international paper Q3 2008 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended September 30, 2008

For the Transition Period From to

Commission File Number 1-3157

INTERNATIONAL PAPER COMPANY (Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ⌧ No �

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 company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ⌧ Accelerated filer � Non-accelerated filer � Smaller company �

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes � No ⌧

The number of shares outstanding of the registrant’s common stock as of November 5, 2008 was

427,530,031.

⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

New York 13-0872805(State or other jurisdiction of (I.R.S. Employerincorporation of organization) Identification No.)

6400 Poplar Avenue, Memphis, TN 38197(Address of principal executive offices) (Zip Code)

INTERNATIONAL PAPER COMPANY

INDEX

PAGE NO.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statement of Operations - Three Months and Nine Months Ended September 30, 2008 and 2007 1

Consolidated Balance Sheet - September 30, 2008 and December 31, 2007 2

Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2008 and 2007 3

Consolidated Statement of Changes in Common Shareholders’ Equity - Nine Months Ended September 30, 2008 and 2007 4

Condensed Notes to Consolidated Financial Statements 5

Financial Information by Industry Segment 22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24

Item 3. Quantitative and Qualitative Disclosures About Market Risk 43

Item 4. Controls and Procedures 44

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 45

Item 1A. Risk Factors 45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds *

Item 3. Defaults upon Senior Securities *

Item 4. Submission of Matters to a Vote of Security Holders *

Item 5. Other Information *

Item 6. Exhibits 46

Signatures 47

* Omitted since no answer is called for, answer is in the negative or inapplicable.

PART I. FINANCIAL INFORMATION

INTERNATIONAL PAPER COMPANY Consolidated Statement of Operations

(Unaudited) (In millions, except per share amounts)

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

1

ITEM 1. FINANCIAL STATEMENTS

Three Months Ended

September 30, Nine Months Ended

September 30, 2008 2007 2008 2007

Net Sales $ 6,808 $ 5,541 $18,283 $16,049

Costs and Expenses Cost of products sold 5,154 4,086 13,720 11,818 Selling and administrative expenses 507 455 1,438 1,331Depreciation, amortization and cost of timber harvested 374 277 965 808Distribution expenses 376 255 962 765Taxes other than payroll and income taxes 48 42 136 131Gain on sale of mineral rights (261) — (261) — Restructuring and other charges 97 42 152 86Forestland sales (3) (9) (6) (9)Net losses (gains) on sales and impairments of businesses 107 1 106 (314)Interest expense, net 144 77 306 218

Earnings From Continuing Operations Before Income Taxes, Equity Earnings and Minority Interest 265 315 765 1,215

Income tax provision 118 89 274 321 Equity earnings, net of taxes 5 — 51 — Minority interest expense, net of taxes 3 6 15 17

Earnings From Continuing Operations 149 220 527 877Discontinued operations, net of taxes and minority interest — (3) (18) (36)

Net Earnings $ 149 $ 217 $ 509 $ 841

Basic Earnings Per Common Share

Earnings from continuing operations $ 0.35 $ 0.52 $ 1.25 $ 2.03Discontinued operations — (0.01) (0.04) (0.08)

Net earnings $ 0.35 $ 0.51 $ 1.21 $ 1.95

Diluted Earnings Per Common Share Earnings from continuing operations $ 0.35 $ 0.52 $ 1.24 $ 2.01 Discontinued operations — (0.01) (0.04) (0.08)

Net earnings $ 0.35 $ 0.51 $ 1.20 $ 1.93

Average Shares of Common Stock Outstanding – assuming dilution 423.4 425.6 424.2 435.7

Cash Dividends Per Common Share $ 0.25 $ 0.25 $ 0.75 $ 0.75

INTERNATIONAL PAPER COMPANY Consolidated Balance Sheet

(In millions)


2

September 30,

2008 December 31,

2007

Assets (unaudited) Current Assets

Cash and temporary investments $ 771 $ 905Accounts and notes receivable, net 3,864 3,152Inventories 2,766 2,071Assets of businesses held for sale — 24Deferred income tax assets 217 213Other current assets 272 370

Total Current Assets 7,890 6,735

Plants, Properties and Equipment, net 14,755 10,141Forestlands 712 770 Investments 1,377 1,276Goodwill 3,877 3,650Deferred Charges and Other Assets 1,558 1,587

Total Assets $ 30,169 $ 24,159

Liabilities and Common Shareholders’ Equity Current Liabilities

Notes payable and current maturities of long-term debt $ 800 $ 267Accounts payable 2,532 2,145Accrued payroll and benefits 404 400Liabilities of businesses held for sale — 4Other accrued liabilities 1,219 1,026

Total Current Liabilities 4,955 3,842

Long-Term Debt 11,232 6,353Deferred Income Taxes 3,124 2,919Other Liabilities 1,854 2,145 Minority Interest 239 228Common Shareholders’ Equity

Common stock, $1 par value, 493.6 shares in 2008 and 2007 494 494Paid-in capital 6,710 6,755Retained earnings 4,559 4,375Accumulated other comprehensive loss (614) (471)

11,149 11,153Less: Common stock held in treasury, at cost, 66.0 shares in 2008 and 68.4 shares in 2007 2,384 2,481

Total Common Shareholders’ Equity 8,765 8,672

Total Liabilities and Common Shareholders’ Equity $ 30,169 $ 24,159

INTERNATIONAL PAPER COMPANY Consolidated Statement of Cash Flows

(Unaudited) (In millions)


3

Nine Months Ended

September 30, 2008 2007

Operating Activities

Net earnings $ 509 $ 841Discontinued operations, net of taxes and minority interest 18 36

Earnings from continuing operations 527 877Depreciation, amortization and cost of timber harvested 965 808Deferred income tax (benefit) expense, net (51) 125 Restructuring and other charges 152 86Payments related to restructuring and legal reserves (71) (60)Net losses (gains) on sales and impairments of businesses 106 (314)Equity earnings, net (51) — Gains on sales of forestlands (3) (9)Periodic pension expense, net 89 158Other, net 80 145 Changes in current assets and liabilities

Accounts and notes receivable (12) (6)Inventories (104) (91)Accounts payable and accrued liabilities 243 (313)Other 86 1

Cash provided by operations – continuing operations 1,956 1,407Cash used for operations – discontinued operations — (56)

Cash Provided by Operations 1,956 1,351

Investment Activities

Invested in capital projects (732) (804)Acquisitions, net of cash acquired (6,086) (227)Proceeds from divestitures 14 1,675 Equity investment in Ilim (21) — Other (147) (135)

Cash (used for) provided by investment activities – continuing operations (6,972) 509Cash used for investment activities – discontinued operations — (12)

Cash (Used for) Provided by Investment Activities (6,972) 497

Financing Activities

Repurchases of common stock and payments of restricted stock tax withholding (47) (1,124)Issuance of common stock 1 122Issuance of debt 6,011 15Reduction of debt (627) (528)Change in book overdrafts (45) (3)Dividends paid (321) (330)Other (69) —

Cash Provided by (Used for) Financing Activities 4,903 (1,848)

Effect of Exchange Rate Changes on Cash (21) 78

Change in Cash and Temporary Investments (134) 78Cash and Temporary Investments

Beginning of period 905 1,624

End of period $ 771 $ 1,702

INTERNATIONAL PAPER COMPANY Consolidated Statement of Changes in Common Shareholders’ Equity

(Unaudited) (In millions, except share amounts in thousands)

Nine Months Ended September 30, 2008

Nine Months Ended September 30, 2007

AccumulatedOther

ComprehensiveIncome (Loss)

TotalCommon

Shareholders’Equity

Common Stock Issued Paid-inCapital

RetainedEarnings

Treasury Stock

Shares Amount Shares Amount

Balance, December 31, 2007 493,556 $ 494 $6,755 $ 4,375 $ (471) 68,436 $2,481 $ 8,672Issuance of stock for various plans, net — — (45) — — (3,899) (144) 99Repurchase of stock — — — — — 1,472 47 (47)Common stock dividends — — — (325) — — — (325)Comprehensive income (loss):

Net earnings — — — 509 — — — 509 Amortization of pension and post-

retirement prior service costs and net loss:

U.S. plans (less tax of $43) — — — — 62 — — 62Non-U.S. plans (less tax of $0) — — — — 3 — — 3

Change in cumulative foreign currency translation adjustment (less tax of $0) — — — — (163) — — (163)

Net gains on cash flow hedging derivatives:

Net gains arising during the period (less tax of $3) — — — — 16 — — 16

Less: Reclassification adjustment for gains included in net income (less tax of $22) — — — — (61) — — (61)

Total comprehensive income 366

Balance, September 30, 2008 493,556 $ 494 $6,710 $ 4,559 $ (614) 66,009 $2,384 $ 8,765

AccumulatedOther

ComprehensiveIncome (Loss)

Total Common

Shareholders’Equity

Common Stock Issued Paid-inCapital

RetainedEarnings

Treasury Stock

Shares Amount Shares Amount

Balance, December 31, 2006 493,340 $ 493 $6,735 $ 3,737 $ (1,564) 39,844 $1,438 $ 7,963Issuance of stock for various plans, net 216 1 (17) — — (5,031) (182) 166Repurchase of stock — — — — — 30,577 1,124 (1,124)Common stock dividends — — — (330) — — — (330)Comprehensive income (loss):

Net earnings — — — 841 — — — 841Pension and post-retirement

divestitures, amortization of prior service costs and net loss:

U.S. plans (less tax of $52) — — — — 70 — — 70 Non-U.S. plans (less tax of $4) — — — — 8 — — 8

Change in cumulative foreign currency translation adjustment (less tax of $0) — — — — 451 — — 451

Net gains on cash flow hedging derivatives:

Net gains arising during the period (less tax of $0) — — — — 17 — — 17

Less: Reclassification adjustment for gains


4

included in net income (less tax of $1) — — — — (12) — — (12)

Total comprehensive income 1,375Adoption of FIN 48 (Note 8) — — — (94) — — — (94)

Balance, September 30, 2007 493,556 $ 494 $6,718 $ 4,154 $ (1,030) 65,390 $2,380 $ 7,956

INTERNATIONAL PAPER COMPANY Condensed Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods presented. Except as disclosed herein, such adjustments are of a normal, recurring nature. Results for the first nine months of the year may not necessarily be indicative of full year results. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in International Paper’s (the Company) Annual Report on Form 10-K for the year ended December 31, 2007, and International Paper’s Current Report on Form 8-K filed on May 9, 2008 to update the historical financial statements included in the Company’s Form 10-K for the year ended December 31, 2007 to reflect changes to the Company’s allocation of corporate overhead expenses as described below (collectively the “2007 10-K”), both of which have previously been filed with the Securities and Exchange Commission.

Financial information by industry segment is presented on page 22. Effective January 1, 2008, the Company changed its method of allocating corporate 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 operating 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 three months and nine months ended September 30, 2007 by $132 million and $381 million, respectively, with no effect on reported net income.

NOTE 2 - EARNINGS PER COMMON SHARE Basic earnings per common share from continuing operations are computed by dividing earnings from continuing operations by the weighted average number of common shares outstanding. Diluted earnings per common share from continuing operations are computed assuming that all potentially dilutive securities, including “in-the-money” stock options, are converted into common shares at the beginning of each period. A reconciliation of the amounts included in the computation of earnings per common share from continuing operations, and diluted earnings per common share from continuing operations is as follows:

5

Three Months Ended


September 30,In millions, except per share amounts 2008 2007 2008 2007

Earnings from continuing operations $ 149 $ 220 $ 527 $ 877Effect of dilutive securities — — — —

Earnings from continuing operations – assuming dilution $ 149 $ 220 $ 527 $ 877

Average common shares outstanding 421.2 422.3 421.0 431.8Effect of dilutive securities

Restricted stock performance share plan 2.2 2.9 3.2 3.4Stock options (a) — 0.4 — 0.5

Average common shares outstanding – assuming dilution 423.4 425.6 424.2 435.7

Earnings per common share from continuing operations $ 0.35 $ 0.52 $ 1.25 $ 2.03

Diluted earnings per common share from continuing operations $ 0.35 $ 0.52 $ 1.24 $ 2.01

NOTE 3 - RESTRUCTURING AND OTHER CHARGES 2008: During the third quarter of 2008, restructuring and other charges totaling $97 million before taxes ($60 million after taxes) were recorded, including $35 million before taxes ($22 million after taxes) for adjustments to legal reserves (see Note 9), $53 million before taxes ($33 million after taxes) to write-off supply chain initiative development costs for U.S. container operations that will not be implemented due to the CBPR acquisition (see Note 4), $8 million before taxes ($5 million after taxes) for costs associated with the reorganization of the Company’s Shorewood operations in Canada, and $1 million before taxes ($0 million after taxes) for severance costs associated with the Company’s Transformation Plan.

During the second quarter of 2008, restructuring and other charges totaling $13 million before taxes ($9 million after taxes) were recorded related to the reorganization of the Company’s Shorewood operations in Canada, including $10 million before taxes ($7 million after taxes) of severance charges and $3 million before taxes ($2 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.

During the first quarter of 2008, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded, including a $40 million charge before taxes ($25 million after taxes) for adjustments of legal reserves (see Note 9), a $5 million charge before taxes ($3 million after taxes) related to the reorganization of the Company’s Shorewood operations in Canada and a $3 million credit before taxes ($2 million after taxes) for adjustments to previously recorded reserves associated with the Company’s organizational restructuring programs.

2007: During the third quarter of 2007, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded. These charges consisted of a pre-tax charge of $27 million ($17 million after taxes) of accelerated depreciation charges for the Terre Haute mill, a pre-tax charge of $10 million ($6 million after taxes) for closure reserves associated with the Terre Haute mill, a pre-tax charge of $3 million ($2 million after taxes) related to the restructuring of the Company’s Brazil operations, and a pre-tax charge of $2 million ($1 million after taxes) for organizational restructuring programs associated with the Company’s Transformation Plan. Additionally, a $3 million increase to the income tax provision was recorded related to the settlement of a prior year tax audit.

During the second quarter of 2007, restructuring and other charges totaling $26 million before taxes ($16 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $17 million before taxes ($11 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.

During the first quarter of 2007, restructuring and other charges totaling $18 million before taxes ($11 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $12 million before taxes ($7 million after taxes) of accelerated depreciation charges for long-lived assets being removed from service. Additionally, a $2 million pre-tax credit ($1 million after taxes) was recorded in Interest expense, net, for interest received from the Canadian government on refunds of prior-year softwood lumber duties.

6

(a) Options to purchase 25.7 million shares and 19.2 million shares for the three months ended September 30, 2008 and 2007, respectively, and options to purchase 25.7 million shares and 18.0 million shares for the nine months ended September 30, 2008 and 2007, 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 period.

NOTE 4 – ACQUISITIONS, EXCHANGES AND JOINT VENTURES

Acquisitions: 2008: On August 4, 2008, International Paper completed the acquisition of the assets of Weyerhaeuser Company’s Containerboard, Packaging and Recycling business (CBPR) for $6 billion in cash, subject to post-closing adjustments. In June 2008, the Company had issued $3 billion of unsecured senior notes in anticipation of the CBPR business acquisition. The remainder of the purchase price was 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.

The following table summarizes the preliminary allocation of the purchase price, plus direct acquisition costs, to the fair value of assets and liabilities acquired. The final allocation is expected to be completed in the first half of 2009.

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

In connection with the preliminary purchase price allocation, inventories were written up by approximately $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.

7

In millions

Cash and temporary investments $ 2Accounts and notes receivable, net 662Inventory 611Other current assets 15Plants, properties and equipment, net 4,920Goodwill 279Other intangible assets 48Deferred charges and other assets 61

Total assets acquired 6,598

Accounts payable and accrued liabilities 471Deferred income taxes 8Other liabilities 50

Total liabilities assumed 529

Net assets acquired $6,069

In millions Estimated Fair Value

AverageRemaining Useful Life

(at acquisition date)

Asset Class: Trade names $ 5 4 - 12 yearsPatented technology 9 4 - 12 yearsProprietary software 16 4 - 5 yearsPower agreements 16 1 - 7 yearsWater rights 2 Indefinite

Total $ 48

Additionally, Selling and administrative expenses for the 2008 third quarter included a $19 million charge before taxes ($12 million after taxes) for integration costs associated with the acquisition.

The following unaudited pro forma information for the three months and nine months ended September 30, 2008 and 2007 presents the results of operations of International Paper as if the CBPR acquisition, and the 2007 acquisition and exchange discussed below, had occurred on January 1, 2007. This pro forma information does not purport to represent International Paper’s actual results of operations if the transaction described above would have occurred on January 1, 2007, nor is it necessarily indicative of future results.

The CBPR financial position and results of operations have been included in International Paper’s consolidated financial statements since its acquisition date on August 4, 2008.

2007: On August 24, 2007, International Paper completed the acquisition of Central Lewmar LLC, a privately held paper and packaging distributor in the United States, for $189 million. During the first quarter of 2008, the Company finalized the allocation of the purchase price to the fair value of the assets and liabilities acquired as follows:

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

8

Three Months Ended


September 30,In millions, except per share amounts 2008 2007 2008 2007

Net sales $ 7,298 $ 6,937 $21,405 $20,385Earnings from continuing operations 138 189 411 752Net earnings 138 186 393 716Earnings from continuing operations per common share 0.33 0.44 0.97 1.73Net earnings per common share 0.33 0.44 0.93 1.64

In millions

Accounts receivable $116Inventory 31Other current assets 7Plants, properties and equipment, net 2Goodwill 81Deferred tax asset 2Other intangible assets 33

Total assets acquired 272

Other current liabilities 79Other liabilities 4


Net assets acquired $189




Asset Class:

Customer lists $ 18 13 yearsNon-compete covenants 7 5 yearsTrade names 8 15 years

Total $ 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.

Exchanges: On February 1, 2007, the Company completed the non-cash exchange of certain pulp and paper assets in Brazil with Votorantim Celulose e Papel S.A. (VCP) that had been announced in the fourth quarter of 2006. The Company exchanged its in-progress pulp mill project and certain forestland operations including approximately 100,000 hectares of surrounding forestlands in Tres Lagoas, Brazil, for VCP’s Luiz Antonio uncoated paper and pulp mill and approximately 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 opportunities 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 ($164 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.

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

Identifiable intangible assets included the following:

The following unaudited pro forma information for the three months and nine months ended September 30, 2007 presents the results of operations of International Paper as if the Central Lewmar acquisition and the Luiz Antonio asset exchange had occurred on January 1, 2007. This pro forma information does not purport to represent International Paper’s actual results of operations if the transactions described above would have occurred on January 1, 2007, nor is it necessarily indicative of future results.

9

In millions

Accounts receivable $ 55Inventory 19Other current assets 40Plants, properties and equipment, net 582Forestlands 434Goodwill 521Other intangible assets 154Other long-term assets 9

Total assets acquired 1,814

Other current liabilities 18Deferred income taxes 270Other liabilities 6


Net assets acquired $1,520




Asset Class:

Non-competition agreement $ 10 2 yearsCustomer lists 144 10 - 20 years

Total $ 154

Joint Ventures: On October 5, 2007, International Paper and Ilim Holding S.A. announced the completion of the formation of a 50:50 joint venture to operate in Russia as Ilim Group. To form the joint venture, International 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. The Company’s investment in Ilim totaled $765 million at September 30, 2008, which is approximately $350 million higher than the Company’s share of the underlying net assets of Ilim. Based on current estimates, approximately $250 million 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 $100 million of the difference represents estimated goodwill.

International Paper is accounting for its investment in Ilim, a separate reportable industry segment, using the equity method of accounting. Due to the complex organizational structure of Ilim’s operations, and the extended time required for Ilim to prepare consolidated financial information in accordance with accounting principles generally accepted in the United States, the Company reports its share of Ilim’s results of operations on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the three months and nine months ended September 30, 2008 includes the Company’s share of Ilim’s operating results for the three-month and nine-month periods ended June 30, 2008 under the caption Equity earnings, net of taxes.

NOTE 5 - BUSINESSES HELD FOR SALE AND DIVESTITURES Discontinued Operations: 2008: 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 (see Note 9), and a $2 million charge before taxes ($1 million after taxes) for operating losses related to certain wood products facilities.

2007: During the third quarter of 2007, the Company completed 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.

10

In millions, except per share amounts Three Months EndedSeptember 30, 2007

Nine Months EndedSeptember 30, 2007

Net sales $ 5,669 $ 16,627Earnings from continuing operations 225 886Net earnings 222 851Earnings from continuing operations per common share 0.53 2.03Net earnings per common share 0.52 1.95

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 completion 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.

Forestlands: 2008: During both the second and third quarters of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan sale of forestlands.

2007: 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 connection with the 2006 Transformation Plan forestlands sales.

Other Divestitures and Impairments: 2008: During the third quarter of 2008, based on a current strategic plan update of projected future operating results of the Company’s Inverurie 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 Company’s Printing Papers industry segment to 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 businesses in the accompanying consolidated statement of operations.

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.

2007: 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, including a $5 million tax charge in Brazil) was recorded to adjust previously estimated gains/losses of businesses 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 transaction, International Paper acquired a minority interest of approximately 10% in the resulting new entity. Since the interest acquired represents significant continuing involvement in the operations of the business under accounting principles generally accepted in the United States, the operating results for Arizona Chemical have been included in continuing operations in the accompanying consolidated statement of operations through the date of sale.

11

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.

These gains are included, along with the gain on the exchange for the Luiz Antonio mill in Brazil (see Note 4), in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.

NOTE 6 - SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Temporary investments with an original maturity of three months or less are treated as cash equivalents and are stated at cost. Temporary investments totaled $522 million and $578 million at September 30, 2008 and December 31, 2007, respectively.

Inventories by major category were:

Accumulated depreciation was $15.5 billion at September 30, 2008 and $14.9 billion at December 31, 2007. The allowance for doubtful accounts was $122 million at September 30, 2008 and $95 million at December 31, 2007.

The following tables present changes in goodwill balances as allocated to each business segment for the nine-month periods ended September 30, 2008 and 2007:

12

In millions September 30,

2008 December 31,

2007

Raw materials $ 447 $ 320Finished pulp, paper and packaging 1,831 1,413Operating supplies 438 308Other 50 30

Total $ 2,766 $ 2,071

In millions

BalanceDecember 31,

2007

Reclassificationsand

Other (a) Additions/

(Reductions)

BalanceSeptember 30,

2008

Printing Papers $ 2,043 $ (43) $ (21) (b) $ 1,979Industrial Packaging 683 (2) 281 (c) 962Consumer Packaging 530 6 5 (d) 541Distribution 394 — 1 (e) 395

Total $ 3,650 $ (39) $ 266 $ 3,877

(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.

(c) Reflects $279 million related to the CBPR acquisition and $2 million in purchase accounting adjustments related to the Compagnie Marocaine des Cartons et des Papiers (CMCP) purchase.

(d) Reflects additional goodwill related to joint ventures in China.

(e) Reflects an increase from the final purchase adjustments related to the Central Lewmar acquisition in August 2007.

In millions

BalanceDecember 31,

2006

Reclassificationsand

Other (a) Additions/

(Reductions)

BalanceSeptember 30,

2007

Printing Papers $ 1,441 $ 81 $ 531 (b) $ 2,053Industrial Packaging 670 3 (6) (c) 667Consumer Packaging 510 4 14 (d) 528Distribution 308 — 96 (e) 404

Total $ 2,929 $ 88 $ 635 $ 3,652

There was no material activity related to asset retirement obligations during either the first nine months of 2008 or 2007.

Interest payments made during the nine-month periods ended September 30, 2008 and 2007 were $321 million and $353 million, respectively. Capitalized interest costs were $19 million and $25 million for the nine months ended September 30, 2008 and 2007, respectively. Total interest expense was $374 million for the first nine months of 2008 and $342 million for the first nine months of 2007. Interest income was $68 million and $124 million for the nine months ended September 30, 2008 and 2007, respectively. Interest expense and interest income in 2008 and 2007 exclude approximately $179 million and $256 million, respectively, related to investments in and borrowings from variable interest entities for which the Company has a legal right of offset. Distributions under preferred securities paid by Southeast Timber, Inc., a consolidated subsidiary of International Paper, were $8 million and $10 million during the first nine months of 2008 and 2007, respectively. The expense related to these preferred securities was included in Minority interest expense in the consolidated statement of operations. Income tax payments of $104 million and $243 million were made during the first nine months of 2008 and 2007, respectively.

Equity earnings, net of taxes includes the Company’s share of earnings from its investment in Ilim Holding S.A. ($5 million and $54 million for the three and nine months ended September 30, 2008, respectively) and certain other smaller investments.

The components of the Company’s postretirement benefit cost were as follows:

Fair Value Measurements In accordance with the provisions of FASB Staff Position FAS 157-2 (see Note 7), 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 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 following table provides a summary of the inputs used to develop these estimated fair values under the hierarchy defined in SFAS No. 157:

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(a) Represents the effects of foreign currency translations and reclassifications.

(b) Includes the acquisition of the Luiz Antonio mill in February 2007.

(c) Reflects a $3 million decrease from final purchase adjustments related to the Box USA acquisition, and a $3 million decrease from the adjustments upon the purchase of the remaining 33.5% interest in Compagnie Marocaine des Cartons et des Papiers (CMCP) in August 2007.

(d) Reflects additional goodwill related to joint ventures in China.

(e) Reflects the acquisition of Central Lewmar in August 2007.

Three Months Ended


September 30, In millions 2008 2007 2008 2007

Service cost $ 1 $ — $ 2 $ 1Interest cost 8 9 25 26Actuarial loss 7 6 21 17Amortization of prior service cost (9) (11) (27) (33)

Net postretirement benefit cost (a) $ 7 $ 4 $ 21 $ 11

(a) Excludes credits of $1 million and $11 million for the three-month and nine-month periods ended September 30, 2007, respectively, for curtailments and termination benefits related to Wood Products, Arizona Chemical, Beverage Packaging and the Transformation Plan initiative recorded in Restructuring and other charges and Discontinued operations.

NOTE 7 – RECENT ACCOUNTING DEVELOPMENTS Accounting for Convertible Debt Securities: In May 2008, the Financial Accounting Standards Board (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 borrowing rate when interest cost is recognized in subsequent periods. This FSP is effective for financial statements issued in fiscal years (and interim periods) 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 currently has no convertible debt instruments that may be settled in cash upon conversion.

Intangible Assets: In April 2008, the FASB 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 (calendar year 2009). The Company is currently evaluating the provisions of this FSP.

14

Fair Value Measurements at September 30, 2008 Using

In millions Total

Quoted Prices inActive Markets for

Identical Assets(Level 1)

Significant OtherObservable

Inputs (Level 2)

SignificantUnobservable

Inputs (Level 3)

Assets:

Interest rate swaps (a) $ 60 $ — $ 60 $ — Commodity forward contracts (b) 4 — 4 — Foreign currency forward contracts (c) 85 — 85 —

Total $ 149 $ — $ 149 $ —

Liabilities:

Interest rate swaps (d) $ 8 $ — $ 8 $ — Commodity forward contracts (e) 19 19

Foreign currency forward contracts (f) 43 — 43 — Embedded derivatives (g) 4 — 4 —

Total $ 74 $ — $ 74 $ —

(a) Includes $3 million recorded in Other current assets and $57 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet.

(b) Includes $1 million recorded in Other current assets and $3 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet.

(c) Includes $72 million recorded in Other current assets and $13 million recorded in Deferred charges and other assets in the accompanying consolidated balance sheet.

(d) Includes $8 million recorded in Other liabilities in the accompanying consolidated balance sheet.

(e) Includes $11 million recorded in Other accrued liabilities and $8 million recorded in Other liabilities in the accompanying consolidated balance sheet.

(f) Includes $33 million recorded in Other accrued liabilities and $10 million recorded in Other liabilities in the accompanying consolidated balance sheet.

(g) Includes $4 million recorded in Other liabilities in the accompanying consolidated balance sheet.

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 Statement 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 features in derivative agreements. Statement No. 161 is effective for fiscal years (and interim periods) beginning after November 15, 2008 (calendar year 2009). The Company is currently evaluating the provisions of this statement.

Business Combinations: In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” Statement No. 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: In 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 consolidated income statement of the amounts attributed 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 disclosure requirements applied retrospectively to comparative financial statements. The Company is currently evaluating the provisions of this statement.

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 disclosures about the use of fair value to measure assets and liabilities. It also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. 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 effective January 1, 2008 (see Note 6). 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.

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NOTE 8 - INCOME TAXES International Paper adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), on January 1, 2007. The adoption of this standard resulted in a charge to the beginning balance of retained earnings of $94 million at the date of adoption. Total unrecognized tax benefits at the date of adoption including this cumulative effect charge were $919 million. At December 31, 2007, unrecognized tax benefits totaled $794 million.

During the third quarter of 2008, due to current period transactions, unrecognized tax benefits increased by $2 million to $515 million and accrued estimated interest and tax penalties increased by $3 million to $77 million. The Company currently estimates that, as a result of ongoing discussions, pending tax settlements and expirations of statutes of limitations, the amount of unrecognized tax benefits could be reduced by approximately $240 million during the next 12 months.

Also in the 2008 third quarter, a $29 million charge was recorded for estimated U.S. income taxes on a gain recorded by the Company’s Ilim Holding S.A. joint venture relating to the sale of a Russian subsidiary.

NOTE 9 - COMMITMENTS AND CONTINGENCIES 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. Additionally, the Company also has property damage and business interruption insurance policies that are expected to be adequate to cover any significant losses resulting from this event. Accordingly, the Company believes that neither the settlement of these lawsuits nor the resolution of the property damage and business interruption claims will have a material adverse effect on its consolidated financial statements.

Exterior Siding and Roofing Litigation: International Paper has established reserves relating to the settlement, during 1998 and 1999, of three nationwide class action lawsuits against the Company and Masonite Corp., a former wholly-owned subsidiary of the Company. Those settlements relate to (1) exterior hardboard siding installed during the 1980’s (the 1980’s Hardboard Claims) and during the 1990’s (the 1990’s Hardboard Claims, and together with the 1980’s Hardboard Claims, the Hardboard Claims); (2) Omniwood siding installed during the 1990’s (the Omniwood Claims); and (3) Woodruf roofing installed during the 1980’s and 1990’s (the Woodruf Claims). Each of these settlements is discussed in detail in Note 10, Commitments and Contingent Liabilities, to the financial statements included in International Paper’s 2007 10-K. All Hardboard Claims were required to be made by January 15, 2008, while all Omniwood and Woodruf Claims must be made by January 6, 2009.

Claims Data and Reserve Analysis Claims activity for the Hardboard, Omniwood and Woodruf claims during 2007 was generally in line with updated projections made in the fourth quarter of 2006, although in connection with the January 15, 2008 filing deadline for Hardboard siding claims, the Company received a large number of claims at the end of 2007 and the beginning of 2008. 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, 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 million increase in the reserve balance in the 2008 third quarter to increase the reserve to management’s best

16

estimate of the amount required for future payments. This increase, together with a $7 million reduction of a related liability, is included in Restructuring and other charges in the accompanying consolidated statement of operations for the three and nine months ended September 30, 2008.

The following table presents the claims activity of the Hardboard Claims for the nine-month period ended September 30, 2008:

The average settlement cost per claim for the nine-month period ended September 30, 2008, for the Hardboard settlement was $2,261.

The following table presents the claims activity of the Omniwood Claims and the Woodruf Claims for the nine-month period ended September 30, 2008:

The average settlement costs per claim for the nine-month period ended September 30, 2008, for the Omniwood and Woodruf settlements were $5,294 and $4,138, respectively.

The following table presents an analysis of the net reserve activity for the nine-month period ended September 30, 2008:

Other Legal Matters: International Paper is involved in various other inquiries, administrative proceedings and litigation relating to contracts, sales of property, intellectual property, environmental permits, taxes, personal injury, 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.

17

In thousands Single Family

Multi-Family Total

December 31, 2007 29.8 2.2 32.0No. of Claims Filed 8.7 1.5 10.2No. of Claims Paid (14.1) (1.0) (15.1)No. of Claims Dismissed (17.9) (0.3) (18.2)

September 30, 2008 6.5 2.4 8.9

Omniwood Woodruf Total

In thousands SingleFamily

Multi-Family

Single Family

Multi- Family

Single Family

Multi-Family Total

December 31, 2007 3.1 0.6 1.0 0.3 4.1 0.9 5.0No. of Claims Filed 4.6 0.1 0.9 — 5.5 0.1 5.6No. of Claims Paid (3.4) (0.1) (0.3) — (3.7) (0.1) (3.8)No. of Claims Dismissed (0.8) (0.1) (0.4) — (1.2) (0.1) (1.3)

September 30, 2008 3.5 0.5 1.2 0.3 4.7 0.8 5.5

In millions Hardboard Omniwood Woodruf Total

Balance, December 31, 2007 $ 20 $ 25 $ 1 $ 46Additional Provisions 45 29 8 82Payments (49) (20) (3) (72)

Balance, September 30, 2008 $ 16 $ 34 $ 6 $ 56

NOTE 10 - DEBT 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 balance sheet and will be amortized over the term of the loan. Also in August 2008, International Paper borrowed approximately $395 million under its receivables securitization program. These 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. A $500 million bridge loan that was available to fund the acquisition was not used by the Company and was cancelled upon the closing of the acquisition.

Also in the third quarter of 2008, International Paper repaid approximately $355 million it had borrowed under its receivables securitization program. The Company also 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 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 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 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 second quarter of 2008, International Paper issued $3 billion of unsecured senior notes consisting of $1 billion of 7.4% notes due in 2014, $1.7 billion 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 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 interest 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.

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, International Paper Investments (Luxembourg) S.ar.l, a wholly-owned subsidiary of International Paper, 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 in the quarter.

At September 30, 2008 and December 31, 2007, International Paper classified $806 million and $112 million, respectively, of tenderable bonds, commercial paper and bank notes and Current maturities of long-term debt as Long-term debt. International Paper has the intent and ability to renew or convert these obligations, as evidenced by its contractually committed $1.5 billion bank credit agreement.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2008, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (negative outlook) by Standard and Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings of A-3 and P-3 by S&P and Moody’s, respectively.

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NOTE 11 - RETIREMENT PLANS

International Paper maintains pension plans that provide retirement benefits to substantially all salaried U.S. employees hired prior to July 1, 2004 and substantially all hourly and union employees regardless of hire date. These employees generally are eligible to participate in the plans upon completion of one year of service and attainment of age 21. Employees hired after June 30, 2004, who are not eligible for these pension plans, receive an additional company contribution to their individual savings plans.

The pension plans provide defined benefits based on years of credited service and either final average earnings (salaried employees), hourly job rates or specified benefit rates (hourly and union employees). A detailed discussion of these plans is presented in Note 15 to the financial statements included in International Paper’s 2007 10-K.

Net periodic pension expense for our qualified and nonqualified U.S. defined benefit plans consisted of the following:

The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional 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 has no obligation to fund its domestic qualified plan in 2008. The Company continually reassesses the amount and timing of any discretionary contributions. The nonqualified defined benefit plans are funded to the extent of benefit payments, which totaled $21 million through September 30, 2008.

NOTE 12 - STOCK-BASED COMPENSATION International Paper has a Long-Term Incentive Compensation Plan (LTICP) that includes a performance share program, a service-based restricted stock award program, an executive continuity award program that provides for tandem grants of restricted stock and stock options, and a stock option program that has been discontinued as described below. The LTICP is administered by the Management Development and Compensation Committee of the Board of Directors (the Committee). Non-employee directors are not eligible for awards under the LTICP. A detailed discussion of these plans is presented in Note 17 to the Financial Statements included in International Paper’s 2007 10-K. As of September 30, 2008, 27.4 million shares were available for grant under the LTICP.

Total stock-based compensation cost recognized in Selling and administrative expenses in the accompanying consolidated statement of operations for the nine months ended September 30, 2008 and 2007 was $83 million and $94 million, respectively. The actual tax deduction realized for stock-based compensation costs

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Three Months Ended


September 30, In millions 2008 2007 2008 2007

Service cost $ 28 $ 28 $ 76 $ 85Interest cost 135 130 404 390Expected return on plan assets (168) (158) (503) (475)Actuarial loss 30 48 90 143Amortization of prior service cost 7 5 22 15

Net periodic pension expense (a) $ 32 $ 53 $ 89 $ 158

(a) Excludes a one-time charge of $4 million for the nine-month period ended September 30, 2007 for curtailments and special termination benefits related to the Transformation Plan recorded in Restructuring and other charges.

related to non-qualified stock options was $19,000 and $15 million for the nine-month periods ended September 30, 2008 and 2007, respectively. The actual tax deduction realized for stock-based compensation costs related to restricted and performance shares was $130 million and $60 million for the nine-month periods ended September 30, 2008 and 2007, respectively. At September 30, 2008, $97 million, net of estimated forfeitures, of compensation cost 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 one year.

Performance-Based Restricted Share Program: Under the Performance Share Program (PSP), contingent awards of International Paper common stock are granted by the Committee to approximately 900 employees. Awards are earned based on the achievement of defined performance rankings of return on investment (ROI) and total shareholder return (TSR) compared to peer groups. Awards are weighted 75% for ROI and 25% for TSR for all participants except for officers for whom 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 simulation as the TSR component contains a market condition. The Monte Carlo simulation estimates the fair value of the TSR component based on the expected term of the award, the risk-free rate, expected dividends, and the expected volatility for the Company 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 certain members of senior management are liability awards, which are required to be remeasured at fair value at each balance sheet date. The valuation of these PSP liability awards is computed based on the same methodology as other PSP awards.

The following table sets forth the assumptions used to determine compensation cost for the market condition component of the PSP consistent with the requirements of SFAS No. 123(R):

The following summarizes the activity for PSP for the nine months ended September 30, 2008:

Stock Option Program: 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.

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Three Months Ended September 30, 2008

Nine Months EndedSeptember 30, 2008

Expected volatility 22.083% - 40.389% 19.567% - 40.389%Risk-free interest rate 1.759% - 3.497% 1.199% - 3.497%

Nonvested

Shares

Weighted AverageGrant Date Fair Value

Outstanding at December 31, 2007 6,217,012 $ 35.67Granted 3,984,146 36.26Shares Issued (a) (3,585,430) 41.65Forfeited (262,354) 34.64

Outstanding at September 30, 2008 6,353,374 $ 32.71

(a) Includes 171,458 shares held for payout at the end of the performance period.

A summary of option activity under the plan as of September 30, 2008 is presented below:

All options were fully vested and exercisable as of September 30, 2008.

Executive Continuity and Restricted Stock Award Program: The following summarizes the activity of the Executive Continuity and Restricted Stock Award Program for the nine months ended September 30, 2008:

21

Options

WeightedAverage Exercise

Price

Weighted Average

Remaining Life(years)

AggregateIntrinsic

Value (thousands)

Outstanding at December 31, 2007 28,013,735 $ 39.81

Granted — —

Exercised (14,800) 31.55

Forfeited (92,648) 44.40

Expired (2,217,875) 41.92

Outstanding at September 30, 2008 25,688,412 $ 39.62 3.90 $ —

Nonvested

Shares

Weighted AverageGrant Date Fair Value

Outstanding at December 31, 2007 122,625 $ 37.18Granted 18,000 28.34Shares Issued (28,625) 38.80Forfeited (3,000) 33.70

Outstanding at September 30, 2008 109,000 $ 35.39

INTERNATIONAL PAPER COMPANY Financial Information by Industry Segment

(Unaudited) (In millions)

Sales by Industry Segment

Operating Profit by Industry Segment

22

Three Months Ended


September 30, 2008 2007 2008 2007

Printing Papers $ 1,800 $ 1,660 $ 5,305 $ 4,810Industrial Packaging 2,320 1,305 5,235 3,855Consumer Packaging 830 775 2,395 2,235Distribution 2,075 1,880 6,030 5,275 Forest Products 55 120 135 295Other Businesses (6) — — — 135Corporate and Inter-segment Sales (272) (199) (817) (556)

Net Sales $ 6,808 $ 5,541 $18,283 $16,049

Three Months Ended


September 30, 2008 2007 (2) 2008 2007 (2)

Printing Papers $ 103(3) $ 241 $ 514(3) $ 596Industrial Packaging 95(4) 84 279(4) 265 Consumer Packaging (2)(5) 27 20 (5) 97Distribution 35 30 77 80Forest Products 305 96 371 287Other Businesses (6) — — — 6

Operating Profit (1) 536 478 1,261 1,331Interest expense, net (144) (77) (306) (218)Minority interest/equity earnings adjustment (7) (1) 4 11 15Corporate items, net (40) (56) (82) (150)Restructuring and other charges (89) (42) (126) (86)Sale of forestlands 3 9 6 9Net (gains) losses on sales and impairments of businesses — (1) 1 314

Earnings from continuing operations before income taxes, equity earnings and minority interest $ 265 $ 315 $ 765 $1,215

Equity earnings, net of taxes – Ilim Holding S.A. (1) $ 5 $ — $ 54 $ —

(1) In addition to the operating profits shown above, International Paper recorded $5 million and $54 million of equity earnings, net of taxes, for the three months and nine months ended September 30, 2008, respectively, related to its equity investment in Ilim Holding S.A., a separate reportable industry segment.

(2) Prior-year information has been revised to reflect a change in the allocation of corporate overhead to the Company’s industry segments (see Note 1 to the consolidated financial statements).

(3) Includes a charge of $107 million to write down the assets of the Inverurie, Scotland mill to estimated fair value.

(4) Includes a charge of $39 million relating to the write-up of inventory to fair value in connection with the CBPR acquisition, and a charge of $19 million for CBPR integration costs.

(5) Includes charges of $8 million and $26 million before taxes, for the three months and nine months ended September 30, 2008, respectively, related to the reorganization of the Company’s Shorewood operation in Canada.

(6) Includes Arizona Chemical and certain smaller businesses.

(7) Operating profits for industry segments include each segment’s percentage share of the profits of subsidiaries included in that segment that are less than wholly owned. The pre-tax minority interest / equity earnings for these subsidiaries are included here to present consolidated earnings before income taxes, minority interest and equity earnings.

INTERNATIONAL PAPER COMPANY Sales Volumes By Product (1) (2)

(Unaudited)

Sales Volumes represent supplemental information that is not included in Part I, Item 1. Financial Information.

23

Three Months Ended


September 30,In thousands of short tons 2008 2007 2008 2007

Printing Papers U.S. Uncoated Papers 875 940 2,653 2,871European and Russian Uncoated Papers 355 351 1,101 1,081Brazilian Uncoated Papers 217 225 638 567Asian Uncoated Papers 6 6 21 18

Uncoated Papers 1,453 1,522 4,413 4,537

Market Pulp (3) 448 348 1,218 1,020

Industrial Packaging

Corrugated Packaging (4) 1,641 896 3,419 2,683Containerboard (4) 686 466 1,686 1,315Recycling (4) 397 — 397 — Saturated Kraft 45 42 130 124Bleached Kraft 24 19 65 53European Industrial Packaging 261 274 844 879Asia Industrial Packaging 154 116 443 329

Industrial Packaging 3,208 1,813 6,984 5,383

Consumer Packaging

U.S. Coated Paperboard 403 413 1,202 1,200European Coated Paperboard 81 79 235 238Asia Coated Paperboard 138 127 386 371Other Consumer Packaging 48 42 136 125

Consumer Packaging 670 661 1,959 1,934

(1) Sales volumes include third party and inter-segment sales and exclude sales of equity investees.

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

(3) Includes internal sales to mills.

(4) Includes CBPR volumes from date of acquisition.

EXECUTIVE SUMMARY Despite difficult market conditions, International Paper delivered solid operating results in the 2008 third quarter. The Company achieved improvements in average price realizations for most major products; however this favorable effect was offset by higher input costs for wood, energy and chemicals and higher freight costs. Results also benefited from reduced operating costs, contributions from our global operations and the addition of the containerboard, packaging and recycling business acquired on August 4, 2008 from Weyerhaeuser Company. Finally, cash provided by operations increased significantly to nearly $950 million, well above the $250 million used for capital expenditures during the quarter.

Looking ahead to the 2008 fourth quarter, the recent decline in economic conditions, weakness in global financial markets, and global currency fluctuations have created difficult fourth-quarter market conditions. Average price realizations should improve for uncoated freesheet, containerboard, corrugated boxes and coated paperboard products in North America as we continue to realize announced price increases. Price realizations in Brazil for uncoated freesheet should also move higher, but prices in Europe are expected to be about flat. Global market prices for pulp, however, are expected to continue to decline. Demand for paper and packaging products in North America, and for market pulp globally, weakened sharply toward the end of the third quarter, and are expected to remain weak during the fourth quarter. Printing papers demand is expected to remain stable in Brazil. While prices for natural gas, electricity and fuel oil have declined, prices for other input costs are expected to remain high or to increase, with no significant decrease in total input costs expected in the fourth quarter.

In summary, we expect that operating profits for the fourth quarter will be less than third-quarter earnings, with the amount of the decline dependent upon global economic activity and its impact on demand for our major products as we continue to manage our production to meet our customers’ needs and to maximize cash flow.

RESULTS OF OPERATIONS For the third quarter of 2008, International Paper reported net sales of $6.8 billion, compared with $5.5 billion in the third quarter of 2007 and $5.8 billion in the second quarter of 2008.

Net earnings totaled $149 million, or $0.35 per share, in the 2008 third quarter. This compared with earnings of $217 million, or $0.51 per share, in the third quarter of 2007 and earnings of $227 million, or $0.54 per share, in the second quarter of 2008.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Earnings from continuing operations were $149 million in the third quarter of 2008 compared with $220 million in the third quarter of 2007 and $228 million in the 2008 second quarter. Compared with the third quarter of 2007, earnings in the 2008 third quarter benefited from higher average price realizations ($118 million), higher sales volumes ($52 million), including sales from the former Weyerhaeuser Company CBPR business acquired in the 2008 third quarter, lower operating costs and a more favorable mix of products sold ($72 million), higher earnings from land and mineral rights sales ($149 million), and slightly lower corporate items and other costs ($3 million). These benefits were offset by higher mill outage costs ($8 million), significantly higher raw material and freight costs ($204 million), a higher income tax provision ($20 million) reflecting a higher estimated effective tax rate in 2008, and higher net interest expense ($48 million). Costs associated with the extended shutdown of the Vicksburg mill caused by a recovery boiler explosion during the second quarter also reduced earnings ($6 million). The 2008 third-quarter results included equity earnings, net of taxes, relating to International Paper’s investment in Ilim Holding S.A. ($5 million). Additionally, net special items were a loss of $207 million in the 2008 third quarter versus a loss of $23 million in the third quarter of 2007.

Compared with the second quarter of 2008, earnings from continuing operations benefited from higher average price realizations ($41 million), higher sales volumes ($45 million), including sales from the CBPR business acquired in the 2008 third quarter, higher earnings from land and mineral sales ($176 million), and lower mill outage costs ($16 million). These benefits were partially offset by higher manufacturing costs ($7 million), higher raw material and freight costs ($67 million), and increased corporate items and other costs ($14 million). Net interest expense increased ($44 million). Earnings were positively impacted by lower costs associated with the extended shutdown of the Vicksburg mill ($2 million). Equity earnings, net of taxes for Ilim Holding, S.A. decreased by $27 million versus the second quarter. Net special items were a loss of $207 million in the 2008 third quarter versus a loss of $7 million in the second quarter of 2008.

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To measure the performance of the Company’s business segments from period to period without variations caused by special or unusual items, International Paper’s management focuses on business segment operating profit. This is defined as earnings before taxes, and equity earnings and minority interest net of taxes, excluding interest expense, corporate charges and special items that include restructuring charges, early debt extinguishment costs, legal reserves, insurance recoveries, gains (losses) on sales and impairments of businesses, and the reversal of reserves no longer required.

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

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Three Months Ended September 30, June 30,

2008 In millions 2008 2007

Net Earnings $149 $217 $ 227Deduct – Discontinued operations:

Losses from operations — 3 — Loss on sales or impairments — — 1

Earnings From Continuing Operations 149 220 228Add back (deduct):

Income tax provision 118 89 97Equity earnings, net of taxes (5) — (30)Minority interest expense, net of taxes 3 6 7

Earnings From Continuing Operations Before Income Taxes, Equity Earnings and Minority Interest 265 315 302 Interest expense, net 144 77 81Minority interest / equity earnings included in operations 1 (4) (8)Corporate items 40 56 21

Special items:

Restructuring and other charges 89 42 — Sale of forestlands (3) (9) (3)Net losses on sales and impairments of businesses — 1 —

$536 $478 $ 393

Industry Segment Operating Profit

Printing Papers $103 $241 $ 226Industrial Packaging 95 84 87Consumer Packaging (2) 27 13Distribution 35 30 26Forest Products 305 96 41

Total Industry Segment Operating Profit (1) $536 $478 $ 393

(1) In addition to operating profit shown above, International Paper recorded $5 million and $32 million of equity earnings, net of taxes, for the three months ended September 30, 2008 and June 30, 2008, respectively, related to its investment in Ilim Holding S.A., a separate reportable industry segment.

Industry Segment Operating Profit

Industry segment operating profits of $536 million in the third quarter were higher than both the $478 million in the 2007 third quarter and the $393 million in the 2008 second quarter. Compared with the third quarter of 2007, earnings in the current quarter benefited from significantly higher average price realizations ($166 million), higher sales volumes ($73 million), including sales from the CBPR business acquired in the 2008 third quarter, lower operating costs and a more favorable mix of products sold ($101 million), and higher gains from land and mineral sales ($209 million). These benefits were partially offset by higher mill outage costs ($11 million), significantly higher raw material and freight costs ($286 million), and higher corporate items and other costs ($12 million). Costs associated with the extended shutdown of the Vicksburg mill caused by a recovery boiler explosion during the second quarter also reduced earnings ($9 million). Special items consisted of a loss of $173 million in the 2008 third quarter.

Compared with the 2008 second quarter, operating profits benefited from higher average price realizations ($60 million), higher sales volumes ($67 million), including sales from the CBPR business acquired in the 2008 third quarter, significantly lower mill outage costs ($23 million), and higher gains from land and mineral sales ($261 million). These benefits were offset by higher manufacturing costs ($11 million) and higher raw material and freight costs ($99 million). Corporate items and other costs increased ($1 million). Profits were also positively impacted by lower costs associated with the extended shutdown of the Vicksburg mill ($3 million). Special items consisted of a loss of $173 million in the 2008 third quarter versus a loss of $13 million in the second quarter of 2008.

During the 2008 third quarter, International Paper took approximately 315,000 tons of downtime, including 35,000 tons that were market-related, compared with approximately 105,000 tons of downtime in the third quarter of 2007, which included 7,000 tons of market-related downtime. During the 2008 second quarter, International Paper took approximately 270,000 tons of downtime, including 2,000 tons that were market-related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.

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Discontinued Operations 2008: 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 of the purchase price received by the Company for the sale of its Beverage Packaging business (see Note 9), and a $2 million charge before taxes ($1 million after taxes) for operating losses related to certain wood products facilities.

2007: During the third quarter of 2007, the Company completed 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 completion 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.

Income Taxes The income tax provision was $118 million for the 2008 third quarter. Excluding a $52 million benefit relating to the tax effects of special items, the effective income tax rate for continuing operations was 32.5% for the quarter.

In the 2008 second quarter the income tax provision was $97 million. Excluding a $3 million benefit relating to the tax effects of special items, the effective tax rate for continuing operations was 32.5% for the quarter.

The income tax provision totaled $89 million in the 2007 third quarter. Excluding an $11 million benefit related to the tax effects of special items, the effective income tax rate for continuing operations before special items was 29%.

Interest Expense and Corporate Items Net interest expense for the third quarter of 2008 was $144 million compared with $81 million for the second quarter of 2008 and $77 million for the 2007 third quarter, reflecting the issuance of $6 billion of debt, mainly in connection with the acquisition of the CBPR business.

Corporate items, net, were $40 million in the third quarter of 2008 compared with $21 million in the second quarter of 2008 and $56 million in the third quarter of 2007. Compared with the prior quarter, the higher costs reflect a $10 million settlement of a multi-employer pension fund liability and an $11 million gain in the second quarter resulting from the sale of the former Natchez, MS mill site. The decrease compared with the comparable prior-year quarter primarily reflects lower pension costs.

Overhead charges allocated to industry segments in the third quarter of 2008 were $28 million higher than in the second quarter of 2008 reflecting higher incentive compensation and inventory-related costs. Overhead charges allocated to industry segments in the third quarter of 2008 were $28 million lower than in the 2007 third quarter, primarily due to lower benefits-related costs and gains on natural gas hedges.

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Special Items Restructuring and Other Charges 2008: During the third quarter of 2008, restructuring and other charges totaling $97 million before taxes ($60 million after taxes) were recorded, including $35 million before taxes ($22 million after taxes) for adjustments to legal reserves, $53 million before taxes ($33 million after taxes) to write-off supply chain initiative development costs for U.S. container operations that will not be implemented due to the CBPR acquisition, $8 million before taxes ($5 million after taxes) for costs associated with the reorganization of the Company’s Shorewood operations in Canada, and $1 million ($0 million after taxes) for severance costs associated with the Company’s Transformation Plan.

During the second quarter of 2008, restructuring and other charges totaling $13 million before taxes ($9 million after taxes) were recorded related to the reorganization of the Company’s Shorewood operations in Canada, including $10 million before taxes ($7 million after taxes) of severance charges and $3 million before taxes ($2 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.

During the first quarter of 2008, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded, including a $40 million charge before taxes ($25 million after taxes) for adjustments of legal reserves, a $5 million charge before taxes ($3 million after taxes) related to the reorganization of the Company’s Shorewood operations in Canada and a $3 million credit before taxes ($2 million after taxes) for adjustments to previously recorded reserves associated with the Company’s organizational restructuring programs.

2007: During the third quarter of 2007, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded. These charges consisted of a pre-tax charge of $27 million ($17 million after taxes) of accelerated depreciation charges for the Terre Haute mill, a pre-tax charge of $10 million ($6 million after taxes) for closure reserves associated with the Terre Haute mill, a pre-tax charge of $3 million ($2 million after taxes) related to the restructuring of the Company’s Brazil operations, and a pre-tax charge of $2 million ($1 million after taxes) for organizational restructuring programs associated with the Company’s Transformation Plan. Additionally, a $3 million increase to the income tax provision was recorded related to the settlement of a prior year tax audit.

During the second quarter of 2007, restructuring and other charges totaling $26 million before taxes ($16 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $17 million before taxes ($11 million after taxes) of accelerated depreciation expense for long-lived assets being removed from service.

During the first quarter of 2007, restructuring and other charges totaling $18 million before taxes ($11 million after taxes) were recorded for organizational restructuring programs associated with the Company’s Transformation Plan, including $12 million before taxes ($7 million after taxes) of accelerated depreciation charges for long-lived assets being removed from service. Additionally, a $2 million pre-tax credit ($1 million after taxes) was recorded in Interest expense, net, for interest received from the Canadian government on refunds of prior-year softwood lumber duties.

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Forestlands 2008: During both the second and third quarters of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan sale of forestlands.

2007: 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 connection with the 2006 Transformation Plan forestlands sales.

Net Losses (Gains) on Sales and Impairments of Businesses 2008: During the third quarter of 2008, based on a current strategic plan update of projected future operating results of the Company’s Inverurie 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 Company’s Printing Papers industry segment to 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 businesses in the accompanying consolidated statement of operations.

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.

2007: 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, including a $5 million tax charge in Brazil) was recorded to adjust previously estimated gains/losses of businesses 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 transaction, International Paper acquired a minority interest of approximately 10% in the resulting new entity.

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.

These gains are included, along with the $205 million pre-tax gain ($164 million after taxes) on the exchange for the Luiz Antonio mill in Brazil (see Note 4), in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.

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BUSINESS SEGMENT OPERATING RESULTS The following presents business segment discussions for the first nine months of 2008. Printing Papers

Printing Papers net sales for the third quarter of 2008 were 1% higher than the second quarter of 2008 and 8% higher than the third quarter of 2007. Operating profits in the third quarter of 2008 were 54% lower than the second quarter of 2008, and 57% lower than the third quarter of 2007. Operating profits for the third quarter of 2008 included a $107 million impairment charge to write down the assets of a mill in Europe to estimated fair value.

North American Printing Papers net sales were $905 million in the third quarter of 2008 compared with $880 million in the second quarter of 2008 and $870 million in the third quarter of 2007. Operating earnings were $131 million in the third quarter of 2008 compared with $125 million in the second quarter of 2008 and $135 million in the third quarter of 2007.

Average sales prices for uncoated freesheet were significantly higher than the second quarter, due to price increases during the period. However, this favorable pricing impact was largely offset by higher input costs for wood, energy and chemicals and higher freight costs. Sales volumes were slightly higher than in the second quarter. Mill operations improved further from a strong second quarter, resulting in favorable operating costs. In addition, planned maintenance downtime costs were about $9 million lower than in the second quarter reflecting third-quarter outages at only three mills compared with four in the prior quarter.

Compared with the third quarter of 2007, average sales price realizations were up significantly in the third quarter of 2008 reflecting the realization of price increases implemented in the second half of 2007 and in the first three quarters of 2008. However, these improvements were largely offset by significantly higher input costs for wood, energy and chemicals and increased transportation expenses. Sales volumes were lower in the third quarter of 2008 as production was kept in balance with customer demand, including the conversions of the uncoated freesheet machine at the Pensacola, Florida mill to linerboard production in the summer of 2007 and the Bastrop, Louisiana mill to 100% pulp production in June 2008. Manufacturing costs improved reflecting these conversions. Planned maintenance downtime costs were $13 million higher in the current quarter, with outages at three mills versus one in the 2007 third quarter.

Looking ahead to the fourth quarter of 2008, average sales price realizations are expected to improve slightly, reflecting the full realization of third-quarter sales price increases. Sales volumes are expected to decline as we continue to balance production with our customers’ demand, reflecting overall slowdown in the economy. Although energy costs should be lower, costs for wood and chemicals are expected to continue to rise. Planned maintenance expenses will be lower in the fourth quarter as the majority of the 2008 planned outages have been completed.

European Printing Papers net sales were $425 million in the third quarter of 2008 compared with $445 million in the second quarter of 2008 and $370 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were a loss of $78 million (including an impairment charge of $107 million to write down the assets of the Inverurie, Scotland mill to estimated fair value) compared with earnings of $39 million in the second quarter of 2008 and $34 million in the third quarter of 2007.

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2008 2007

In millions 3rd Quarter 2nd Quarter Nine Months 3rd Quarter 2nd Quarter Nine Months

Sales $ 1,800 $ 1,790 $ 5,305 $ 1,660 $ 1,610 $ 4,810Operating Profit 103 226 514 241 188 596

Average sales price realizations in the third quarter of 2008 improved for uncoated freesheet paper in Russia and the UK, but declined for pulp compared with the second quarter of 2008. Sales volumes were lower due to decreased sales of uncoated freesheet paper in Western Europe. However, the earnings impact of this decline was partially offset by improved sales volumes in Russia at higher average margins. Manufacturing costs were higher during the quarter due to the annual maintenance outage at our Kwidzyn mill in Poland. Raw material costs were higher as lower wood costs in Russia only partially offset the effect of higher energy costs in the UK. Operating earnings were also lower due to unfavorable foreign exchange effects, particularly the impact caused by the strengthening of the Polish Zloty.

Compared with the third quarter of 2007, average sales price realizations were significantly higher. Sales volumes in the third quarter of 2008 declined slightly despite higher sales of uncoated freesheet in Russia and Central Europe and higher pulp sales from the new BCTMP facility in Svetogorsk. Manufacturing costs were favorable reflecting the timing of the annual maintenance outage at the Saillat mill in France. Input costs, however, were significantly higher for energy, wood and chemicals. Operating earnings were also lower due to unfavorable foreign exchange effects.

Entering the 2008 fourth quarter, sales volumes of uncoated freesheet paper are expected to increase seasonally, but sales of BCTMP will be lower reflecting weaker pulp demand. Average sales price realizations for uncoated freesheet papers should improve slightly due to the full implementation of the UK and Russian price increases, but pulp prices are expected to be significantly lower. Manufacturing costs will be favorable as there are no annual maintenance outages scheduled for the fourth quarter, but raw material costs are expected to continue to increase due to higher energy costs.

Brazilian Printing Papers net sales were $255 million in both the third and second quarters of 2008 compared with $250 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were $58 million compared with $51 million in the second quarter of 2008 and $54 million in the third quarter of 2007.

Average sales price realizations in the third quarter of 2008 were higher than in the second quarter of 2008 reflecting higher prices in both domestic and export markets. Sales volumes increased slightly due to stronger domestic cut-size paper sales and increased pulp shipments. Margins were positively affected by an increased proportion of higher-margin domestic sales. Input costs were higher reflecting a full-quarter impact of a 38% increase in natural gas prices at the end of the second quarter and increases in pulp and chemicals costs in the third quarter. Manufacturing costs were higher due to the planned pulp mill outage at the Luiz Antonio mill. Third-quarter results benefited from the 20% devaluation of the Brazilian Real toward the end of the quarter.

Compared with the third quarter of 2007, average sales price realizations increased reflecting higher prices in both domestic and export markets. Sales volumes were down slightly from last year for both pulp and paper reflecting reduced demand in export markets. Margins were positively impacted by an increased proportion of higher-margin domestic sales. Input costs were significantly higher, primarily for electricity, natural gas and chemicals. Manufacturing operating costs were higher as a result of the planned pulp mill outage at the Luiz Antonio mill.

Looking ahead to the fourth quarter, average sales price realizations are expected to continue to improve in both domestic and export markets with the full-quarter impact of third quarter price increases and the partial realization of an announced price increase on domestic cut-size and offset paper effective in November. Sales volumes should be seasonally higher for cut-size paper and pulp. Input costs are expected to be slightly higher reflecting the full-quarter impact of chemical cost increases.

Asian Printing Papers net sales were approximately $5 million for all periods presented. Operating earnings in the third quarter of 2008 were $1 million compared with breakeven for the second quarter of 2008 and the third quarter of 2007.

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U.S. Market Pulp net sales were $210 million in the third quarter of 2008 compared with $205 million in the second quarter of 2008 and $165 million in the third quarter of 2007. Operating earnings were a loss of $9 million in the third quarter of 2008 compared with earnings of $11 million in the second quarter of 2008 and $18 million in the third quarter of 2007.

Sales volumes in the third quarter of 2008 were higher than in the second quarter of 2008 reflecting additional pulp production at the Louisiana mill which shifted to 100% pulp production in June 2008. However as demand weakened during the quarter, 17,000 tons of lack-of-order downtime was taken to balance inventory levels. Average sales price realizations for market pulp declined during the quarter, while fluff pulp prices were generally stable. Manufacturing costs were slightly higher, reflecting costs associated with the conversion of the Louisiana mill. Input costs for wood, energy and chemicals increased, and freight costs were also higher.

Compared with the third quarter of 2007, sales volumes were higher reflecting the increased pulp production at the Louisiana mill and the ramp-up of fluff pulp production at the Riegelwood mill. However, the lack-of-order downtime taken in the quarter partially offset these volume increases. Average sales price realizations were significantly higher reflecting sales price increases implemented during 2007 and in the first three quarters of 2008. Manufacturing operating costs increased reflecting the increased pulp production at the Louisiana mill. Wood, energy, chemicals and freight costs were also higher.

Entering the 2008 fourth quarter, weakening market demand for pulp is expected to result in further lack-of-order downtime to balance production with customer demand. Average sales prices for market pulp are expected to soften as slowing demand puts pressure on sales prices. Fluff pulp shipments are expected to decline, but average sales prices should remain at third-quarter levels. Planned mill maintenance downtime costs will be lower; however, input costs are expected to be higher than the third quarter, with the benefits of lower domestic energy prices being offset by higher wood and export freight costs.

Industrial Packaging

Industrial Packaging net sales for the third quarter of 2008 were 58% higher than in the second quarter of 2008 and 78% higher than in the third quarter of 2007. Operating profits in the third quarter of 2008 were 9% higher than in the second quarter of 2008, and 13% higher than the third quarter of 2007. Results for the 2008 third quarter include the CBPR business acquired on August 4, 2008.

North American Industrial Packaging net sales were $1.9 billion in the third quarter of 2008 compared with $1.1 billion in the second quarter of 2008 and $975 million in the third quarter of 2007. Operating earnings were $82 million in the third quarter of 2008 compared with $65 million in the second quarter of 2008 and $74 million in the third quarter of 2007. Sales and profits for the third quarter of 2008 include the operating results of the CBPR acquisition from the August 4 acquisition date. Operating profits also included a charge of $39 million related to the write-up of CBPR inventory to fair value and a charge of $19 million for CBPR integration costs, and $9 million of costs, net of insurance recoveries, related to the second-quarter Vicksburg recovery boiler explosion.

Excluding the effect of the CBPR acquisition, sales volumes in the third quarter of 2008 compared with the second quarter of 2008 were slightly lower as customer demand began to weaken late in the quarter. Average sales price realizations improved versus second-quarter levels reflecting the partial realization of a $55 per ton containerboard price increase effective during the quarter. Planned maintenance downtime costs were lower than in the second quarter when significant maintenance projects were completed. Input costs for wood, energy, wax and chemicals continued to move substantially higher.

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2008 2007



Compared with the third quarter of 2007, excluding the effects of the CBPR acquisition, sales volumes for containerboard were about flat while box volumes declined. Average sales price realizations were significantly higher due to price increases implemented in late 2007 and in the 2008 third quarter. However, the benefits of these price increases were more than offset by higher costs for wood, energy, and chemicals. Freight costs also increased significantly reflecting higher fuel costs. Costs associated with planned maintenance downtime were $5 million lower than in the third quarter of 2007. Results in the third quarter of 2007 had also included $23 million of expenses related to the conversion of the Pensacola mill to linerboard production.

Looking ahead to the 2008 fourth quarter, sales volumes are expected to decline as weakening economic conditions cause customer box demand to soften, and containerboard production is balanced with customer orders. Average sales price realizations should improve for containerboard and boxes with the full-quarter impact of price increases implemented in the third quarter. Costs associated with planned maintenance outages should be somewhat higher in the fourth quarter with outages planned for the Pensacola and Prattville mills. Input costs are expected to remain high in the fourth quarter as wood costs increase while recycled fiber costs moderate. Fourth-quarter results should benefit from the additional insurance recoveries related to the Vicksburg recovery boiler explosion and the start-up of the mill .

European Industrial Packaging net sales were $285 million in the third quarter of 2008 compared with $315 million in the second quarter of 2008 and $265 million for the third quarter of 2007. Operating earnings were $11 million in the third quarter of 2008 compared with $20 million in the second quarter of 2008 and $10 million in the third quarter of 2007. The Company completed the purchase of the minority shares of its operations in Morocco during the 2007 third quarter.

Sales volumes in the third quarter of 2008 were lower than in the second quarter of 2008 principally reflecting a seasonal decline in demand for boxes in the fruit and vegetable markets and weaker industrial markets throughout Europe. Sales margins improved reflecting a larger proportion of higher-margin sales in France. Box prices held generally steady during the quarter. Unfavorable operating expenses reflected the planned annual maintenance outage at the Etienne mill. Energy costs were higher quarter over quarter.

Compared with the third quarter of 2007, sales volumes in the 2008 third quarter were lower reflecting a weaker market for industrial products throughout Europe, particularly in Spain and Italy, and lower sales of banana boxes in Morocco. Sales margins were higher reflecting stronger pricing and declining costs for kraft and recycled containerboard. These benefits were partially offset by higher energy and operating costs.

Entering the fourth quarter, sales volumes are expected to be higher reflecting seasonally stronger agricultural markets for citrus fruits in Spain and Morocco and apples and kiwi fruit in Italy, although industrial markets throughout Europe are expected to continue to remain weak. Sales margins are expected to reflect pressure on box prices.

Asian Industrial Packaging net sales were $100 million in the third quarter of 2008 compared with $95 million in the second quarter of 2008 and $65 million in the third quarter of 2007. Operating earnings were $2 million in both the third and second quarters of 2008, up from about breakeven in the third quarter of 2007.

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Consumer Packaging

Consumer Packaging net sales for the third quarter of 2008 were 4% higher than in the second quarter of 2008, and 7% higher than in the third quarter of 2007. Operating profits in the third quarter of 2008 resulted in a small loss compared with earnings in the second quarter of 2008 and the third quarter of 2007.

North American Consumer Packaging net sales were $645 million in the third quarter of 2008 compared with $625 million in the second quarter of 2008 and $620 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were a loss of $1 million compared with about breakeven in the second quarter of 2008 and a gain of $20 million in the third quarter of 2007.

Coated paperboard average sales prices improved in the third quarter of 2008 compared with the second quarter of 2008 with the realization of price increases for cup stock, folding carton board and coated bristols. Sales volumes were up slightly as demand remained steady. Planned maintenance downtime costs were $2 million lower than in the second quarter. Costs for wood, energy and chemicals were significantly higher than in the second quarter. Manufacturing operating costs were also unfavorable. Compared with the third quarter of 2007, average sales prices were significantly higher with the realization of price increases implemented in late 2007 and in the first three quarters of 2008. Sales volumes were up slightly. However, input costs were significantly higher, particularly for energy and chemicals, while planned maintenance downtime expenses were about $3 million higher.

Shorewood sales volumes in the third quarter of 2008 increased from the second quarter of 2008 reflecting a seasonal increase in demand in the home entertainment segment and slightly higher shipments in the tobacco segment. Average margins benefited from a higher proportion of sales in the home entertainment market. Raw material costs were higher reflecting continuing cost increases for coated paperboard. Third quarter results included $8 million of expenses related to the reorganization of Shorewood’s Canadian operations versus $13 million in the second quarter. Compared with the third quarter of 2007, sales volumes in the third quarter of 2008 were lower reflecting softer demand in the tobacco and display segments, partially offset by improvement in the home entertainment segment. Average sales margins improved primarily due to an increase in higher-margin products within the home entertainment segment. Results for the 2008 third quarter included the $8 million charge related to the reorganization of the Canadian operations, while the third quarter of 2007 included $4 million of costs related to the closures of the Edison, NJ and the Waterbury, CT plants.

Foodservice sales volumes in the third quarter of 2008 were seasonally slightly lower than in the second quarter of 2008. Average sales price realizations improved with the full-quarter realization of a second quarter price increase and contract price increases during the quarter. Converting operating costs were unfavorable due to increased waste and operating costs. Raw material costs were higher reflecting continued increases in board and resin costs. Compared with the third quarter of 2007, sales volumes in the 2008 third quarter increased, while average sales prices were also higher. However, raw material costs increased for board and resins, and freight costs were also higher.

Looking ahead to the fourth quarter, coated paperboard sales volumes are expected to seasonally decrease. Average sales price realizations should continue to improve with a full-quarter impact of price increases announced in the third quarter for folding carton board, cup stock and coated bristols. Input costs are expected to rise slightly as energy costs and chemical costs should moderate while wood costs continue to increase. Manufacturing costs are expected to reflect improved operations, but planned maintenance costs will be higher with outages planned at three mills compared with one mill in the third quarter. Shorewood’s

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2008 2007


Sales $ 830 $ 795 $ 2,395 $ 775 $ 745 $ 2,235Operating Profit (2) 13 20 27 30 97

sales volumes are expected to be ahead of third quarter, but slightly behind prior year, due to softer tobacco segment demand, particularly in Asia. Operating results should also improve in the fourth quarter with seasonally stronger sales volumes in the home entertainment segment and significantly lower expenses related to the reorganization of the Canadian operations. Foodservice operating results should benefit from the realization of sales price increases and a more favorable product mix, although input costs for coated board and resin are expected to continue to increase.

European Consumer Packaging net sales were $80 million in the third quarter of 2008 compared with $75 million in the second quarter of 2008 and $70 million in the third quarter of 2007. Operating earnings were about breakeven in the third quarter of 2008 compared with $8 million in the second quarter of 2008 and $3 million in the third quarter of 2007.

Sales volumes in the third quarter of 2008 were higher than in the second quarter of 2008, and average sales price realizations improved. Manufacturing costs were significantly higher during the quarter due to expenses related to the annual maintenance outage at the Kwidzyn mill in Poland. Operating earnings were also lower due to unfavorable foreign exchange effects, particularly the impact caused by the strengthening of the Polish Zloty. Compared with the third quarter of 2007, sales volumes and average sales price realizations were higher, but this benefit was more than offset by higher annual maintenance and raw material costs. Operating results for the 2008 fourth quarter should improve as there are no annual maintenance outages scheduled.

Asian Consumer Packaging net sales were $105 million in the third quarter of 2008 compared with $95 million in the second quarter of 2008 and $85 million in the third quarter of 2007. Operating earnings in the third quarter of 2008 were a loss of $1 million compared with gains of $5 million in the second quarter of 2008 and $4 million in the third quarter of 2007. Costs related to the start-up of the Shandong International Paper and Sun Coated Paperboard Co., Ltd. joint venture’s new folding box board paper machine, and weaker demand in China, led to the earnings decrease.

Distribution

Distribution’s 2008 second quarter sales were 5% higher than in the second quarter of 2008, while operating profits increased 35%. Compared to the 2007 third quarter, sales rose 10% while operating profits increased 17%.

While unit demand remained weak, third-quarter 2008 revenues of printing papers, graphic arts supplies and equipment totaled $1.4 billion, an increase from $1.3 billion in the second quarter of 2008 and $1.2 billion in the 2007 third quarter due to price increases and contributions from Central Lewmar sales in 2008. Print volumes improved over the second quarter. Publication printing activity (magazines, catalogs and books) continued to outpace commercial printing. Trade margins decreased as a result of changes in product mix in the third quarter 2008, but otherwise held firm as supplier cost increases were passed through to the marketplace.

Packaging sales were $0.4 billion in the third quarter of 2008, up 6% versus the second quarter of 2008 and up 3% versus the third quarter of 2007. Trade margins for packaging products decreased compared with both the second quarter of 2008 and third quarter of 2007 reflecting a change in product and service mix.

Sales of facility supply products were $0.3 billion in the second quarter of 2008, up 9% versus the second quarter of 2008 and 7% versus the third quarter of 2007. Strong re-distribution sales growth and national accounts activity led the improvement in this segment. However, trade margins for facility supplies were lower than the second quarter of 2008 and third quarter 2007 reflecting a less favorable product mix.

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2008 2007



Operating profits totaled $35 million in the third quarter of 2008 compared with $26 million in the second quarter of 2008 and $30 million in the third quarter of 2007. Increased sales and lower operating costs were the major factors in the improvement over prior periods.

Looking ahead to the 2008 fourth quarter, revenue and earnings growth are expected to slow reflecting declining economic activity and seasonal patterns.

Forest Products

Forest Products net sales in the third quarter of 2008 were even with the second quarter of 2008, but 54% lower than in the third quarter of 2007. Operating earnings in the second quarter of 2008 were significantly higher than in both the second quarter of 2008 and the third quarter of 2007.

Forest Products earnings from harvest and recreational income and the sales of mineral rights increased $266 million versus the second quarter, including $261 million from the sale of 13,000 net acres of subsurface mineral rights in Louisiana. Earnings from forestland sales in the third quarter of 2008 were $7 million lower than in the second quarter of 2008 due to the timing of the completion of sale transactions. Forestland operating expenses were $2 million lower, while profits from the sales of real estate properties increased $3 million. Compared with the 2007 third quarter, earnings from harvest and recreational income and sales of mineral rights increased $267 million, while earnings from forestland sales declined $60 million. Forestland operating expenses were $2 million lower than in the third quarter of 2007, while profits from sales of real estate properties were unchanged. Operating results in the 2008 fourth quarter are expected be significantly below third-quarter levels, reflecting lower earnings from forestland and mineral rights sales.

Other Businesses

The Other Businesses segment principally included the operating results of Arizona Chemical, as well as certain smaller businesses. The Arizona Chemical business was sold in February 2007; and thus operating results in 2007 reflect only two months of activity.

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 organizational 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 operating results on a one-quarter lag basis. Accordingly, the accompanying consolidated statement of operations for the three months ended September 30, 2008 includes the Company’s 50% share of Ilim’s operating results for the three-month period ended June 30, 2008 under the caption “Equity earnings, net of taxes.” Ilim is reported as a separate reportable industry segment.

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2008 2007


Sales $ 55 $ 55 $ 135 $ 120 $ 90 $ 295Operating Profit 305 41 371 96 94 287

2008 2007


Sales $ — $ — $ — $ — $ — $ 135Operating Profit — — — — — 6

The Company recorded equity earnings for Ilim, net of taxes, of $5 million in the third quarter of 2008 compared with $32 million in the second quarter of 2008. Earnings for the second quarter had included a $14 million after-tax foreign exchange gain on the remeasurement of U.S. dollar denominated debt, and a $3 million after-tax charge to write off a share repurchase option.

Compared with the second quarter, sales volumes for paper were about flat, but were lower for pulp primarily due to the reduced production volumes resulting from annual maintenance outages at the Bratsk and Ust-Ilimsk mills. Average sales price realizations improved for both domestic and export sales, but pulp prices declined late in the quarter. Input costs increased for wood, chemicals and energy. Distribution costs decreased slightly reflecting lower volumes, a more favorable geographical mix and the effect of supply chain initiatives. A small exchange loss and higher income tax expense also contributed to the earnings decrease.

For the 2008 third quarter to be reported in the Company’s fourth quarter, strong domestic market conditions are expected to continue, but demand in China will be reduced due to impacts from the Olympics. Production volume will be affected by a partial maintenance shutdown at the Kotlas mill. Average sales price realizations should remain solid, except for some expected price erosion for exported hardwood and softwood pulp. Input costs for wood, chemicals and energy are expected to remain high. A large unfavorable foreign exchange loss on remeasurement of U.S. dollar debt will also lead to lower overall results.

LIQUIDITY AND CAPITAL RESOURCES Cash provided by continuing operations totaled $2.0 billion for the first nine months of 2008, up from $1.4 billion for the comparable 2007 nine-month period. Earnings from continuing operations adjusted for non-cash charges were $1.7 billion for the first nine months of 2008 compared to $1.8 billion for the first nine months of 2007. Cash provided by working capital components totaled $213 million for the first nine months of 2008, up from a use of $409 million for the comparable 2007 nine-month period.

Cash used for acquisitions for the first nine months of 2008 totaled $6.1 billion, including the acquisition of the assets of the CBPR business from Weyerhaeuser Company in the third quarter. Cash proceeds from divestitures totaled approximately $14 million for the first nine months of 2008, relating to the sales of certain remaining Wood Products facilities during the first quarter. Investments in capital projects totaled $732 million in the first nine months of 2008 compared to $804 million in the first nine months of 2007. Full-year 2008 capital spending is currently expected to be approximately $1.1 billion, or about 80% of depreciation and amortization expense for our current businesses.

Financing activities for the first nine months of 2008 included a $5.4 billion net increase in debt versus a $513 million net decrease during the comparable 2007 nine-month period.

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 balance sheet and will be amortized over the term of the loan. Also in August 2008, International Paper borrowed approximately $395 million under its receivables securitization program. These 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. A $500 million bridge loan that was available to fund the acquisition was not used by the Company and was cancelled upon the closing of the acquisition.

Also in the third quarter of 2008, International Paper repaid approximately $355 million it had borrowed under its receivables securitization program. The Company also 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.

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The Company also 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 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.

In the second quarter of 2008, International Paper issued $3 billion of unsecured senior notes consisting of $1 billion of 7.4% notes due in 2014, $1.7 billion 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 will be 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 interest rate swap agreements, with a notional amount of $1 billion and maturities in 2014 and 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.

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, International Paper Investments (Luxembourg) S.ar.l., a wholly-owned subsidiary of International Paper, 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 September 30, 2008 and December 31, 2007, International Paper classified $806 million and $112 million, respectively, of tenderable bonds, commercial paper and bank notes and current maturities of long-term debt as Long-term debt. International Paper has the intent and ability, as evidenced by its contractually committed $1.5 billion bank credit agreement, to renew or convert these obligations.

During the first nine months of 2008, International Paper issued 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 withholding taxes totaled $47 million. During the first nine months of 2007, the Company purchased 30.6 million shares of its common stock through open market purchases for approximately $1.1 billion, and issued approximately 5.0 million shares of treasury stock for various incentive plans, including stock option exercises that generated approximately $122 million of cash and restricted stock that did not generate cash. Common stock dividend payments totaled $321 million and $330 million for the first nine months of 2008 and 2007, respectively. Dividends were $.75 per share for the first nine months in both years.

Contractual obligations for payments of future debt maturities by calendar year at September 30, 2008 were as follows (in millions): $10 in 2008; $853 in 2009; $1,339 in 2010; $1,403 in 2011; $967 in 2012; $1,503 in 2013; and $5,959 thereafter.

Maintaining an investment-grade credit rating is an important element of International Paper’s financing strategy. At September 30, 2008, the Company held long-term credit ratings of BBB (negative outlook) and Baa3 (negative outlook) by Standard and Poor’s (S&P) and Moody’s Investor Services (Moody’s), respectively. The Company currently has short-term credit ratings of A-3 and P-3 by S&P and Moody’s, respectively.

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At September 30, 2008, International Paper had approximately $2.5 billion of committed liquidity, including a $1.5 billion contractually committed bank credit agreement that expires in March 2011 and a receivables securitization program that expires in October 2009. There were approximately $40 million of outstanding borrowings under the receivables securitization program and no outstanding borrowings under the fully committed bank credit agreement at September 30, 2008.

International Paper expects to be able to meet projected capital expenditures, service existing debt and meet working capital and dividend requirements through 2008 using existing cash balances plus cash from operations, supplemented as required by its existing credit facilities. Funding decisions will be guided by our capital structure planning and debt management practices. The primary goals of the Company’s capital structure planning are to maximize financial flexibility and preserve liquidity while reducing interest expense. The majority of International Paper’s debt is accessed through global public capital markets where we have a wide base of investors.

While the recent disruption in the credit market and increased risk associated with financial institutions has increased market volatility and the cost of credit, the Company does not believe that these conditions currently have had a significant impact on its liquidity. The Company believes it can borrow as needed on its committed credit and receivables securitization facilities.

At September 30, 2008, International Paper had a $47 million investment in a money market fund that is currently being liquidated. As a result of the liquidation process, the timing of redemptions from the fund is uncertain, but the Company does not expect the liquidation to have a material impact on its financial condition or results of operations. The Company has classified $24 million of its investment in this fund as Other current assets in the accompanying consolidated balance sheet since the timing of receipt of these funds is uncertain.

A further discussion of potential future effects of any ongoing disruption of capital and credit markets is included in Item 1A Risk Factors.

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

Accounting policies whose application may have a significant effect on the reported results of operations and financial position of International Paper, and that can require judgments by management that affect their application, include SFAS No. 5, “Accounting for Contingencies,” SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” SFAS No. 142, “Goodwill and Other Intangible Assets,” SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 132 and 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,” including recent accounting requirements under FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”

The Company has included in its 2007 10-K a discussion of these critical accounting policies, which are important to the portrayal of the Company’s financial condition and results of operations and require management’s judgments. While the Company has not made any changes in these critical accounting policies during the first nine months of 2008, the discussion of accounting for possible impairments of long-lived assets and goodwill, as shown below, has been modified to emphasize certain key judgments and estimates required by management.

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Impairment of Long-Lived Assets and Goodwill. An impairment of a long-lived asset exists when the asset’s carrying amount exceeds its fair value, and is recorded when the carrying amount is not recoverable through future operations. A goodwill impairment exists when the carrying amount of goodwill exceeds its fair value. Assessments of possible impairments of long-lived assets and goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material, energy and freight costs, and various other projected operating and economic factors. As these key factors change in future periods, the Company will update its impairment analyses to reflect its latest estimates and projections.

SIGNIFICANT ACCOUNTING ESTIMATES Pension Accounting. Net pension expense totaled approximately $89 million for International Paper’s U.S. plans for the nine months ended September 30, 2008, or about $69 million less than the pension expense for the first nine months of 2007. Net pension expense for non-U.S. plans was about $2 million and $3 million for the first nine months of 2008 and 2007, respectively. The decrease in U.S. plan pension expense was principally due to an increase in the assumed discount rate to 6.20% in 2008 from 5.75% in 2007 and lower amortization of unrecognized actuarial losses.

After consultation with our actuaries, International Paper determines key actuarial assumptions on December 31 of each year that are used to calculate liability information as of that date and pension expense for the following year. Key assumptions affecting pension expense include the discount rate, the expected long-term rate of return on plan assets, the expected rate of future salary increases, and various demographic assumptions including expected mortality. The discount rate assumption is determined based on a yield curve that incorporates approximately 500-550 Aa-graded bonds. The plan’s projected cash flows are then matched to the yield curve to develop the discount rate. 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. At September 30, 2008, the market value of plan assets for International Paper’s U.S. plans totaled approximately $7.1 billion, consisting of approximately 44% equity securities, 36% fixed income securities, and 20% real estate and other assets.

The Company’s funding policy for its qualified pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plans, tax deductibility, the cash flow generated by the Company, and other factors. The Company has no obligation to fund its domestic qualified plans in 2008. The Company continually reassesses the amount and timing of any discretionary contributions. The U.S. nonqualified plans are only funded to the extent of benefits paid which are expected to be $26 million in 2008.

Accounting for Share-Based Compensation Plans. 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 compensation to Company performance on two key performance drivers: return on investment (ROI) and total shareholder return (TSR). As part of this shift in focus away from stock options to performance-base restricted stock, the Company accelerated the vesting of all 14 million unvested stock options to July 12, 2005.

The Company adopted SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2006 using the modified prospective transition method. This standard requires that compensation cost related to share-based payments be recognized in the financial statements. The amount of compensation cost is measured based on the grant date fair value of the award. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. The adoption

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of SFAS No. 123(R) resulted in a $1 million increase in stock-based compensation expense for the three months ended March 31, 2006, with no effect on prior periods. Prior to January 1, 2006, the Company had accounted for share-based compensation in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

Accounting for Uncertainty in Income Taxes. The Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation requires management to make judgments regarding the probability that certain income tax positions taken by the Company in filing tax returns in the various jurisdictions in which it operates will be sustained upon examination by the respective tax authorities based on the technical merits of these tax positions, and to make estimates of the amount of tax benefits that will be realized upon the settlement of these positions. The adoption of this interpretation resulted in a charge to the 2007 beginning balance of retained earnings of $94 million.

FORWARD-LOOKING STATEMENTS Certain statements in this Quarterly Report on Form 10-Q, and in particular, statements found in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical in nature may constitute forward-looking statements. These statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,”“plan,” “appear,” “project,” “estimate,” “intend,” and words of similar import. Such statements reflect the current views of International Paper with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include, among other things, the following: our ability to realize the expected benefits of our acquisition of the containerboard, packaging and recycling business of Weyerhaeuser Company in light of integration difficulties and other challenges; changes in the cost or availability of raw materials and energy; changes in transportation availability or costs; the effects of competition from foreign and domestic producers; changes in our product mix; delays in implementing previously announced price increases; the strength of demand for our product and changes in overall demand; changes in credit ratings issued by nationally recognized statistical rating organizations; the availability of credit; pension and health care costs; changes related to international economic conditions; changes in currency exchange rates; unanticipated expenditures relating to the cost of compliance with environmental and other governmental regulations; results of legal proceedings; whether we experience a material disruption at one of our manufacturing facilities; whether expected non-price improvements can be realized; increases in interest rates; our substantial indebtedness; our ability to meet our debt service obligations and the bankruptcy or event of default by one of our counterparties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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Information relating to quantitative and qualitative disclosures about market risk is shown on page 42 of International Paper’s 2007 10-K, which information is incorporated herein by reference. In June 2008, in anticipation of the CBPR business acquisition, International Paper issued $3 billion of unsecured senior notes and entered into $1 billion of fixed-to-floating interest rate swaps to hedge the new debt. At September 30, 2008, the fair value of the new unsecured bonds still exposed to interest rate risk was approximately $1.8 billion. The potential loss in fair value resulting from a 10% adverse shift in quoted interest rates would have been approximately $114 million at September 30, 2008. There have been no other material changes in the Company’s exposure to market risk since December 31, 2007.

International Paper evaluates credit risk by monitoring its exposure with each counterparty and ensuring 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, our 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Evaluation of Disclosure Controls and Procedures: Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and completely and accurately reported (and accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure) within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting: There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the 2008 third quarter, the Company completed the acquisition of Weyerhaeuser Company’s CBPR business. Integration activities, including a preliminary assessment of internal controls over financial reporting, are currently in process. The initial annual assessment of internal controls over financial reporting for the CBPR business will be conducted over the course of our 2009 assessment cycle.

During the 2007 first quarter, the Company completed the non-cash exchange of assets for the Luiz Antonio mill in Brazil. During the 2007 third quarter, the Company completed the acquisition of Central Lewmar LLC. The integration of financial processes and business systems is continuing for these two operations. We are in the process of conducting our annual assessment of internal controls over financial reporting over the course of our 2008 assessment cycle. These two operations contributed approximately 3% of net sales for the year ended December 31, 2007, and approximately 4% of total assets as of December 31, 2007.

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.

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ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

A discussion of material developments in the Company’s litigation and settlement matters occurring in the period covered by this report is found in Note 9 to the Financial Statements in this Form 10-Q.

The Company’s 2007 10-K contains important risk factors that could cause the Company’s actual results to differ materially from those projected in any forward-looking statement. Forward-looking statements are statements that are not historical in nature and are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “appear,” “project,” “estimate,” “intend,” and words of a similar nature.

The Company has identified the following additional risk factor to supplement those set forth in the 2007 10-K:

The Impairment of Financial Institutions Could Adversely Affect Us The capital and credit markets have been experiencing volatility and disruption for more than twelve months. In the past several months, volatility and disruptions have increased and recently reached unprecedented levels. We have exposure to counterparties with which we routinely execute transactions. Such counterparties include commercial banks, insurance companies, investment banks, investment funds and other financial institutions, some of which may be exposed to bankruptcy or liquidity risks. While we have not realized any significant losses to date, a bankruptcy or illiquidity event by one of our significant counterparties may materially and adversely affect our access to capital, future business and results of operations.

These risk factors do not represent a comprehensive list of factors that could cause our results to differ from those that are currently anticipated and should be read together with the risk factors set forth in the 2007 10-K and in the Company’s other filings with the Securities and Exchange Commission.

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ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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ITEM 6. EXHIBITS

(a) Exhibits

10.1

Amendment No. 1 dated August 29, 2008, to the Receivables Sale and Contribution Agreement dated as of March 13, 2008.

10.2 Amendment No. 1, dated July 31, 2008, to the Credit Agreement dated as of June 16, 2008.

10.3 International Paper Company Industrial Packaging Group Special Incentive Plan.

10.4a

Form of Restricted Stock Unit award (cash settled) under the Long Term Incentive Compensation Plan.

10.4b

Form of Restricted Stock Unit award (stock settled) under the Long Term Incentive Compensation Plan.

11 Statement of Computation of Per Share Earnings.

12 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.

31.1

Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INTERNATIONAL PAPER COMPANY(Registrant)

Date: November 7, 2008 By /s/ TIM S. NICHOLLS

Tim S. NichollsSenior Vice President and Chief Financial Officer

Date: November 7, 2008 By /s/ ROBERT J. GRILLET

Robert J. GrilletVice President – Finance and Controller

Exhibit 10.1

AMENDMENT #1 TO RECEIVABLES SALE AND CONTRIBUTION AGREEMENT

THIS AMENDMENT #1 RECEIVABLES SALE AND CONTRIBUTION AGREEMENT (this “Amendment”) is entered into as of August 29, 2008, by and between INTERNATIONAL PAPER COMPANY, a New York corporation (“IPCO”), and RED BIRD RECEIVABLES, LLC, a Delaware limited liability company formerly known as Red Bird Receivables, Inc. (“Buyer”), and pertains to the Receivables Sale and Contribution Agreement between IPCO and Buyer dated as of March 13, 2008 (the “Existing Agreement”). Capitalized terms used and not otherwise defined herein are used with the meanings attributed thereto in the Existing Agreement.

W I T N E S S E T H :

WHEREAS, the parties wish to modify the Existing Agreement to add Receivables originated by IPCO’s Honeywell International division of xpedx to the Receivables conveyed thereunder;

NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby agree as follows:

1. Amendment. Effective as of September 1, 2008, Schedule B to the Existing Agreement is hereby amended and restated in its entirety to read as set forth in Annex I hereto.

2. Representations.

2.1. IPCO hereby represents and warrants to the other parties hereto that it has duly authorized, executed and delivered this Amendment and that this Amendment constitutes, a legal, valid and binding obligation of IPCO, enforceable in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability).

2.2. IPCO further represents and warrants to the other parties hereto that, after giving effect to this Amendment, each of its representations and warranties set forth in Section 2.1 of the Existing Agreement is true and correct as of the date hereof.

3. Condition Precedent. This Amendment shall become effective as of September 1, 2008 upon the Administrative Agent’s receipt of a counterpart hereof duly executed by each of the parties hereto and consented to by the Administrative Agent.

4. Miscellaneous.

4.1. Except as expressly amended hereby, the Existing Agreement shall remain unaltered and in full force and effect, and each of the parties hereto ratifies and confirms each of the Transaction Documents to which it is a party.

4.2. THIS AMENDMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF OTHER THAN SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW.

4.3. This Amendment may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same amendment.

4.4. To the fullest extent permitted by applicable law, delivery of an executed counterpart hereof via facsimile or via electronic mail of a .pdf copy hereof, shall have the same force and effect as delivery of an executed original hereof.

<Signature pages follow>

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their duly authorized officers as of the date hereof.

By its signature below, the undersigned hereby consents to the foregoing Amendment pursuant to Section 7.1(i)(xiv) of the Credit and Security Agreement:


By: /s/ Errol A. Harris Name: Errol A. Harris Title: Vice President and Treasurer

RED BIRD RECEIVABLES, LLC

By: /s/ Phillip M. Sisneros Name: Phillip M. Sisneros Title: Vice President

CITICORP NORTH AMERICA, INC., as Administrative Agent

By: /s/ Debbie Ng Name: Debbie Ng Title: Vice President

Annex I

SCHEDULE B

Receivables created by domestic sales of the following businesses:

(i) Stores Division; (ii) Cincinnati Reading Road Division, location #679; and (iii) Saalfeld Re-Distribution Business, location #680

• U.S. Printing Papers • Consumer Packaging • Industrial Packaging • xpedx – Excluding the following:

• U.S. Pulp

Exhibit 10.2

AMENDMENT NO. 1, dated as of July 31, 2008 (this “Amendment”), among INTERNATIONAL PAPER COMPANY, a New York corporation (the “Borrower”), and the Lenders listed on the signature pages hereto, to the Credit Agreement dated as of June 16, 2008 (the “Credit Agreement”) among the Borrower, the Guarantors, the Lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent. Capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement.

WHEREAS, the Borrower has entered into a certain Purchase Agreement with the Seller, pursuant to which the Borrower has agreed to purchase the Acquired Business from the Seller;

WHEREAS, the Borrower has entered or intends to enter into certain Partial Assignments of Rights Under Purchase Agreement (the “Assignments”) with certain newly-formed subsidiaries (the “Titleholder LLCs”) of DB Reverse Exchange Services Corp. (the “Exchange Accommodator”), pursuant to which it will assign its right to acquire legal title to certain real estate property with an aggregate fair market value of approximately $450 million (the “Parked Property”) included in the Acquired Business to the Titleholder LLCs;

WHEREAS, the Borrower has entered or intends to enter into a Qualified Exchange Accommodation Agreement with the Exchange Accommodator and certain related agreements pursuant to which the Borrower and its Subsidiaries will receive membership interests in the Titleholder LLCs (the “Exchange Program”);

WHEREAS, Sustainable Forest LLC, a Subsidiary of the Borrower (“SF LLC”), is currently an Excluded Subsidiary under the Credit Agreement, subject to the requirements set forth in the definition of Excluded Subsidiary;

WHEREAS, SF LLC may, as part of the Exchange Program, dispose of some of its assets and as part of such disposition acquire membership interests in certain of the Titleholder LLCs;

WHEREAS, the Borrower has requested that the Administrative Agent and the Required Lenders consent to this Amendment as set forth below;

WHEREAS, Section 9.02(b) of the Credit Agreement permits the Credit Agreement to be amended from time to time;

NOW, THEREFORE, in consideration of the premises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

Section 1. Amendments. (a) The first line of the Credit Agreement is hereby replaced in its entirety with the following: “This CREDIT AGREEMENT (this “Agreement”), dated as of June 16, 2008, among INTERNATIONAL PAPER COMPANY, the GUARANTORS, the LENDERS party hereto, and JPMORGAN CHASE BANK, N.A., as Administrative Agent.”

(b) Section 1.01 of the Credit Agreement is hereby amended by replacing clause (v) of the definition of “Excluded Subsidiary” in its entirety with the following:

“(v) Sustainable Forest LLC, a Delaware limited liability company; provided that such Subsidiary shall cease to be an Excluded Subsidiary pursuant to this clause (v) if, within 18 months of the date hereof, it does not enter into definitive agreements with third parties for the sale, or other bona fide financing transaction relating to the disposition, of substantially all of its assets (other than (x) Equity Interests in entities that are Guarantors and (y) other assets such that, not taking into account such Equity Interests in or assets of entities that are Guarantors, it would satisfy the test under clause (ii) above) or does not consummate such sale or other bona fide financing transaction within 27 months of the date hereof, and provided further that prior to such sale or other bona fide financing transaction, it shall not guarantee any other Indebtedness; and”.

Section 2. Conditions to Effectiveness.

This Amendment shall become effective as of the date when each of the following conditions is satisfied:

(a) The Administrative Agent (or its counsel) shall have received from (i) Lenders constituting the Required Lenders and (ii) the Borrower, a counterpart of this Amendment signed on behalf of such party;

(b) All corporate and other proceedings taken or to be taken in connection with this Amendment and all documents incidental thereto, whether or not referred to herein, shall be reasonably satisfactory in form and substance to the Administrative Agent; and

(c) At the time of and after giving effect to the Amendment, no Default or Event of Default has occurred and is continuing.

Section 3. Representations and Warranties. In order to induce the Lenders and the Administrative Agent to authorize this Amendment, the Borrower represents and warrants to each of the Lenders that both before and after giving effect to this Amendment:

(a) The execution, delivery, and performance of this Amendment by the Borrower is within the corporate power and authority of the Borrower and has been duly authorized by all necessary corporate action.

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(b) This Amendment and the Credit Agreement, as amended hereby, constitute legal, valid, and binding obligations of each of the Obligors, enforceable in accordance with their terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditor’s rights generally.

(c) At the time of and after giving effect to the Amendment, no Default or Event of Default has occurred and is continuing.

Section 4. Expenses. The Borrower agrees to reimburse the Administrative Agent for its reasonable out-of-pocket expenses incurred by them in connection with this Amendment, including the reasonable fees, charges and disbursements of Cahill Gordon & Reindel LLP, counsel for the Administrative Agent.

Section 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be deemed to be an original, but all of which when taken together shall constitute a single instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

Section 6. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

Section 7. Headings. The headings of this Amendment are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.

Section 8. Effect of Amendment. Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of the Lenders, the Administrative Agent, the Syndication Agent or the Co-Documentation Agents under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other provision of the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect.

Section 9. Reference to the Credit Agreement. Upon and after the execution of this Amendment by each of the parties hereto, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit

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Agreement, and each reference in the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified hereby.

Section 10. Binding Effect. This Amendment and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto, and shall be enforceable by any such successors and assigns.

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.


By: /s/ Errol A. Harris Name: Errol A. Harris Title: Vice President and Treasurer

JPMORGAN CHASE BANK, N.A., as Administrative Agent and a Lender

By: /s/ Linda M. Meyer Name: Linda MeyerTitle: President

UBS LOAN FINANCE LLC, as a Lender

By: /s/ Richard L. Tavrow Name: Richard L. Tavrow Title: Director

By: /s/ David B. Julie Name: David B. Julie Title: Associate Director

Bank of America, as a Lender

By: /s/ Michael Balok Name: Michael Balok Title: Senior Vice President

DEUTSCHE BANK AG NEW YORK, as a Lender

By: /s/ Heidi Sandquist Name: Heidi Sandquist Title: Vice President

By: /s/ Ming K. Chu Name: Ming K. Chu Title: Vice President

DEUTSCHE BANK AG CAYMAN ISLANDS, as a Lender

By: /s/ Heidi SandquistName: Heidi Sandquist

Title: Vice President

By: /s/ Ming K. Chu Name: Ming K. Chu Title: Vice President

THE ROYAL BANK OF SCOTLAND PLC, as a Lender

By: /s/ L. Peter Yetman Name: L. Peter YetmanTitle: SVP

CoBank, ACB, as a Lender

By: /s/ Jeff C. Norte Name: Jeff C. Norte Title: Vice President

SUMITOMO MITSUI BANKING CORPORATION,as a Lender

By: /s/ Yoshihiro Hyakutome Name: Yoshihiro HyakutomeTitle: General Manager

BNP Paribas, as a Lender

By: /s/ Shayn March Name: Shayn March Title: Managing Director

By: /s/ Angela Bentley Arnold Name: Angela Bentley Arnold Title: Director

BBVA, as a Lender

By: /s/ Kruster Holm Name: Kruster Holm Title: Managing Director

By: /s/ Peter Tommaney Name: Peter Tommaney Title: Senior Vice President

CALYON NEW YORK BRANCH, as a Lender

By: /s/ Rod Hurst Name: Rod Hurst Title: Managing Director

By: /s/ Yuri Muzichenko Name: Yuri Muzichenko Title: Director

Regions Bank, as a Lender

By: /s/ Bryan W. Ford Name: Bryan W. Ford Title: Senior Vice President

SOCIETE GENERALE, as a Lender

By: /s/ Arnaud Achour Name: Arnaud Achour Title: Head of Capital Markets and Syndicate

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.NEW YORK BRANCH, as a lender

By: /s/ Ravneet Mumick Name: Ravneet MumickTitle: Authorized Signatory

TORONTO DOMINION (TEXAS) LLC, as a Lender

By: /s/ Debbi L. Brito Name: Debbi L. BritoTitle: Authorized Signatory

BANK OF NOVA SCOTIA, as a Lender

By: /s/ Karen Anillo Name: Karen Anillo Title: Director

Nordea Bank Finland Plc, Acting through its New York and Grand Cayman Branches, as a Lender

By: /s/ Henrik M. Steffensen Name: Henrik M. SteffensenTitle: Senior Vice President

By: /s/ Leena Parker Name: Leena Parket Title: Vice President

Mizuho Corporate Bank, Ltd, as a Lender

By: /s/ Toru Inoue Name: Toru Inoue Title: Deputy General Manager

Wells Fargo Bank, N.A., as a Lender

By: /s/ Greg Campbell Name: Greg Campbell Title: Vice President

Bank of China, New York Branch, as a Lender

By: /s/ William Warren Smith Name: William Warren Smith Title: Chief Lending Officer

The Governor and Company of the Bank of Ireland,as a Lender

By: /s/ Elaine Crowley Name: Elaine CrowleyTitle: Senior Manager

By: /s/ Peter O’Connor Name: Peter O’Connor Title: Deputy Manager

PNC Bank, National Association, as a Lender

By: /s/ Robert M. Martin Name: Robert M. Martin Title: Senior Vice President

The Bank of New York Mellon as a Lender (formerly known as The Bank of New York)

By: /s/ Clifford A. Mull Name: Clifford A. Mull Title: First Vice President

First Tennessee Bank, as a Lender

By: /s/ Matthew A. Wages Name: Matthew A. Wages Title: Vice President

RAYMOND JAMES BANK, FSB, as a Lender

By: /s/ Garrett McKinnon Name: Garrett McKinnon Title: Vice President

State Street Bank and Trust Company, as a Lender

By: /s/ Janet B. Nolin Name: Janet B. Nolin Title: Vice President

Exhibit 10.3

INTERNATIONAL PAPER COMPANY INDUSTRIAL PACKAGING GROUP SPECIAL INCENTIVE PLAN

Effective January 1, 2009

The purpose of this International Paper Company Industrial Packaging Group (“IPG”) Special Incentive Plan is to provide an incentive for Participants to maximize financial results associated with the acquisition of Weyerhaeuser’s containerboard, packaging and recycling (“CBPR”) business into the Industrial Packaging Business from January 1, 2009 through December 31, 2010. The Plan is a two-year, cash-based incentive plan developed around achievement of a pre-established Performance Objective and funded based on the Business’ achievement level against that Performance Objective.

“Business” means the International Paper Company Industrial Packaging business.

“Capital Expenditure Target” means an amount identified by the Company no later than 90 days after the beginning of the Performance Period.

“Cause” includes but is not limited to misconduct or other activity detrimental to the business interest or reputation of the Company or continued unsatisfactory job performance without making reasonable efforts to improve. Examples include insubordination, protracted or repeated absence from work without permission, illegal activity, disorderly conduct, etc.

“Committee” means the Management Development and Compensation Committee of the Company’s Board of Directors.

“Company” means International Paper Company, a New York corporation.

“EBITDA” means Earnings Before Interest, Taxes, Depreciation and Amortization.

“Earned Award” means the percentage of the Target Award to be paid to a Participant calculated in accordance with Section VI.

“Employee” means a regular, full-time employee of the Company.

I. Purpose of the Plan and Plan Description

II. Definitions

• Business

• Capital Expenditure Target

• Cause

• Committee

• Company

• EBITDA

• Earned Award

• Employee

“Participant” means a person who has been designated as a participant in the Plan, according to Section IV.

“Performance Objective” means the measure identified by the Company and approved by the Committee identified in Section V of this Plan.

“Performance Period” means the 24-month period from January 1, 2009 through December 31, 2010.

“Plan” means this International Paper Company Industrial Packaging Group (“IPG”) Special Incentive Plan, effective as January 1, 2009.

“Target Award” means an amount equal to the percentage of salary range midpoint applicable to the actual position level of each Participant, shown in Appendix A, as it may be amended from time to time.

“Working Capital Target” means an amount identified by the Company no later than 90 days after the beginning of the Performance Period.

The Plan operates at the discretion of the Committee. The Committee may exercise considerable discretion and judgment in interpreting the Plan, and adopting, from time to time, rules and regulations that govern the administration of the Plan. The Committee has delegated authority to the Chairman and Chief Executive Officer or his designee for the day-to-day administration of the Plan, except with respect to a Participant designated as senior vice president of the Company or higher. Recommendations of Earned Awards will be made jointly by the (i) Industrial Packaging Human Resources Director and (ii) Director, Global Compensation, for approval by the (i) Senior Vice President, Industrial Packaging, (ii) Senior Vice President, Human Resources and Communications, and (iii) Chairman and Chief Executive Officer. Earned Awards for senior vice presidents of the Company and above will be recommended by the Chairman and Chief Executive Officer for approval by the Committee. Decisions of the Committee are final, conclusive and binding on all parties, including the Business, the Company, its shareowners, and employees.

Participation in the Plan is generally limited to Employees of the Company employed by the Business with a position level of 18 or higher. Candidates for participation whose position level is below 18 may be recommended to the (i) Industrial Packaging Human Resources Director, and (ii) Director, Global Compensation for approval by the (i) Senior Vice President, Industrial Packaging, (ii) Senior Vice President, Human Resources and Communications, and (iii) Chairman and Chief Executive Officer. The Senior Vice President, Industrial Packaging, shall be the only senior vice president of the Company eligible to participate in the Plan.

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• Participant

• Performance Objective

• Performance Period

• Plan

• Target Award

• Working Capital Target

III. Administration of the Plan

IV. Participation in the Plan

Except as set forth in Section VII, Participants must be actively employed on a full-time basis during the Performance Period and on the date of the award payout in order to receive a payout. An Employee who becomes eligible to participate in the Plan during the Performance Period will be eligible for a pro-rated award provided that such Employee serves in an eligible position for at least 12 consecutive months. An Employee who is promoted from one eligible position level to another during the Performance Period will receive a pro-rated award based on the number of months employed at each respective position level during the Performance Period. Participation in this Plan, or receipt of an award under this Plan, does not give a Participant or Employee any right to a subsequent award, nor any right to continued employment by the Company for any period.

A. Performance Objective – Funding the Award Pool The Business must achieve at least a minimum level of performance in order to fund the award pool. The total award pool will be determined based on achievement of the Performance Objective calculated over the full two-year Performance Period as set forth below:

B. Reductions to the Total Award Pool The total award pool will be reduced by ten percent (10%) for each objective in the event of failure to meet either of the following two objectives:

(i) Working Capital Target; and (ii) Capital Expenditure Target

The above two reductions will be cumulative; failure to achieve both objectives will result in a reduction of the award pool by twenty percent (20%).

C. Approval by the Committee of the Total Award Pool The Performance Objective will be evaluated at the end of the Performance Period to determine the level at which the Performance Objective was achieved. The Company’s determination of performance achievement will be presented to the Committee for its review and approval no later than 90 days following the end of the Performance Period.

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V. Award Pool

Threshold Target Maximum

EBITDA $ (Billions) $ 3.6B $3.8B $ 4.1BPayout % 50% 100% 150%Payout $ (Millions) $ 15M $30M $ 45M

The Committee approves the total award pool based on the Business’ performance achievement against the Performance Objective unless the Committee determines in its sole discretion to reduce or eliminate the total award pool based upon any objective or subjective criteria it deems appropriate. The Committee may not increase the total award pool above the calculated amount.

Participants each have a Target Award expressed as a percentage of the midpoint of a defined salary range based on position level as set forth on the attached Appendix A. Earned Awards are based on Business performance against the established objectives and the Target Award in place at the beginning of Year Two of the two-year Performance Period. Accordingly, awards may be earned based on the following Award Scale:

Award Scale

Participants do not vest in the Earned Award until the end of the two-year Performance Period; there is no partial vesting during the Performance Period.

A Participant whose employment terminates during the Performance Period for the following reasons will be eligible for a pro-rated award based on the period of active employment with the Business during the Performance Period, provided the Participant has participated in the Plan for at least 12 consecutive months:

If a Participant’s employment with the Company is terminated prior to actual payment of an award for any reason other than listed above, or an employee has not worked 12 consecutive months during the Performance Period in an eligible position, such award will be canceled and the Participant will have no right under the Plan to receive payment.

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VI. Payout of Awards

If achievement of Business EBITDA is:

In each year of the Performance Period, the

Target Award is multiplied by: TOTAL Earned Award at

December 31, 2010 is:

$ 3.6 Billion 50% 1X Target Award$ 3.8 Billion 100% 2X Target Award$ 4.1 Billion 150% 3X Target Award

VII. Termination of Employment or Leave of Absence

• Death or disability • Transfer out of the Business

• Layoff, divestiture, job restructuring or other similar reorganization activity

• Retirement

Any exceptions to the above must be approved by the Company’s (i) Senior Vice President, Industrial Packaging and (ii) Senior Vice President, Human Resources and Communications.

A. Type of Payment Earned Awards under the Plan are paid in cash. Earned Awards are not eligible for deferral under either the Company’s Salaried Savings Plan or Deferred Compensation Savings Plan. Earned Awards are not considered pensionable earnings under the Company’s Retirement Plan, Pension Restoration Plan or Unfunded Supplemental Retirement Plan for Senior Managers (“SERP”).

B. Time of Payment

Awards may be paid at such time(s) as determined by the Committee but in all events will be paid no later than the later of: (i) March 15 following the end of the Performance Period, or (ii) two and one-half (2 1/2) months after the expiration of the fiscal year in which the Performance Period with respect to which the awards are earned has ended.

C. Payment to Beneficiaries If a Participant dies prior to receipt of an approved award under the Plan, the award will be paid in a lump sum to the Participant’s estate at the end of the Performance Period.

If the Company reasonably believes that a Participant has committed an act of misconduct as described in this Section IX either during employment with the Company or after such employment terminates, the Company may terminate the Participant’s participation in the Plan or seek recoupment of an award paid under this Plan. Recoupment may be effectuated by a notice of recapture (“Recapture Notice”) to such Participant in respect of any Award, including Awards previously paid to the Participant. The Participant will be required to deliver to the Company an amount in cash equal to the gross cash payment or payments to which such Recapture Notice relates within ten days after receiving such Recapture Notice from the Company. For purposes of this Section IX, “misconduct” includes but is not limited to, an act detrimental to the business interest or reputation of the Company or continued unsatisfactory job performance without making reasonable efforts to improve as determined by the Senior Vice President, Human Resources and Communications. “Misconduct” will also include for purposes of this Section IX, any act determined by the Senior Vice President, Human Resources and Communications, to be a deliberate disregard of the Company’s rules, an unauthorized disclosure of any Company trade secret or confidential information, any conduct constituting unfair competition, inducing any customer to breach a contract with the Company, or violation of the Employee’s Non-Competition or Non-Solicitation Agreement. The Company has sole and absolute discretion to take action or not to take action pursuant to this Section IX upon discovery of misconduct, and its determination not to take action in any particular instance does not in any way limit its authority to terminate the participation of a Participant in the Plan and/or send a Recapture Notice in any other instance.

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VIII. Payment of Awards

IX. Recoupment or Forfeiture of Awards

If any provision of this Section IX is determined to be unenforceable or invalid under any applicable law, such provision will be applied to the maximum extent permitted by applicable law, and will automatically be deemed amended in a manner consistent with its objectives to the extent necessary to conform to any limitations required under applicable law.

The Committee may at any time suspend, terminate, modify or amend any or all of the provisions of this Plan.

The Plan is governed by the laws of the State of New York.

The Company has the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it may have under law to withhold federal, state or local income or other taxes incurred by reason of payments pursuant to the Plan.

The Plan is intended to comply with the applicable requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and will be limited, construed and interpreted in accordance with such intent.

No award under this Plan, and no rights or interests therein, will be assignable or transferable by a Participant (or legal representative).

This Plan is effective as of January 1, 2009, and continues through December 31, 2010 unless earlier terminated, suspended, modified, or amended by the Committee.

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X. Modification, Suspension or Termination of Plan

XI. Governing Law

XII. Tax Withholding

XIII. Section 409A

XIV. Non-Transferability of Award

XV. Effective Date

Appendix A

International Paper Company Industrial Packaging Group (“IPG”) Special Incentive Plan

Target Awards

7

Position Level Target Award (% of Midpoint)

36 75% 35 70% 34 70% 33 65% 32 65% 31 60% 30 55% 29 50% 28 50% 27 45% 26 45% 25 40% 24 40% 23 35% 22 30% 21 30% 20 25% 19 25% 18 20% 17 20% 16 20% 15 15% 14 15%

Exhibit 10.4a

INTERNATIONAL PAPER COMPANY LONG-TERM INCENTIVE COMPENSATION PLAN RESTRICTED STOCK UNIT AWARD AGREEMENT

The International Paper Company Long-Term Incentive Compensation Plan, amended and restated as of February 7, 2005 (the “Plan”), provides in Section 18 for the award of restricted stock units (“RSU’s”), which are a derivative security based on shares of common stock of International Paper Company, a New York corporation (the “Company”), under the terms of the Plan. The terms and provisions of the Plan are incorporated by reference herein.

For services performed for the International Paper group of companies by [NAME] (the “Employee”), it is hereby agreed between the Company and the Employee as follows:

The term “Share” or “Stock” as used in this Restricted Stock Unit Award Agreement shall mean a share of common stock, $1.00 par value, of International Paper Company. The term “Restricted Stock Unit” or “RSU” under this Restricted Stock Unit Award Agreement shall mean a right to receive payment in cash based on the value of Company Stock on the last business day immediately preceding the date the RSU vests under Section 4.

It is the intention of the parties that this Restricted Stock Unit Award Agreement, and any securities issued pursuant to this Restricted Stock Unit Award Agreement, shall comply with all provisions of federal and applicable state securities laws.

Subject to the provisions of the Plan and this Restricted Stock Unit Award Agreement, the Company hereby awards and authorizes the issuance to Employee of [###] Restricted Stock Units. The Employee shall have no voting rights with regard to Restricted Stock Units. The Employee shall be eligible to receive dividends on the Restricted Stock Units to the extent dividends are paid by the Company to equity owners. All dividends paid on Restricted Stock Units shall be reinvested in additional Restricted Stock Units (which shall be subject to being earned by the Employee on the same basis as the original Restricted Stock Units). No award under this Plan, and no rights or interest herein, may be sold, transferred, pledged or assigned by the Employee, except at death by will or by the laws of descent and distribution. Restricted Stock Units shall be subject to forfeiture and cancellation pursuant to the provisions of the Plan and this Restricted Stock Unit Award Agreement.

1. Definitions

2. Compliance with Law and Regulations

3. Award of Restricted Stock Units

The restrictions on this Restricted Stock Unit Award shall be removed, and the award shall vest, pursuant to the following schedule:

[###] shares on [DATE]

The Employee may file with the Company a designation of a beneficiary or beneficiaries on a form approved by the Company, which designation may be changed or revoked by the Employee’s sole action, provided that the change or revocation is filed with the Company on a form approved by it. In case of the death of the Employee before termination of employment or after disability, any portion of the Employee’s award to which the Employee’s designated beneficiary or estate is entitled under the Plan and this Restricted Stock Unit Award Agreement shall be paid to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives the Employee, shall be delivered as directed by the executor or administrator of the Employee’s estate.

4. Method of Earning Restricted Stock Units and Removal of Restrictions

(a) Upon death of the Employee or the Employee’s becoming disabled as such condition is determined in the sole discretion of

the Committee, if earlier; or

(b) Upon a change of control of the Company (as defined in the Plan) if earlier; however,

(c) If Employee ceases to be an active employee of the Company prior to [INSERT VESTING DATE FROM ABOVE] for

any reason other than death or disability as described above, all of the Restricted Shares under this Agreement shall be canceled and forfeited unless the Committee determines otherwise pursuant to Section 2 of the Plan.

5. Designation of Beneficiary

6. Other Terms and Conditions

(a) Employee (or his or her estate or beneficiary) shall promptly provide all information related to this Restricted Stock Unit

Award Agreement requested by the Company for its tax returns.

(b) Employee represents that Employee is familiar with the terms and provisions of the Plan, and hereby accepts the Restricted Stock Units awarded under this Restricted Stock Unit Award Agreement subject to all the terms and provisions of the Plan and this Restricted Stock Unit Award Agreement. Employee hereby agrees to accept as binding, conclusive and final all decisions which are made by the Committee with respect to interpretations of the terms of the Plan or this Restricted Stock Unit Award Agreement and with respect to any questions or disputes arising under the Plan or this Restricted Stock Unit Award Agreement.

Employee shall be required to execute both a Non-Competition and Non-Solicitation Agreement as a condition to receiving the award of Restricted Stock Units. The Non-Competition and Non-Solicitation Agreements entered into between the Company and the Employee shall be attached to this Restricted Stock Unit Award Agreement, and are hereby incorporated by reference to this Restricted Stock Unit Award Agreement.

This Restricted Stock Unit Award Agreement shall be governed by and construed in accordance with the laws of the State of New York (without regard to its rules of conflict of laws). The parties expressly agree that any appropriate state or federal district court located in the County of Westchester, State of New York shall have exclusive jurisdiction over any and all cases or controversies arising under or in connection with the Restricted Stock Unit Award or this Restricted Stock Unit Award Agreement and shall be a proper forum in which to adjudicate such case or controversy. The parties hereby waive any and all defenses to lack of personal jurisdiction with respect to such agreed upon forum. IN WITNESS WHERE OF, the parties hereby execute this Restricted Stock Unit Award Agreement, effective as of [DATE].

(c) All of the terms and conditions of the Plan and this Restricted Stock Unit Award Agreement shall be binding upon any

surviving spouse, beneficiary, executor, administrator, heirs, successors or assigns of Employee.

(d) Participation in the Plan, and execution of this Restricted Stock Unit Award Agreement, shall not give the Employee any right to a subsequent award, nor any right to continued employment by the Company or its subsidiaries for any period, nor shall the granting of an award or execution of this Restricted Stock Unit Award Agreement give the Company or its subsidiaries any right to continued services of the Employee for any period.

7. Non-Competition and Non-Solicitation Agreements

8. Applicable Law and Choice of Forum


By:

Title: Senior Vice President-Human Resources

[NAME OF EMPLOYEE]:

Signature of Employee:

Social Security Number:

Exhibit 10.4b

INTERNATIONAL PAPER COMPANY LONG-TERM INCENTIVE COMPENSATION PLAN RESTRICTED STOCK UNIT AWARD AGREEMENT

The International Paper Company Long-Term Incentive Compensation Plan, amended and restated as of February 7, 2005 (the “Plan”), provides in Section 18 for the award of restricted stock units(“RSU’s”), which are a derivative security based on shares of common stock of International Paper Company, a New York corporation (the “Company”), under the terms of the Plan. The terms and provisions of the Plan are incorporated by reference herein.

For services performed for the International Paper group of companies by [NAME] (the “Employee”), it is hereby agreed between the Company and the Employee as follows:

The term “Share” or “Stock” as used in this Restricted Stock Unit Award Agreement shall mean a share of common stock, $1.00 par value, of International Paper Company. The term “Restricted Stock Unit” or “RSU” under this Award Agreement shall mean a right to receive payment in Shares.

It is the intention of the parties that this Restricted Stock Unit Award Agreement, and any securities issued pursuant to this Restricted Stock Unit Award Agreement, shall comply with all provisions of federal and applicable state securities laws.

1. Definitions

2. Compliance with Law and Regulations

3. Award of Restricted Stock Units

(a) Subject to the provisions of the Plan and this Restricted Stock Unit Award Agreement, the Company hereby awards and authorizes the issuance to Employee of [###] Restricted Stock Units. Such Restricted Stock Units shall be issued with the restriction that the Employee may not sell, transfer, pledge, or assign the Shares associated with the Restricted Stock Units until the Restricted Stock Units are earned and the restrictions are removed as described below, and shall be subject to forfeiture and cancellation pursuant to the provisions of the Plan and this Restricted Stock Unit Award Agreement. The Employee shall be eligible to receive dividends on the Restricted Stock Units to the extent dividends are paid by the Company to equity owners. All dividends paid on Restricted Stock Units shall be reinvested in additional Restricted Shares (which shall be subject to being earned by the Employee on the same basis as the original Restricted Stock Units). All Restricted Stock Units awarded under this Restricted Stock Unit Award Agreement, and purchased with reinvested dividends, shall be uncertificated shares with notations describing the applicable restrictions of the Plan and this Restricted Stock Unit Award Agreement, and no stock certificates shall be issued

The restrictions on this Restricted Stock Unit Award shall be removed, and the award shall vest, pursuant to the following schedule:

[###] shares on [DATE]

The Employee may file with the Company a designation of a beneficiary or beneficiaries on a form approved by the Company, which designation may be changed or revoked by the Employee’s sole action, provided that the change or revocation is filed with the Company on a form approved by it. In case of the death of the Employee before termination of employment or after disability, any portion of the Employee’s award to which the Employee’s designated beneficiary or estate is entitled under the Plan and this Restricted Stock Unit Award Agreement shall be paid to the beneficiary or beneficiaries so designated or, if no beneficiary has been designated or survives the Employee, shall be delivered as directed by the executor or administrator of the Employee’s estate.

by the Company or its designated custodian until the restrictions are removed. No award or share under this Plan, and no rights or interest herein, shall be assignable or transferable by the Employee, except at death by will or by the laws of descent and distribution.

(b) The number of Shares determined by the Committee to have been earned by Employee under the Plan and this Restricted

Stock Unit Award Agreement shall be final, conclusive and binding upon all parties, including the Employee, the Company, and its shareholders.

4. Method of Earning Restricted Stock Units and Removal of Restrictions

(a) Upon death of the Employee or the Employee’s becoming disabled as such condition is determined in the sole discretion of

the Committee, if earlier; or

(b) Upon a change of control of the Company (as defined in the Plan) if earlier; however,

(c) If Employee ceases to be an active employee of the Company prior to [INSERT VESTING DATE FROM ABOVE] for

any reason other than death or disability as described above, all of the Restricted Shares under this Agreement shall be canceled and forfeited unless the Committee determines otherwise pursuant to Section 2 of the Plan.

5. Designation of Beneficiary

6. Other Terms and Conditions

(a) Employee (or his or her estate or beneficiary) shall promptly provide all information related to this Restricted Stock Unit

Award Agreement requested by the Company for its tax returns.

Employee shall be required to execute both a Non-Competition and Non-Solicitation Agreement as a condition to receiving the award of Restricted Stock Units. The Non-Competition and Non-Solicitation Agreements entered into between the Company and the Employee shall be attached to this Restricted Stock Unit Award Agreement, and are hereby incorporated by reference to this Restricted Stock Unit Award Agreement.

This Restricted Stock Unit Award Agreement shall be governed by and construed in accordance with the laws of the State of New York (without regard to its rules of conflict of laws). The parties expressly agree that any appropriate state or federal district court located in the County of Westchester, State of New York shall have exclusive jurisdiction over any and all cases or controversies arising under or in connection with the Restricted Stock Unit Award or this Restricted Stock Unit Award Agreement and shall be a proper forum in which to adjudicate such case or controversy. The parties hereby waive any and all defenses to lack of personal jurisdiction with respect to such agreed upon forum. IN WITNESS WHERE OF, the parties hereby execute this Restricted Stock Unit Award Agreement, effective as of [DATE].

(b) Employee represents that Employee is familiar with the terms and provisions of the Plan, and hereby accepts the Restricted Stock Units awarded under this Restricted Stock Unit Award Agreement subject to all the terms and provisions of the Plan and this Restricted Stock Unit Award Agreement. Employee hereby agrees to accept as binding, conclusive and final all decisions which are made by the Committee with respect to interpretations of the terms of the Plan or this Restricted Stock Unit Award Agreement and with respect to any questions or disputes arising under the Plan or this Restricted Stock Unit Award Agreement.

(c) All of the terms and conditions of the Plan and this Restricted Stock Unit Award Agreement shall be binding upon any

surviving spouse, beneficiary, executor, administrator, heirs, successors or assigns of Employee.

(d) Participation in the Plan, and execution of this Restricted Stock Unit Award Agreement, shall not give the Employee any right to a subsequent award, nor any right to continued employment by the Company or its subsidiaries for any period, nor shall the granting of an award or execution of this Restricted Stock Unit Award Agreement give the Company or its subsidiaries any right to continued services of the Employee for any period.

7. Non-Competition and Non-Solicitation Agreements

8. Applicable Law and Choice of Forum


By:

Title: Senior Vice President-Human Resources

[NAME OF EMPLOYEE]:

Signature of Employee:

Social Security Number:

Exhibit 11

INTERNATIONAL PAPER COMPANY STATEMENT OF COMPUTATION OF PER SHARE EARNINGS

(Unaudited) (In millions, except per share amounts)

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

Three Months Ended


September 30, 2008 2007 2008 2007

Earnings from continuing operations $ 149 $ 220 $ 527 $ 877Discontinued operations — (3) (18) (36)

Net earnings 149 217 509 841Effect of dilutive securities — — — —

Net earnings – assuming dilution $ 149 $ 217 $ 509 $ 841

Average common shares outstanding 421.2 422.3 421.0 431.8Effect of dilutive securities

Restricted stock performance share plan 2.2 2.9 3.2 3.4 Stock options — 0.4 — 0.5

Average common shares outstanding – assuming dilution 423.4 425.6 424.2 435.7

Earnings per common share from continuing operations $ 0.35 $ 0.52 $ 1.25 $ 2.03Discontinued operations — (0.01) (0.04) (0.08)

Net earnings per common share $ 0.35 $ 0.51 $ 1.21 $ 1.95

Earnings per common share from continuing operations – assuming dilution $ 0.35 $ 0.52 $ 1.24 $ 2.01Discontinued operations — (0.01) (0.04) (0.08)

Net earnings per common share – assuming dilution $ 0.35 $ 0.51 $ 1.20 $ 1.93

Exhibit 12

INTERNATIONAL PAPER COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

AND PREFERRED STOCK DIVIDENDS (Dollar amounts in millions)

(Unaudited)

NOTE: Dividends on International Paper’s preferred stock are insignificant. As a result, for all periods presented, the ratios of earnings to fixed charges and preferred stock dividends are the same as the ratios of earnings to fixed charges.

For the Years Ended December 31, Nine Months Ended

September 30,

2003 2004 2005 2006 2007 2007 2008

TITLE

A) Earnings from continuing operations before income taxes and minority interest $ 89.0 $ 376.0 $ 286.0 $3,188.0 $1,654.0 $1,215.0 $ 765 (1)

B) Minority interest expense, net of taxes (79.0) (24.0) (9.0) (17.0) (24.0) (17.0) (15.0)C) Fixed charges excluding capitalized interest 943.8 859.7 752 724.5 552.8 407.3 428.0D) Amortization of previously capitalized interest 40.8 40.3 39.2 34.8 27.2 20.2 22.5E) Equity in undistributed earnings of affiliates 3.1 (13.4) 9.7 (5.8) (10.7) 2.8 — (1)

F) Earnings from continuing operations before income taxes and fixed charges $997.7 $1,238.6 $1,077.9 $3,924.5 $2,199.3 $1,628.3 $1,200.5

Fixed Charges

G) Interest and amortization of debt expense $801.8 $ 780.3 $ 680.8 $ 651.4 $ 487.0 $ 359.9 $ 374.2H) Interest factor attributable to rentals 74.9 63.9 61.2 60.2 55.4 40.9 46.6I) Preferred dividends of subsidiaries 67.1 15.5 10.0 12.9 10.4 6.5 7.2J) Capitalized interest 8.0 9.7 13.7 20.7 29.9 25.4 18.6

K) Total fixed charges $951.8 $ 869.4 $ 765.7 $ 745.2 $ 582.7 $ 432.7 $ 446.6

L) Ratio of earnings to fixed charges 1.05 1.42 1.41 5.27 3.77 3.76 2.69

(1) Beginning in 2008, earnings from continuing operations are reported before equity earnings. Therefore, equity earnings will no longer be adjusted out of the total in Line E.

Exhibit 31.1

CERTIFICATION

I, John V. Faraci, certify that:

Date: November 7, 2008

1. I have reviewed this quarterly report on Form 10-Q of International Paper Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under

our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be

designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our

conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the

registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting

which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the

registrant’s internal control over financial reporting.

/s/ John V. FaraciJohn V. FaraciChairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Tim S. Nicholls, certify that:

Date: November 7, 2008

1. I have reviewed this quarterly report on Form 10-Q of International Paper Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under

our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be

designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our

conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the

registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting

which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the

registrant’s internal control over financial reporting.

/s/ Tim S. NichollsTim S. NichollsSenior Vice President and Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Quarterly Report of International Paper Company (the “Company”) on Form 10-Q for the quarterly period ending September 30, 2008 for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code. John V. Faraci, Chief Executive Officer of the Company, and Tim S. Nicholls, Chief Financial Officer of the Company, each certify that, to the best of his knowledge:

This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to International Paper Company and will be retained by International Paper Company and furnished to the Securities and Exchange Commission or its staff upon request.

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of

operations of the Company.

/s/ John V. FaraciJohn V. FaraciChairman and Chief Executive OfficerNovember 7, 2008

/s/ Tim S. NichollsTim S. NichollsSenior Vice President and Chief Financial Officer November 7, 2008

international paper Q3 2008 10-Q

Economy & Finance

Transcript of international paper Q3 2008 10-Q