 158 (pre-tax):

Net actuarial loss
Prior service cost

$(3,196)

$ (243)

$ 4,389
226

$1,513
239

$ 4,615

$1,752

The components of the $2.9 billion increase in the
amounts recognized in OCI during 2008 consisted of:

In millions

Curtailment effects
Current year actuarial loss
Amortization of actuarial loss
Current year prior service cost
Amortization of prior service cost

$
(4)
2,999
(120)
17
(29)

$2,863

The total amounts recognized in net periodic benefit
costs and OCI were $3 billion, $(603) million and
$(377) million for 2008, 2007 and 2006, respectively.

The total amounts recognized in net periodic benefit
cost and OCI were $40 million, $(41) million and $17
million for 2008, 2007 and 2006, 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 $127 million, $111 mil-
lion and $64 million, respectively, at December 31,
2008. Plan assets consist principally of common
stock and fixed income securities.

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 retire-
ment. Contributions may be made on a before-tax or
after-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 $80 million, $91 million and $96 mil-
lion for the plan years ending in 2008, 2007 and 2006,
respectively.

NOTE 17 POSTRETIREMENT BENEFITS

U.S. POSTRETIREMENT BENEFITS

International Paper provides certain retiree health
care and life insurance benefits covering certain U.S.
salaried and hourly employees. These employees
are generally eligible for benefits upon retirement
and completion of a specified number of years of
creditable service. Excluded from company-provided
medical benefits are salaried employees whose age
plus years of employment with the Company totaled
less than 60 as of January 1, 2004.
International
Paper does not fund these benefits prior to payment
and has the right to modify or terminate certain of
these plans in the future.

The following table shows the changes in the benefit
obligation and plan assets for 2008 and 2007, and the
plans’ funded status as of December 31, 2008 and
2007.

In millions

Change in projected benefit obligation:

Benefit obligation, January 1

Service cost

Interest cost

Participants’ contributions

Acquisitions

Divestitures

Actuarial loss (gain)

Benefits paid

Plan amendments

Effect of foreign currency exchange rate movements

2008

2007

$180

$248

–

(8)

(1)

(38)

–

(68)

(25)

(10)

–

Benefit obligation, December 31

$168

$180

Change in plan assets:

Fair value of plan assets, January 1

$162

$179

Actual return on plan assets

Company contributions

Benefits paid

Participants’ contributions

Divestitures

(13)

(8)

–

Effect of foreign currency exchange rate movements

(35)

(10)

(48)

Fair value of plan assets, December 31

Funded status, December 31

Amounts recognized in the consolidated

balance sheet:

Non-current asset

Current liability

Non-current liability

Amounts recognized in accumulated other

comprehensive income (pre-tax):

Prior service cost
Net actuarial loss (gain)

$115

$162

$ (53)

$ (18)

$ 11

$ 21

(2)

(62)

(2)

(37)

$ (53)

$ (18)

$ –

$ 1
(24)

$ 13

$ (23)

The components of the $36 million increase in the
amounts recognized in OCI during 2008 consisted of:

In millions

Current year actuarial loss

Current year prior service credit

Amortization of actuarial gain

Effect of foreign currency exchange rate movements

$37

(1)

$36

The components of postretirement benefit expense
in 2008, 2007 and 2006, were as follows:

In millions

Service cost

Interest cost

Actuarial loss

Amortization of prior service cost

2008

2007

2006

$ 3

$ 1

$ 2

(38)

(43)

(50)

Net postretirement benefit expense (a)

$ 28

$ 15

$ 7

(a) Excludes $0.8 million, $0.7 million and $1.3 million of curtail-

ment gains in 2008, 2007 and 2006, respectively, and $0.5 mil-

lion of termination benefits in 2008, 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 and $0.2 million in

curtailment gains in 2007 and 2006, respectively, and $3.3 mil-

lion and $13.7 million of termination benefits in 2007 and 2006,

respectively, related to certain divestitures recorded in Net

losses (gains) on sales and impairments of businesses in the

consolidated financial statements.

International Paper evaluates its actuarial assump-
tions annually as of December 31 (the measurement
date) and considers changes in these long-term 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, 2008, 2007 and 2006 were
as follows:

Discount rate

2008

2007

2006

5.90% 5.75% 5.50%

The weighted average
assumptions used to
determine the benefit obligation at December 31,
2008 and 2007, were as follows:

Discount rate

Health care cost trend rate assumed for next year

Rate that the cost trend rate gradually declines to

Year that the rate reaches the rate it is assumed to

remain

2008

2007

5.90% 5.90%
9.50% 10.00%
5.00% 5.00%

2017

benefit

obligation

postretirement

A 1% increase in the assumed annual health care
cost trend rate would have increased the accumu-
lated
at
December 31, 2008 by approximately $35 million. A
1% decrease in the annual trend rate would have
decreased the accumulated postretirement benefit
obligation at December 31, 2008 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 2008 and 2007:

In millions

2008

2007

Change in projected benefit obligation:

Benefit obligation, January 1

$ 632

$ 624

Service cost

Interest cost

Participants’ contributions

Actuarial (gain) loss

Benefits paid

Less: Federal subsidy

Acquisitions / divestitures

Curtailment

Special termination benefits

(28)

(113)

(134)

–

Benefit obligation, December 31

$ 596

$ 632

Change in plan assets:

Fair value of plan assets, January 1

Company contributions

Participants’ contributions

Benefits paid

Fair value of plan assets, December 31

Funded status, December 31

Amounts recognized in the consolidated balance

sheet under SFAS 158:

Current liability

Non-current liability

Amounts recognized in accumulated other

comprehensive income under SFAS 158 (pre-tax):

Net actuarial loss

Prior service credit

–

(113)

(134)

–

$(596)

$(632)

$ (57)

$ (67)

(539)

(565)

$(596)

$(632)

$ 185

$ 243

(80)

(119)

$ 105

$ 124

The non-current portion of the liability is included
with the postemployment liability in the accompany-
ing consolidated balance sheet under Postretirement
and postemployment benefit obligation. In accord-
ance with SFAS No. 158, an after-tax charge of $16.1
million and an after-tax credit of $4 million were
recorded as of December 31, 2008 and 2007,
respectively.

The components of the $19 million decrease in the
amounts recognized in OCI during 2008 consisted
of:

In millions

Curtailment effects

Current year actuarial gain

Amortization of actuarial loss

Amortization of prior service credit

$ 1

(29)

$(19)

Effective January 1, 2006,
International Paper
adopted the provisions of SFAS No. 123, “Share-
Based Payment” using the modified prospective
method. As no unvested stock options were out-
standing at this date, the adoption did not have a
material impact on the consolidated financial state-
ments.

STOCK OPTION PROGRAM

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. No
replacement options were granted in 2008.

Under the program, upon exercise of an option, a
replacement option may be granted under certain
circumstances with an exercise price equal to the
market price at the time of exercise and with a term
the original
extending to the expiration date of
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 to more closely tie long-
term incentive compensation to Company perform-
ance on two key performance drivers: return on
investment (ROI) and total shareholder return (TSR).

The total of amounts recognized in net periodic
benefit cost and OCI were $10 million, $94 million
and $7 million in 2008, 2007 and 2006, respectively.

The estimated amount of net loss and prior service
credit that will be amortized from OCI into net post-
retirement benefit cost in 2009 are $30 million and
$28 million, respectively.

At December 31, 2008, estimated total future post-
retirement benefit payments, net of participant con-
tributions and estimated future Medicare Part D
subsidy receipts, are as follows:

In millions

2009

2010

2011

2012

2013

2014 - 2018

Benefit
Payments

Subsidy
Receipts

$ 72

$15

316

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 benefits. Net
postretirement benefit cost for our non-U.S. plans
was $3 million for 2008, $8 million for 2007 and $3
million for 2006. The benefit obligation for these
plans was $19 million in 2008, $28 million in 2007
and $17 million in 2006.

NOTE 18 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
Management Development
and Compensation
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
rights outstanding at December 31, 2008 and 2007.
Restricted stock units were also awarded to certain
non-U.S. employees in 2008 with 59,100 units out-
standing at December 31, 2008. Additionally,
restricted stock, which may be deferred into
restricted stock units (RSU’s), may be awarded under
a Restricted Stock and Deferred Compensation Plan
for Non-Employee Directors.

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 and 2006, respectively:

Replacement Options (a)

Risk-free interest rate

Price Volatility

Dividend yield

Expected term in years

2007

2006

4.92% 4.97%

20.46% 19.70%

2.74% 2.70%

2.00

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

during 2007 and 2006 were $4.68 and $4.63, respectively.

The following summarizes the status of the Stock
Option Program and the changes during the three
years ending December 31, 2008:

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Life
(years)

Aggregate
Intrinsic
Value
(thousands)

Options
(a,b)

41,581,598

$39.49

6.00

$1,642

997

(964,744)

(850,949)

(3,784,204)

35,982,698

1,120

(3,538,171)

(457,200)

(3,974,712)

37.06

32.67

44.21

39.90

39.52

36.54

34.40

46.97

41.18

5.08

1,422

28,013,735

39.81

4.40

1,115

–

(14,800)

(189,158)

(2,716,655)

–

31.55

43.44

40.83

Outstanding at

December 31,

2005

Granted

Exercised

Forfeited

Expired

Outstanding at

December 31,

2006

Granted

Exercised

Forfeited

Expired

Outstanding at

December 31,

2007

Granted

Exercised

Forfeited

Expired

Outstanding at

December 31,

2008

25,093,122

$39.68

3.66

–

(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. The PSP awards vest
over a three-year period. One-fourth of the award
vests 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
the TSR component based on the
fair value of
expected term of the award, a 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, 2008

19.57% - 62.83%

1.07% - 3.5%

The following summarizes PSP activity for the three
years ending December 31, 2008:

The following summarizes the activity of the Execu-
tive Continuity Award program and RSA program for
the three years ending December 31, 2008:

Outstanding at December 31, 2005

Granted

Shares issued

Forfeited

Outstanding at December 31, 2006

Granted

Shares issued

Forfeited

Outstanding at December 31, 2007

Granted

Shares issued (a)

Forfeited

Weighted
Average
Grant Date
Fair Value

$41.29

33.58

37.78

38.97

38.61

33.76

42.55

38.74

35.67

36.26

41.54

34.50

4,195,317

2,320,858

(638,541)

(373,176)

5,504,458

2,494,055

(1,562,174)

(219,327)

6,217,012

3,984,146

(3,639,012)

(307,890)

Outstanding at December 31, 2008

6,254,256

$32.69

(a) Includes 225,041 shares related to retirements or terminations

that are held for payout until the end of the performance peri-

od.

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, 2005

Granted

Shares issued

Forfeited

Outstanding at December 31, 2006

Granted

Shares issued

Forfeited

Outstanding at December 31, 2007

Granted

Shares issued

Forfeited

Weighted
Average
Grant Date
Fair Value

$38.49

34.43

38.80

36.59

37.21

33.85

36.57

–

37.18

28.34

38.91

33.70

250,375

78,000

(89,458)

(61,667)

177,250

14,000

(68,625)

–

122,625

18,000

(35,625)

(3,000)

Outstanding at December 31, 2008

102,000

$35.11

At December 31, 2008, 2007 and 2006 a total of
28.1 million, 27.4 million and 24.5 million shares,
respectively, were available for grant under the
LTICP. A total of 7.0 million shares, 9.4 million shares
and 11.0 million shares were available for the grant-
ing of restricted stock as of December 31, 2008, 2007
and 2006, respectively.

costs

compensation

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, 2008, 2007 and 2006 was
$66 million, $124 million and $106 million,
respectively. The actual tax deduction realized for
stock-based
to
non-qualified stock options was $19,000, $15 million
and $3 million for the years ended December 31,
2008, 2007 and 2006, respectively. The actual tax
deduction realized for stock-based compensation
costs related to restricted and performance shares
was $130 million, $60 million and $15 million for the
years ended December 31, 2008, 2007 and 2006,
respectively. At December 31, 2008, $56.6 million of
compensation cost, net of estimated forfeitures,
related to unvested restricted performance shares,
executive continuity awards and restricted stock
attributable to future performance had not yet been
recognized. This amount will be recognized in
expense over a weighted-average period of 1.4
years.

INTERIM FINANCIAL RESULTS (UNAUDITED)
In millions, except per share amounts and stock
prices

1st
Quarter

2nd
Quarter

$5,807
1,502

3rd
Quarter

$6,808
1,654

4th
Quarter

Year

$ 6,546
1,524

$24,829
6,087

$5,668
1,407

2 0 0 8
Net sales
Gross margin (a)
Earnings (loss) from

continuing operations
before income taxes,
equity earnings and
minority interest

Gain (loss) from discontinued

operations

Net earnings (loss)
Basic earnings (loss) per

share of common stock:
Earnings (loss) from

198 (b)

(17)(c)
133 (b,c)

302 (d)

(1)
227 (d)

265 (e)

(1,918)(f)

(1,153)(b,d,e,f)

–
149 (e)

5 (g)

(1,791)(f,g,h)

(13)(c,g)
(1,282)(b-h)

continuing operations

$ 0.36 (b)

$ 0.54 (d)

$ 0.35 (e)

$ (4.26)(f)

$ (3.02)(b,d,e,f)

Gain (loss) from

discontinued operations

Net earnings (loss)

Diluted earnings (loss) per
share of common stock:
Earnings (loss) from

(0.04)(c)
0.32 (b,c)

–
0.54 (d)

–
0.35 (e)

0.01 (g)
(4.25)(f,g,h)

(0.03)(c,g)
(3.05)(b-h)

continuing operations

$ 0.35 (b)

$ 0.54 (d)

$ 0.35 (e)

$ (4.26)(f)

$ (3.02)(b,d,e,f)

Gain (loss) from

discontinued operations

Net earnings (loss)
Dividends per share of

common stock

Common stock prices

High
Low

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

operations before income
taxes, equity earnings 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

(0.04)(c)
0.31 (b,c)

–
0.54 (d)

–
0.35 (e)

0.01(g)
(4.25)(f,g,h)

(0.03)(c,g)
(3.05)(b-h)

0.25

1.00

$33.77
26.59

$29.37
23.14

$31.07
21.66

$ 26.64
10.20

$ 33.77
10.20

$ 5,217
1,366

$ 5,291
1,410

$ 5,541
1,455

$ 5,841
1,599

$ 21,890
5,830

606 (i)

(23)(j)
434 (i,j)

294 (k)

(10)(l)
190 (k,l)

315 (m)

(3)
217 (m)

439 (n)

1,654 (i,k,m,n)

(11)(o)
327 (n,o,p)

(47)(j,l,o)
1,168 (i-p)

1.03 (i)

0.46 (k)

0.52 (m)

0.80 (n)

2.83 (i,k,m,n)

(0.05)(j)
0.98 (i,j)

(0.02)(l)
0.44 (k,l)

(0.01)
0.51 (m)

(0.02)(o)
0.78 (n,o,p)

(0.11)(j,l,o)
2.72 (i-p)

1.02 (i)

0.46 (k)

0.52 (m)

0.80 (n)

2.81 (i,k,m,n)

(0.05)(j)
0.97 (i,j)

(0.02)(l)
0.44 (k,l)

(0.01)
0.51 (m)

(0.02)(o)
0.78 (n,o,p)

(0.11)(j,l,o)
2.70 (i-p)

0.25

1.00

$ 38.00
32.75

$ 39.94
36.06

$ 41.57
31.05

$ 37.33
31.43

41.57
31.05

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

(f)

(a) Gross margin represents net sales less cost of
products sold, excluding depreciation, amor-
tization and cost of timber harvested.

(b)

(c)

(d)

(e)

taxes)

Includes a $40 million pre-tax charge ($25 mil-
lion after
for adjustments to legal
reserves, a pre-tax charge of $5 million ($3
million after taxes) for costs associated with
the reorganization of the Company’s Shore-
wood operations in Canada, and a pre-tax gain
of $3 million ($2 million after
for
adjustments to previously recorded reserves
associated with the Company’s 2006 Trans-
formation Plan.

taxes)

Includes a pre-tax charge of $25 million ($16
million after taxes) for the settlement of a post-
closing adjustment on the sale of the Beverage
Packaging business and the operating results
of certain wood products facilities during the
quarter.

Includes a pre-tax charge of $13 million ($9
million after taxes) for costs associated with
the reorganization of the Company’s Shore-
wood operations in Canada, and a pre-tax gain
of $3 million ($2 million after taxes) for an
adjustment to the gain on the 2006 Trans-
formation Plan forestland sales.

Includes a pre-tax charge of $107 million ($84
million after taxes) to write down the assets at
the Inverurie, Scotland mill to estimated fair
value, a pre-tax charge of $39 million ($24 mil-
lion after taxes) relating to the write-up of
inventory to fair value in connection with the
CBPR acquisition, a pre-tax charge of $35 mil-
lion ($22 million after taxes) for an adjustment
to legal reserves, a pre-tax charge of $19 mil-
lion ($12 million after taxes) for integration
costs associated with the CBPR business
acquisition, a pre-tax charge of $8 million ($5
million after taxes) for costs associated with
the reorganization of the Company’s Shore-
wood operations in Canada, a pre-tax charge
of $53 million ($33 million after taxes) to write
off deferred supply chain initiative develop-
ment costs for U.S. container operations that
will not be implemented due to the CBPR
acquisition, a charge of $1 million (before and
after taxes) for severance costs associated with
the Company’s 2006 Transformation Plan and
a $3 million pre-tax gain ($2 million after taxes)
for adjustments of estimated transaction costs
accrued in connection with the 2006 Trans-
formation Plan forestland sales.

(g)

(h)

(i)

(j)

Includes charges of $1.3 billion, $379 million
and $59 million (before and after taxes) for the
impairment of goodwill of the Company’s U.S.
Printing Papers and U.S. and European Coated
Paperboard businesses, a pre-tax charge of
$123 million ($75 million after taxes) for shut-
down costs for the Bastrop, Louisiana mill, a
pre-tax charge of $30 million ($18 million after
taxes) for the shutdown of a paper machine at
the Franklin, Virginia mill, a pre-tax charge of
$26 million ($16 million after
for
integration costs associated with the acquis-
ition of the CBPR business, a pre-tax charge of
$53 million ($32 million after taxes) for sev-
erance and benefit costs associated with the
Company’s 2008 overhead cost reduction ini-
tiative, a pre-tax charge of $8 million ($5 mil-
lion after taxes) for closure costs associated
with the Ace Packaging business, and a pre-tax
charge of $4 million ($2 million after taxes) for
costs associated with the reorganization of the
Company’s Shorewood operations.

taxes)

Includes pre-tax gains of $9 million ($5 million
after taxes) for adjustments to reserves asso-
ciated with the sale of discontinued busi-
nesses.

Includes a $40 million tax benefit related to
restructuring of the Company’s international
operations.

2006 Transformation Plan,

Includes an $18 million charge before taxes
($11 million after
for organizational
taxes)
restructuring charges associated with the
Company’s
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
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.

taxes)

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 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, a $10 million pre-tax credit ($6 million
for additional refunds received
after taxes)

(k)

from the Canadian government of duties paid
by the Company’s Weldwood of Canada Lim-
ited business, and the operating results of the
Beverage Packaging and Wood Products busi-
nesses.

2006 Transformation Plan,

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
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 charge (before and after taxes) related
to other smaller items.

(l)

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

(m) 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 2006
Transformation Plan, a pre-tax charge of $10
million ($6 million after taxes)
for environ-
mental 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 asso-
ciated with the Company’s 2006 Trans-
formation Plan, and a pre-tax gain of $9 million
($5 million after taxes) to reduce estimated
transaction costs accrued in connection with
the 2006 sale of U.S. Forestlands included in
the Company’s 2006 Transformation Plan.

(n)

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 2006
Transformation Plan, a pre-tax gain of $9 mil-
lion ($6 million after taxes) for an Ohio Com-

mercial Activity Tax adjustment, a pre-tax gain
of $7 million ($5 million after taxes) for an
adjustment
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 tax-
es) for an adjustment to the loss on the sale of
the Marasquel mill, and a gain of $1 million
(before and after taxes) for other items.

(o)

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.

(p)

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

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, 2008, an evaluation was carried
out under the supervision and with the participation
of the Company’s management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our dis-
closure controls and procedures, pursuant to Rule
13a-15 under the Securities Exchange Act (the Act).
Based upon this evaluation, the Chief Executive Offi-
cer and Chief Financial Officer have concluded that
the Company’s disclosure controls and procedures
are effective to ensure that information required to
be disclosed by us in reports we file under the Act is
recorded, processed, summarized, and reported by
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 there-
under.

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Our management is responsible for establishing and
maintaining adequate internal controls over our
including the safeguarding of
financial reporting,
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-
lished
asset
statements
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;

provide reasonable assurance regarding pre-
vention or timely detection of unauthorized
acquisition, use, or disposition of our assets that
could have a material effect on our consolidated
financial statements; and

provide
detection of fraud.

reasonable

assurance

to the

internal control systems have inherent

limi-
All
including the possibility of circumvention
tations,
and overriding 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 policies and procedures, contains self-
monitoring mechanisms, and is audited by the
internal audit function. Appropriate actions are taken
by management to correct deficiencies as they are
identified.

As of December 31, 2008, management has assessed
the effectiveness of the Company’s internal control
In a report included on
over financial reporting.
page 49, management concluded that, based on its
assessment, the Company’s internal control over
financial reporting is effective as of December 31,
2008.

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 and Finance
Committee, has audited the consolidated financial
statements prepared by us. Their report on the con-
solidated financial statements is included in Part II,
Item 8. Financial Statements and Supplementary
Data. Deloitte & Touche LLP has issued an attes-
tation 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
reporting procedures,
the performance of our
internal audit function and independent auditors,
forth in its charter. The
and other matters set
Committee, which currently
five
consists of
independent directors, meets regularly with repre-
sentatives
the
independent auditors and the Internal Auditor, with
and without management representatives in attend-
ance, to review their activities.

of management,

and with

CHANGES IN INTERNAL CONTROL OVER FINANCIAL

REPORTING

The Company has ongoing initiatives to standardize
and upgrade its financial, operating and supply chain
systems. The system upgrades will be implemented
in stages, by business, over the next several years.
Management believes the necessary procedures are
in place to maintain effective internal controls over
financial reporting as these initiatives continue.

There have been no changes in our internal control
over financial reporting during the quarter ended
December 31, 2008 that have materially affected, or
are reasonably likely to materially affect, our internal
control over financial reporting.

activities,

In August 2008, the Company completed the acquis-
ition of the Containerboard, Packaging and Recycling
business from Weyerhaeuser Company (CBPR).
Integration
preliminary
assessment of internal controls over financial report-
ing, are currently in process. The initial annual
assessment of internal controls over financial report-
ing for the CBPR business will be conducted over the
course of our 2009 assessment cycle.

including

ITEM 9B. OTHER INFORMATION

None.

PART III.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE

Information concerning our directors is hereby
incorporated by reference to our definitive proxy
statement that will be filed with the Securities and
Exchange Commission (SEC) within 120 days of the
close of our fiscal year. The Audit and Finance
Committee of the Board of Directors has at least one
member who is a financial expert, as that term is
defined in Item 401(d)(5) of Regulation S-K. Further
information concerning the composition of the Audit
and Finance Committee and our audit committee
financial experts is hereby incorporated by reference
to our definitive proxy statement that will be filed
with the SEC within 120 days of the close of our fis-
cal year. Information with respect to our executive
officers is set forth on pages 4 through 6 in Part I of
this Form 10-K under the caption, “Executive Officers
of the Registrant.”

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

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.

A description of certain relationships and related
transactions is hereby incorporated by reference to
our definitive proxy statement that will be filed with
the SEC within 120 days of the close of our fiscal
year.

(4.2)

(4.3)

(4.4)

(10.1)

(10.2)

ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES

Information with respect to fees paid to, and services
rendered by, our principal accountant, and our poli-
cies and procedures for pre-approving those serv-
ices,
is hereby incorporated by reference to our
definitive proxy statement that will be filed with the
SEC within 120 days of the close of our fiscal year.

PART IV.

ITEM 15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES

(a)

(1)

(2)

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

Financial Statement Schedules – The
following additional
financial data
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
the notes
financial statements or
thereto.

Additional Financial Data
2008, 2007 and 2006

Report of Independent Registered Public

Accounting Firm on Financial
Statement Schedule for 2008, 2007
and 2006

Consolidated Schedule: II-Valuation and

Qualifying Accounts

104

105

(3.1)

(3.2)

(4.1)

Paper

Restated Certificate of Incorporation of
International
Company
(incorporated by reference to Exhibit
3.1 to the Company’s Current Report
on Form 8-K dated May 16, 2008, File
No. 1-3157).

By-laws of International Paper Com-
pany, as amended through May 12,
2008 (incorporated by reference to
Exhibit 3.2 to the Company’s Current
Report on Form 8-K dated May 16,
2008, 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, File 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).

Supplemental Indenture (including the
form of Notes), dated as of June 4,
2008, between International Paper
Company and The Bank of New York,
as Trustee (incorporated by reference
to Exhibit 4.1 to the Company’s Cur-
rent Report on Form 8-K dated June 4,
2008, File No. 1-3157).

accordance with

In
Item 601
(b) (4) (iii) (A) of Regulation S-K, cer-
tain instruments respecting long-term
debt of the Company have been omit-
ted but will be furnished to the Com-
mission upon request.

Paper

Share Purchase Agreement, dated
August 16, 2007,
in respect of Ilim
Holdings S.A. by and among Interna-
Investments
tional
(Luxembourg) S.ar.l., Pulp Holding
Luxembourg S.ar.l.,
Ilim Holding
Luxembourg S.ar.l., Ilim Holding S.A.,
Company,
International
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 Sep-
tember 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
(Luxembourg) S.ar.l.,
Investments
Pulp Holding Luxembourg S.ar.l., Ilim
Holding Luxembourg S.ar.l.,
Ilim
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).

(10.3)

(10.4)

(10.5)

(10.6)

(10.7)

(10.8)

dated

Purchase Agreement between Interna-
tional Paper Company and Weyer-
haeuser Company
of
March 15, 2008 (incorporated by
reference to Exhibit 10.1 to the
Company’s Current Report on Form
8-K dated March 20, 2008, File No. 1-
3157).

Incentive Plan,
2008 Management
amended and restated as of Jan-
uary 1, 2008 (incorporated by refer-
ence to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q for the
quarter ended March 31, 2008, File
No. 1-3157). +

Amendment No. 1 to the 2008 Man-
Incentive Plan, effective
agement
December 8, 2008. * +

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

Amendment, effective April 1, 2008, to
the International Paper Company
Long-Term Incentive Compensation
Plan,
amended and restated
February 7, 2005 (incorporated by
reference to Exhibit 10.7 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended March 31,
2008, File No. 1-3157). +

Amendment
effective
No.
October 13, 2008, to the International
Paper Company Long-Term Incentive
Compensation Plan, as amended and
restated
2005
(incorporated by reference to Exhibit
10.4 to the Company’s Current Report
on Form 8-K dated October 17, 2008,
File No. 1-3157). +

February

(10.9)

effective
No.
Amendment
December 8, 2008, to the International
Paper Company Long-Term Incentive
Compensation Plan, as amended and
restated February 7, 2005. * +

100

(10.10)

(10.11)

(10.12)

(10.13)

(10.14)

(10.15)

(10.16)

(10.17)

Form of individual non-qualified stock
option agreement under the LTICP
(incorporated by reference to Exhibit
10.6 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2001, File No. 1-3157). +

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). +

Compensation

Form of Restricted Stock Unit award
(cash settled) under the Long Term
Plan
Incentive
(incorporated by reference to Exhibit
10.4a to the Company’s Quarterly
Report on Form 10-Q for the quarter
ended September 30, 2008, File
No. 1-3157). +

Compensation

Form of Restricted Stock Unit award
(stock settled) under the Long Term
Plan
Incentive
(incorporated by reference to Exhibit
10.4b to the Company’s Quarterly
Report on Form 10-Q for the quarter
ended September 30, 2008, 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

Senior Managers,

Unfunded Supplemental Retirement
Plan
as
amended and restated effective Jan-
uary 1, 2008 (incorporated by refer-
ence
the
Company’s Annual Report on Form
10-K for
ended
December 31, 2007, File No. 1-3157). +

Exhibit

10.21

fiscal

year

the

(10.18)

(10.19)

(10.20)

(10.21)

(10.22)

(10.23)

Amendment No. 1 to the International
Paper Company Unfunded Supple-
mental Retirement Plan for Senior
Managers, effective October 13, 2008
(incorporated by reference to Exhibit
10.3 to the Company’s Current Report
on Form 8-K dated October 17, 2008,
File No. 1-3157). +

Amendment No. 2 to the International
Paper Company Unfunded Supple-
mental Retirement Plan for Senior
Managers, effective October 14, 2008
(incorporated by reference to Exhibit
10.5 to the Company’s Current Report
on Form 8-K dated October 17, 2008,
File No. 1-3157). +

Amendment No. 3 to the International
Paper Company Unfunded Supple-
mental Retirement Plan for Senior
Managers,
8,
2008. * +

effective December

Restricted Stock and Deferred Com-
pensation Plan for Non-Employee
Directors, effective January 1, 2008
(incorporated by reference to Exhibit
10.22 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2007, File No. 1-3157). +

Form of Non-Competition Agreement,
entered into by certain Company
employees (including named execu-
tive officers) who have received
the LTICP,
restricted stock under
effective January 1, 2009. * +

Form of Non-Solicitation Agreement
entered into by certain Company
employees (including named execu-
tive 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
File
No. 1-3157). +

2006,

31,

(10.24)

Form of Change of Control Agree-
ment—Tier I, effective October 15,
2008 (incorporated by reference to
Exhibit 10.1 to the Company’s Current
Report on Form 8-K/A dated Jan-
uary 28, 2009, File No. 1-3157). +

101

(10.25)

(10.26)

(10.27)

(10.28)

(10.29)

(10.30)

(10.31)

Form of Change of Control Agree-
ment—Tier II, effective October 15,
2008 (incorporated by reference to
Exhibit 10.2 to the Company’s Current
Report on Form 8-K dated October 17,
2008, 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). +

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). +

effective October

Executive Employment Agreement
between the Company and Paul Her-
bert,
2007
(incorporated by reference to Exhibit
10.31 to the Company’s Annual Report
on Form 10-K for the fiscal year ended
December 31, 2007, File No. 1-3157). +

Paper

International
Company
Industrial Packaging Group Special
Incentive Plan (incorporated by refer-
ence to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008,
File No. 1-3157). +

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).

(10.32)

(10.33)

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).

Second Amended and Restated Credit
and Security Agreement, dated as of
March 13, 2008, among Red Bird
Receivables,
Borrower,
LLC,
as
International Paper Company,
Servicer, the Conduits and Liquidity
Banks from time to time a party there-
to, The Bank of Tokyo-Mitsubishi, Ltd.,
New York Branch, as Gotham Agent,
JPMorgan Chase Bank, N.A., as
PARCO Agent, BNP Paribas, acting
through its New York Branch, as Star-
bird Agent, Citicorp North America,
Inc., as CAFCO Agent and as Admin-
istrative Agent. Certain confidential
portions have been omitted and filed
separately with the Securities and
Exchange Commission pursuant to a
request
treatment
(incorporated by reference to Exhibit
10.4 to the Company’s Quarterly
Report on Form 10-Q for the quarter
ended March 31, 2008, File No. 1-
3157).

confidential

for

(10.34)

(10.35)

Receivables Sale and Contribution
Agreement, dated as of March 13,
2008, between International Paper
Company and Red Bird Receivables,
LLC (incorporated by reference to
Exhibit 10.5 to the Company’s Quar-
terly Report on Form 10-Q for the
quarter ended March 31, 2008, File No.
1-3157).

Amendment No. 1 dated August 29,
2008,
to the Receivables Sale and
Contribution Agreement dated as of
March 13, 2008 (incorporated by
reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form
10-Q for the quarter ended September
30, 2008, File No. 1-3157).

(10.36)

(10.37)

Debt Commitment Letter by and
among International Paper Company
and JPMorgan Chase Bank, N.A., Bank
of America, N.A., UBS Loan Finance
LLC, Deutsche Bank AG New York
Branch, The Royal Bank of Scotland
PLC, J.P. Morgan Securities Inc., Banc
of America Securities LLC, Deutsche
Bank Securities Inc., UBS Securities
LLC, Deutsche Bank AG Cayman
Islands Branch and RBS Securities
Corporation d/b/a RBS Greenwich
Capital
2008
(incorporated by reference to Exhibit
10.2 to the Company’s Current Report
on Form 8-K dated March 20, 2008,
File No. 1-3157).

dated March

15,

Amendment No. 1, dated May 27,
2008,
to Debt Commitment Letter
dated March 15, 2008 (incorporated by
reference to Exhibit 10.1 to the
Company’s Current Report on Form
8-K dated May
File
No. 1-3157).

2008,

27,

(10.38) Waiver, dated April 14, 2008, to the
Debt Commitment Letter dated March
15, 2008 (incorporated by reference to
Exhibit 10.3 to the Company’s Quar-
terly Report on Form 10-Q for the
quarter ended June 30, 2008, File No.
1-3157).

Credit Agreement, dated as of June
16, 2008, by and among the Company,
the Lenders a party thereto, the sub-
sidiary guarantors party thereto and
JPMorgan Chase Bank, N.A.
as
Administrative Agent (incorporated by
reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-
K
File
No. 1-3157).

dated

2008,

June

20,

Amendment No. 1, dated July 31,
2008, to the Credit Agreement dated
as of June 16, 2008 (incorporated
by reference to Exhibit 10.2 to the
Company’s Quarterly Report
on
Form 10-Q for
the quarter ended
September 30, 2008, File No. 1-3157).

(10.39)

(10.40)

102

(32)

to 18 U.S.C.
Certification pursuant
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002.*

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

(10.41)

10.42

10.43

(11)

(12)

(21)

(23)

(24)

(31.1)

(31.2)

EUR500 million 5-year credit facility,
dated as of August 6, 2004, among the
Company, as Guarantor, International
Paper Investments (France) S.A.S., a
French wholly-owned subsidiary of
the Company, as Borrower, BNP Par-
ibas, Barclays Capital, and ABN AMRO
N.V., as mandated lead arrangers,
certain financial
institutions named
therein and BNP Paribas, as facility
agent (incorporated by reference to
Exhibit 10.4 to the Company’s Annual
Report on Form 10-K for the fiscal year
File
ended December
No. 1-3157).

2004,

31,

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).

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).

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.*

103

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, 2008 and 2007, and for each of the three years in the period ended December 31,
2008, and the Company’s internal control over financial reporting as of December 31, 2008, and have issued our
reports thereon dated February 25, 2009 (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 25, 2009

104

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

INTERNATIONAL PAPER COMPANY AND CONSOLIDATED SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

(In millions)

SCHEDULE II

For the Year Ended December 31, 2008

Balance at
Beginning
of Period

Additions
Charged to
Earnings

Additions
Charged to
Other
Accounts

Deductions
from
Reserves

Balance
at End of
Period

95 $

29 $

120

13(c) $
–

(16)(a)
(31)(b)

121
96

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

Description
Reserves Applied Against Specific
Assets Shown on Balance Sheet:
Doubtful accounts – current
Restructuring reserves

(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.

105

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 26, 2009

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Maura Abeln Smith and Sharon R. Ryan as his or her true and lawful attorney-in-fact and agent, acting
alone, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in
any and all capacities, to sign any or all amendments to this annual report on Form 10-K, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact full power and authority to do and perform each and every act
and thing requisite or necessary to be done, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
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 26, 2009

Director

February 26, 2009

/S/ MARTHA FINN BROOKS

Director

February 26, 2009

Martha Finn Brooks

/S/ LYNN LAVERTY ELSENHANS

Director

February 26, 2009

Lynn Laverty Elsenhans

/S/ SAMIR G. GIBARA
Samir G. Gibara

/S/ STACEY J. MOBLEY

Stacey J. Mobley

Director

February 26, 2009

/S/ JOHN L. TOWNSEND III

Director

February 26, 2009

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

106

February 26, 2009

2008 LISTING OF FACILITIES
(all facilities are owned except noted otherwise)

PRINTING PAPERS

International:

Uncoated Papers and Pulp

U.S.:

Courtland, Alabama
Selma, Alabama
(Riverdale Mill)

Ontario, California leased

(C&D Center)

Cantonment, Florida
(Pensacola 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 Antonio, Sao Paulo, Brazil
Mogi Guacu, Sao Paulo, Brazil
Saillat, France
Hyderabad, India leased

(Sales Office)
Kwidzyn, Poland
Svetogorsk, Russia
Inverurie, Scotland *
Singapore (2 locations) leased

(Sales Offices)

INDUSTRIAL PACKAGING

Containerboard

U.S.:

Pine Hill, Alabama
Prattville, Alabama
Oxnard, California
Cantonment, Florida

(Pensacola, Florida)

Savannah, Georgia
Cedar Rapids, Iowa
Henderson, Kentucky
Campti, Louisiana
Mansfield, Louisiana
Pineville, Louisiana
Vicksburg, Mississippi
Valiant, Oklahoma
Springfield, Oregon
Albany, Oregon

Tokyo, Japan leased

(Sales Office)

Yanzhou City, China
Arles, France

(Etienne Mill)
Veracruz, Mexico
Kenitra, Morocco

Corrugated Container

U.S.:

Bay Minette, Alabama
Decatur, Alabama
Dothan, Alabama leased
Huntsville, Alabama
Conway, Arkansas
Fort Smith, Arkansas
Jonesboro, Arkansas
Russellville, Arkansas (2 locations)
Tolleson, Arizona
Yuma, Arizona
Anaheim, California
Camarillo, California
Carson, California
Compton, California
Elk Grove, California
Exeter, California
Los Angeles, California leased
Modesto, California (2 locations)
Salinas, California
Sanger, California
San Leandro, California leased
Santa Paula, California
Stockton, California
Vernon, California
Golden, Colorado
Putnam, Connecticut
Auburndale, Florida
Jacksonville, Florida leased
Lake Wales, Florida
Plant City, Florida
Tampa, Florida
Columbus, Georgia
Forest Park, Georgia
Griffin, Georgia
Lithonia, Georgia
Savannah, Georgia
Tucker, Georgia
Aurora, Illinois
Bedford Park, Illinois (2 locations)

1 leased

Belleville, Illinois
Chicago, Illinois (2 locations)
Des Plaines, Illinois
Lincoln, Illinois

* On February 17, 2009 the Company announced the closure of this mill.

A-1

Appendix I

Montgomery, Illinois
Northlake, Illinois
Rockford, Illinois
Butler, Indiana
Fort Wayne, Indiana
Hartford City, Indiana
Indianapolis, Indiana (2 locations)
Portland, Indiana leased
Cedar Rapids, Iowa
Waterloo, Iowa
Kansas City, Kansas
Bowling Green, Kentucky
Lexington, Kentucky
Louisville, Kentucky
Walton, Kentucky
Lafayette, Louisiana
Shreveport, Louisiana
Springhill, Louisiana
Auburn, Maine
Brownstown, Michigan
Howell, Michigan
Kalamazoo, Michigan
Three Rivers, Michigan
Arden Hills, Minnesota
Austin, Minnesota
Fridley, Minnesota
Minneapolis, Minnesota
St. Paul, Minnesota
White Bear Lake, Minnesota
Houston, Mississippi leased
Jackson, Mississippi
Magnolia, Mississippi
Olive Branch, Mississippi
Kansas City, Missouri
Maryland Heights, Missouri
North Kansas City, Missouri leased
St. Joseph, Missouri
Omaha, Nebraska
Bellmawr, New Jersey
Barrington, New Jersey
Rochester, New York
Charlotte, North Carolina
(2 locations) 1 leased
Lumberton, North Carolina
Newton, North Carolina
Statesville, North Carolina
Byesville, Ohio
Delaware, Ohio
Eaton, Ohio
Mt. Vernon, Ohio
Newark, Ohio
Solon, Ohio
Wooster, Ohio
Oklahoma City, Oklahoma
Beaverton, Oregon

Hillsboro, Oregon
Portland, Oregon
Salem, Oregon
Eighty-four, Pennsylvania
Lancaster, Pennsylvania
Mount Carmel, Pennsylvania
Georgetown, South Carolina
Laurens, South Carolina
Spartanburg, South Carolina
Cleveland, South Carolina
Lavergne, Tennessee leased
Morristown, Tennessee
Murfreesboro, Tennessee
Amarillo, Texas
Dallas, Texas
Edinburg, Texas (2 locations)
El Paso, Texas
Ft. Worth, Texas leased
Grand Prairie, Texas
Hidalgo, Texas
McAllen, Texas
San Antonio, Texas
Sealy, Texas
Chesapeake, Virginia
Lynchburg, Virginia
Richmond, Virginia
Bellevue, Washington
Moses Lake, Washington
Olympia, Washington
Yakima, Washington
Cedarburg, Wisconsin
Fond du Lac, Wisconsin
Manitowoc, Wisconsin

International:

Tillsonburg, Ontario, Canada leased
Las Palmas, Canary Islands
Tenerife, Canary Islands
Rancagua, Chile
Beijing, China
Chengdu, China
Chongqing, 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
Silao, Mexico
Ixtaczoquitlan, Mexico

Jaurez, Mexico leased
Villa Nicolas Romero, Mexico
Puebla, Mexico leased
Agadir, Morocco

(2 locations) 1 leased

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

Recycling
U.S.:

Phoenix, Arizona
Fremont, California
Norwalk, California
West Sacramento, California
Denver, Colorado
Itasca, Illinois
Des Moines, Iowa
Wichita, Kansas
Baltimore, Maryland
New Brighton, Minnesota
Omaha, Nebraska
Charlotte, North Carolina
Beaverton, Oregon
Eugene, Oregon
Memphis, Tennessee
Carrollton, Texas
Salt Lake City, Utah
Richmond, Virginia
Kent, Washington

International:

Veracruz, Mexico (2 locations)

Bags

U.S.:

Buena Park, California
Beaverton, Oregon
Grand Prairie, Texas

CONSUMER PACKAGING

Appendix I

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

(Sales Office)

Shorewood Packaging

U.S.:

Indianapolis, Indiana
Louisville, Kentucky
Carlstadt, New Jersey leased
West Deptford, New Jersey
Hendersonville, North Carolina
Weaverville, North Carolina
Springfield, Oregon
Danville, Virginia
Newport News, Virginia
Roanoke, Virginia

International:

Smith Falls, Ontario, Canada
Toronto, Ontario, Canada
Guangzhou, China
Kunshan, China
Aguascalientes, Mexico
Torun, Poland
Sacheon, South Korea
Ebbw Vale, Wales, United Kingdom

DISTRIBUTION

xpedx
U.S.:

Stores Group

Chicago, Illinois
123 locations nationwide

115 leased
South Central Region

Coated Paperboard

Ontario, California leased

Greensboro, North Carolina
39 branches in the Southeast and

(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)

A-2

Mid-west States

28 leased

West Region

Denver, Colorado
32 branches in the Rocky

Mountain, Northwest and
Pacific States
19 leased

Appendix I

North Central Region

Hartford, Connecticut
34 branches in New England,
Upper Mid-west and Middle
Atlantic States
27 leased
National Group

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

all leased

International:

Canada (3 locations)

all leased

Mexico (20 locations)

all leased

IP Asia

International:

China (8 locations)
Malaysia
Taiwan
Thailand
Vietnam

FOREST PRODUCTS

Forest Resources

U.S.:

Approximately 200,000 acres in

the South and North

International:

Approximately 250,000 acres in

Brazil
Wood Products

U.S.:

Franklin, Virginia

SPECIALTY BUSINESSES AND
OTHER

IP Mineral Resources
Houston, Texas leased

(Sales Office)

A-3

2008 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

2,950

240

3,190

1,055

–

4,245

1,365

–

1,365

317

125

1,807

11,092

270

1,902

12,994

333

603

882

–

882

–

882

–

915

5,197

240

5,437

1,372

125

6,934

11,386

3,150

14,536

We own, manage or have an interest in approximately 1.0 million acres of

forestlands worldwide. These forestlands and associated acres are located

in the following regions:

South

North

Total U.S.

Brazil

Total

We have harvesting rights in:

Russia

Total

(M Acres)
220

226
250

476

516

992

A-4

International Paper
Senior Leadership
(As of April 1, 2009)

John V. Faraci

Maura Abeln Smith

Gary Gavin

Kevin G. McWilliams

Chairman and
Chief Executive Officer

John N. Balboni

Senior Vice President
Chief Information Officer

Michael J. Balduino

Senior Vice President
Consumer 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

Tommy S. Joseph

Senior Vice President
Manufacturing & Technology

Thomas G. Kadien

Senior Vice President
President, xpedx

Mary A. Laschinger

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

Timothy S. Nicholls

Senior Vice President
Chief Financial Officer

Maximo Pacheco

Senior Vice President
President, International Paper do
Brasil

Carol L. Roberts

Senior Vice President
Industrial Packaging

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

Domenick Andreana

Vice President
National Accounts
Container The Americas

September G. Blain

Vice President
Finance and Strategic
Planning Printing &
Communications Papers

Paul Brown

Vice President
European Container

Vice President
East Area and
Bulk Packaging
Container The Americas

Vice President
Tax

Tracy Pearson

Greg C. Gibson

Vice President
European Papers

Robert J. Grillet

Vice President and Controller
Finance

Errol A. Harris

Vice President
Global Treasury

Vice President
Central Area
Container The Americas

Jean-Michel Ribieras

Vice President
Converting Papers & Pulp

Jay Royalty

Vice President
South Area and Retail
Container The Americas

Peter G. Heist

John V. Sims

Vice President
Coated Paperboard

Vice President
Strategic Planning

Terri L. Herrington

David B. Struhs

Vice President
Internal Audit

William Hoel

Vice President
Container The Americas

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

Eric Chartrain

Robert M. Hunkeler

Vice President
Manufacturing & Technology
International Paper Europe,
Middle East, Africa and
Russia

Thomas A. Cleves

Vice President
Investor Relations

Dennis J. Colley

Vice President
Integration
Industrial Packaging

James A. Connelly

Vice President
xpedx

Kirt J. Cuevas

Vice President
Manufacturing
Coated Paperboard

Arthur J. Douville

Vice President
xpedx

Michael P. Exner

Vice President
Manufacturing

Vice President
Trust Investments

Paul J. Karre

Vice President
Human Resources

Timothy A. Kelly

Vice President
Manufacturing
Containerboard

Michael D. Lackey

Vice President
West Area
Container The Americas

Austin E. Lance

Vice President
Foodservice

Glenn R. Landau

Vice President
Containerboard

David A. Liebetreu

Vice President
Global Sourcing and
Forest Resources

Franz Josef Marx

Vice President
President,
International Paper Russia

DIRECTORS

John V. Faraci

Chairman and Chief Executive Officer
International Paper Co.

David J. Bronczek

President and Chief Executive Officer
FedEx Express

Martha F. Brooks

President and Chief Operating Officer
Novelis Inc.

Lynn Laverty Elsenhans

Chairman, Chief Executive Officer and President
Sunoco Inc.

Samir G. Gibara

Retired Chairman and Chief Executive Officer
The Goodyear Tire & Rubber Co.

Stacey J. Mobley

Senior Counsel
Dickstein Shapiro LLP

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 Corp.

Alberto Weisser

Chairman and Chief Executive Officer
Bunge Ltd.

J. Steven Whisler

Retired Chairman and Chief Executive Officer
Phelps Dodge Corp.

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.

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

SHAREHOLDER INFORMATION

Corporate Headquarters
International Paper Company
6400 Poplar Avenue
Memphis, Tennessee 38197
(901) 419-9000

Annual Meeting
The next annual meeting of shareholders will be held at 11 a.m. local time,
Monday, May 11, 2009, 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 New York Stock Exchange.

Direct Purchase Plan
Under our plan, you may invest all or a portion of your dividends, and you may
purchase up to $20,000 of additional shares each year. International Paper pays
most of the brokerage commissions and fees. You may also deposit your
certificates with the transfer agent for safekeeping. For a copy of the plan
prospectus, call or write to the corporate secretary at the corporate
headquarters.

Independent Registered Public Accounting Firm
Deloitte & Touche LLP
100 Peabody Place
Memphis, Tennessee

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) 419-4848
or e-mailing sustainability@ipaper.com.

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, 2008. 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.

2008 Highlights & Achievements

International Paper Board of Directors

Generated the best free cash flow
in IP history – despite significant
input cost increases – by operating
well, managing working capital and
decreasing capital spending

Completed the acquisition of
Weyerhaeuser's industrial packaging
business and exceeded the 2008
synergies target

Delivered our second-best earnings
per share since 2000 and achieved
record earnings in our North
American printing papers business,
both before special items

Successfully completed the
construction and early start-up of
a coated paperboard machine as
part of our joint venture with Sun
Paper in Asia

Secured new business and gained
share with key customers in
paper, packaging and distribution

Accomplished a major company-
wide safety milestone

Completed the first year of our
Russian joint venture with Ilim Group

Global Headquarters:

Global Offices:

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

International Paper Europe
Middle East and Africa
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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PAPER, PACKAGING AND DISTRIBUTION

www.internationalpaper.com

Listed on the New York Stock Exchange

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

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