UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

(Mark	One)

x Annual	Report	Pursuant	to	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	For	the	Fiscal	Year	Ended	December	31,	2006 or

# INTERNATIONAL	PAPER	COMPANY

(Exact	name	of	registrant	as	specified	in	its	charter)

New	York

(State	or	other	jurisdiction	of	incorporation	or	organization)

(I.R.S.	Employer	Identification	No.)

6400	Poplar	Avenue

Memphis,	Tennessee

(Address	of	principal	executive	offices)

(Zip	Code)

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

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

# Title	of	each	class

# Name	of	each	exchange	on	which	registered

# Securities	Registered	Pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.

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

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding	12	months	(or	for	such shorter	period	that	the	Company	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.	Yes	x				No	¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	(paragraph	229.405	of	this	chapter)	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.	¨

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	or	a	non-accelerated	filer.	See	definition	of	"accelerated	filer	and	large	accelerated	filer"	in	Rule	12b-2	of the	Exchange	Act.

Large	accelerated	filer	x

Accelerated	filer	¨ Non-accelerated	filer	¨

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Act).	Yes ¨				No	x

The	aggregate	market	value	of	the	Company's	outstanding	common	stock	held	by	non-affiliates	of	the	registrant,	computed	by	reference	to	the	closing	price	as	reported	on	the	New	York	Stock Exchange,	as	of	the	last	business	day	of	the	registrant's	most	recently	completed	second	fiscal	quarter	(June	30,	2006)	was	approximately	$15,926,970,664.

Documents	incorporated	by	reference:

Portions	of	the	registrant's	proxy	statement	filed	within	120	days	of	the	close	of	the	registrant's	fiscal	year	in	connection	with	registrant's	2007	annual	meeting	of	shareholders	are	incorporated	by reference	into	Parts	III	and	IV	of	this	Form	10-K.

# INDEX	TO	ANNUAL	REPORT	ON	FORM	10-K

# PART	I.

# INDEX	TO	ANNUAL	REPORT	ON	FORM	10-K	(Continued)

| ITEM	7A. | QUANTITATIVE	AND	QUALITATIVE	DISCLOSURES	ABOUT	MARKET	RISK. | 42 |
| :--- | :--- | :--- |
| ITEM\t8. | \t\t FINANCIAL\tSTATEMENTS\tAND\tSUPPLEMENTARY\tDATA. |  |
|  | Information\tby\tIndustry\tSegment\tand\tGeographic\tArea | 43 |
|  | Report\tof\tManagement\ton\tFinancial\tStatements,\tInternal\tControls\tover\tFinancial\tReporting\tand\tInternal\tControl |  |
|  | Environment\tand\tBoard\tof\tDirectors\tOversight | 45 |
|  | Reports\tof\tDeloitte\t&\tTouche\tLLP,\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 47 |
|  | Consolidated\tStatement\tof\tOperations | 49 |
|  | Consolidated\tBalance\tSheet | 50 |
|  | Consolidated\tStatement\tof\tCash\tFlows | 51 |
|  | Consolidated\tStatement\tof\tChanges\tin\tCommon\tShareholders'\tEquity | 52 |
|  | Notes\tto\tConsolidated\tFinancial\tStatements | 53 |
|  | Interim\tFinancial\tResults\t(Unaudited) | 89 |
| ITEM\t9. | \t\t CHANGES\tIN\tAND\tDISAGREEMENTS\tWITH\tACCOUNTANTS\tON\tACCOUNTING\tAND\tFINANCIAL\tDISCLOSURE. | 92 |
| ITEM\t9A. | \t\t CONTROLS\tAND\tPROCEDURES. | 92 |
| ITEM\t9B. | \t\t OTHER\tINFORMATION. | 93 |
| PART\tIII. |  |  |
| ITEM\t10. | \t\t DIRECTORS,\tEXECUTIVE\tOFFICERS\tAND\tCORPORATE\tGOVERNANCE. | 93 |
| ITEM\t11. | \t\t EXECUTIVE\tCOMPENSATION. | 94 |
| ITEM\t12. | SECURITY\tOWNERSHIP\tOF\tCERTAIN\tBENEFICIAL\tOWNERS\tAND\tMANAGEMENT\tAND\tRELATED\tSTOCKHOLDER |  |
|  | MATTERS. | 94 |
| ITEM\t13. | \t\t CERTAIN\tRELATIONSHIPS\tAND\tRELATED\tTRANSACTIONS,\tAND\tDIRECTOR\tINDEPENDENCE. | 94 |
| ITEM\t14. | \t\t PRINCIPAL\tACCOUNTING\tFEES\tAND\tSERVICES. | 94 |
| PART\tIV. |  |  |
| ITEM\t15. | \t\t EXHIBITS,\tFINANCIAL\tSTATEMENT\tSCHEDULES. |  |
|  | Additional\tFinancial\tData | 94 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm\ton\tFinancial\tStatement\tSchedule | 99 |
|  | Schedule\tII\t-\tValuation\tand\tQualifying\tAccounts | 100 |
|  | \t\t SIGNATURES | 101 |

# ITEM	1.	BUSINESS

# GENERAL

International	 Paper	 Company	 (the	 "Company"	 or	 "International	 Paper," which	may	also	be	referred	to	as	"we"	or	"us"),	is	a	global	paper	and packaging	 company	 that	 is	 complemented	 by	 an	 extensive	 North American	 merchant	 distribution	 system,	 with	 primary	 markets	 and manufacturing	operations	in	the	United	States,	Europe,	South	America and	Asia.	We	are	a	New	York	corporation,	incorporated	in	1941	as	the successor	to	the	New	York	corporation	of	the	same	name	organized	in 1898.	 Our	 home	 page	 on	 the	 Internet	 is	 www.internationalpaper.com. You	can	learn	more	about	us	by	visiting	that	site.

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

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

From	 2002	 through	 2006,	 International	 Paper's	 capital	 expenditures approximated	 $5.1	 billion,	 excluding	 mergers	 and	 acquisitions.	 These expenditures	reflect

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

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

You	can	find	discussions	of	restructuring	charges	and	other	special	items on	 pages 20 through 22 of	 Item	 7.	 Management's	 Discussion	 and Analysis	of	Financial	Condition	and	Results	of	Operations.

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

# FINANCIAL	INFORMATION	CONCERNING	INDUSTRY	SEGMENTS

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

# FINANCIAL	INFORMATION	ABOUT	INTERNATIONAL	AND DOMESTIC	OPERATIONS

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

# COMPETITION	AND	COSTS

Despite	 the	 size	 of	 the	 Company's	 manufacturing	 capacity	 for	 paper, paperboard,	packaging	and	pulp	products,	the	markets	in	all	of	the	cited product	lines	are	large	and	highly	fragmented.	The	markets	for	wood	and specialty	 products	 are	 similarly	 large	 and	 fragmented.	 There	 are numerous	competitors,	and	the	major	markets,	both	U.S.	and	non-U.S., in	which	the	Company	sells	its	principal	products	are	very	competitive. These	 products	 are	 in	 competition	 with	 similar	 products	 produced	 by other	forest	products	companies,	and	in	some	instances,	with	products produced	by	other	industries	from	other	materials.

Many	 factors	 influence	 the	 Company's	 competitive	 position,	 including prices,	costs,	product	quality	and	services.	You	can	find	more	information about	the	impact	of	prices	and	costs	on	operating	profits	on	pages	14 through	29	of	Item	7.	Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations.	You	can	find	information	about	the Company's	manufacturing	capacities	on	page	A-3	of	Appendix	II.

# MARKETING	AND	DISTRIBUTION

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

# DESCRIPTION	OF	PRINCIPAL	PRODUCTS

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

# SALES	VOLUMES	BY	PRODUCT

# (Unaudited)

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers\t(In\tthousands\tof\ttons) |  |  |  |
| Brazil\tUncoated\tPapers | 477 | 447 | 461 |
| Europe\t&\tRussia\tUncoated\tPapers\tand\tBristols | 1,455 | 1,419 | 1,409 |
| U.S.\tUncoated\tPapers\tand\tBristols | 3,991 | 3,850 | 4,179 |
| Uncoated\tPapers\tand\tBristols | 5,923 | 5,716 | 6,049 |
| Coated\tPapers\t(3) | 1,168 | 1,996 | 1,757 |
| Market\tPulp\t(4) | 1,124 | 1,291 | 1,422 |
| Packaging\t(In\tthousands\tof\ttons) |  |  |  |
| Container\tof\tthe\tAmericas | 3,628 | 3,578 | 2,821 |
| European\tContainer\t(Boxes) | 1,267 | 1,073 | 1,049 |
| Other\tIndustrial\tand\tConsumer\tPackaging | 525 | 421 | 745 |
| Industrial\tand\tConsumer\tPackaging | 5,420 | 5,072 | 4,615 |
| Containerboard | 1,816 | 1,937 | 2,090 |
| Bleached\tPackaging\tBoard | 1,503 | 1,264 | 1,000 |
| Coated\tBristols | 410 | 411 | 435 |
| Saturated\tand\tBleached\tKraft\tPapers | 232 | 242 | 272 |
| (1)\nIncludes\tthird-party\tand\tinter-segment\tsales. |  |  |  |

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

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

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

(4) Includes	internal	sales	to	mills.

# RESEARCH	AND	DEVELOPMENT

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

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

# ENVIRONMENTAL	PROTECTION

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

# EMPLOYEES

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

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

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

# EXECUTIVE	OFFICERS	OF	THE	REGISTRANT

John	V.	Faraci,	57,	chairman	and	chief	executive	officer	since	2003.	Prior to	this,	Mr.	Faraci	was	president	since	2003,	and	executive	vice	president and	 chief	 financial	 officer	 from	 2000	 to	 2003.	 Mr.	 Faraci	 joined International	Paper	in	1974.

Newland	 A.	 Lesko, 61, executive	 vice	 president-manufacturing	 and technology	 since	 2003.	 Mr.	 Lesko	 previously	 served	 as	 senior	 vice president-industrial	 packaging	 from	 1998	 to	 2003.	 Mr.	 Lesko	 joined International	Paper	in	1967.

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

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

Michael	 J.	 Balduino, 56, senior	 vice	 president	 of	 the	 Company responsible	for	consumer	products	converting	business	and	president	of the	Company's	Shorewood	Packaging	Corp.	subsidiary	since	2004.	Mr. Balduino	 joined	 the	 Company	 in	 1992	 and	 previously	 served	 as	 the Company's	senior	vice	president	of	sales	and	marketing	 from	2000	 to 2003.

H.	 Wayne Brafford, 55, senior vice president-printing	 and communications	papers	since	2005.	Previously,	Mr.	Brafford	served	as senior	 vice	 president-industrial	 packaging	 from	 2003,	 and	 as	 vice president	and	general	manager-converting,	specialty	and	pulp	from	1999 to	2003.	Mr.	Brafford	joined	International	Paper	in	1975.

Jerome	 N.	 Carter,	 58,	 senior	 vice	 president-human	 resources	 since 1999.	 Since	 2005,	 Mr.	 Carter	 is	 also	 responsible	 for	 overseeing	 the communications	function	of	the	Company.	Mr.	Carter	joined	International Paper	in	1999.

C.	 Cato	 Ealy,	 50,	 senior	 vice	 president-corporate	 development	 since 2003.	 He	 previously	 served	 as	 vice	 president-corporate	 development from	1996	to	2003.	Mr.	Ealy	joined	International	Paper	in	1992.

Thomas	 E.	 Gestrich,	 60,	 senior	 vice	 president	 and	 president-IP	 Asia since	 2005.	 Previously,	 Mr.	 Gestrich	 served	 as	 senior	 vice	 president- consumer	packaging	from	2001	to	2005.	Prior	to	that,	he	served	as	vice president	and	general	manager-beverage	packaging	from	1999	to	2001. Mr.	Gestrich	joined	International	Paper	in	1990.

Paul	Herbert,	57,	senior	vice	president-strategic	initiatives	since	2005.	He previously	served	as	senior	 vice	 president-printing	 and	 communication papers	from	2000	to	2005.	Mr.	Herbert	joined	International	Paper	in	1992.

Thomas	G.	Kadien,	50,	senior	vice	president	and	president-xpedx	since 2005.	 Previously,	 Mr.	 Kadien	 served	 as	 senior	 vice	 president-Europe from	 2003	 to	 2005,	 and	 as	 vice	 president-commercial	 printing	 and imaging	papers	from	2001	to	2003.	Mr.	Kadien	joined	International	Paper in	1978.

Mary	A.	Laschinger,	46,	senior	vice	president	since	2007	and	president- IP	 Europe	 since	 2005.	 Ms.	 Laschinger	 previously	 served	 as	 vice president-wood	products	from	2004	to	2005	and	as	vice	president-pulp from	2001	to	2004.	Prior	to	that,	she	served	as	the	general	manager- industrial	papers	from	1999	to	2001.	Ms.	Laschinger	joined	International Paper	in	1992.

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

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

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

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

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

# RAW	MATERIALS

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

# FORWARD-LOOKING	STATEMENTS

Certain	statements	in	this	Annual	Report	on	Form	10-K,	and	in	particular, statements	found	in	Item	7.	Management's	Discussion	and	Analysis	of Financial	Condition	and	Results	of	Operations,	that	are	not	historical	in nature,	may	constitute	forward-looking	statements.	These	statements	are often	 identified	 by	 the	 words,	 "will,"	 "may,"	 "should,"	 "continue," "anticipate,"	 "believe,"	 "expect,"	 "plan,"	 "appear,"	 "project,"	 "estimate," "intend,"	 and	 words	 of	 a	 similar	 nature.	 Such	 statements	 reflect	 the current	views	of	International	Paper	with	respect	to	future	events	and	are subject	to	risks	and	uncertainties	that	could	cause	actual	results	to	differ materially	from	those	expressed	or	implied	in	these	statements.	Below, we	have	listed	specific	risks	and	uncertainties	that	you	should	carefully read	and	consider.	We	undertake	no	obligation	 to	publicly	update	any forward-looking	statements,	whether	as	a	result	of	new	information,	future events	or	otherwise.

# ITEM	1A.	RISK	FACTORS

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

# RISKS	RELATING	TO	INDUSTRY	CONDITIONS

CHANGES	IN	THE	COST	OR	AVAILABILITY	OF	RAW	MATERIALS	AND	ENERGY .	We rely	heavily	on	certain	raw	materials	(principally	wood	fiber,	caustic	soda and	polyethylene)	and	energy	sources	(principally	natural	gas,	coal	and fuel	oil)	 in	our	manufacturing	process.	Our	ability	 to	 increase	earnings has	been,	and	will	continue	to	be,	affected	by	changes	in	the	costs	and availability	of	such	raw	materials	and	energy	sources.	We	may	not	be able	 to	 fully	 offset	 the	 effects	 of	 higher	 raw	 material	 or	 energy	 costs through	 hedging	 arrangements,	 price	 increases,	 and	 productivity improvements	or	cost	reduction	programs.

CHANGES IN TRANSPORTATION AVAILABILITY OR COSTS .	 Our	 business depends	 on	 the	 transportation	 of	 a	 large	 number	 of	 products,	 both domestically	 and	 internationally.	 In	 the	 United	 States,	 an	 increase	 in transportation	 rates	 or	 fuel	 surcharges	 could	 adversely	 affect	 our earnings,	and/or	a	reduction	in	transport	availability	in	truck	and	rail	could negatively	impact	our	ability	to	provide	products	to	our	customers	in	a timely	manner.	While	we	have	benefited	from	supply-chain	initiatives	that reduce	 usage	 and	 improve	 transportation	 availability,	 there	 is	 no assurance	that	such	availability	can	continue	to	be	effectively	managed	in the	future.

COMPETITION.	 We face	 intense	 competition,	 both	 domestically	 and internationally,	for	our	products	in	all	of	our	operating	segments.	Because our	 outlook	 depends	 on	 a	 forecast	 of	 our	 share	 of	 industry	 sales,	 an unexpected	reduction	in	that	share	due	to	pricing	or	product	strategies pursued	 by	 competitors	 could	 negatively	 impact	 our	 revenues	 and financial	results.

PRODUCT	MIX.	Our	results	may	be	affected	by	a	change	in	the	Company's sales	mix.	Our	outlook	assumes	a	certain	volume	mix	of	sales	as	well	as a	product	mix	of	sales.	If	actual	results	vary	from	this	projected	volume and	product	mix	of	sales,	our	operations	and	our	financial	results	could be	negatively	impacted.

PRICING.	Our	outlook	assumes	that	we	will	be	successful	in	implementing previously	announced	price	increases	as	well	as	other	price	increases that	we	may	in	the	future	deem	necessary	and/or	appropriate.	Delays	in the	 realization	 of	 these	 price	 increases	 would	 negatively	 impact	 our results.	 Moreover,	 price	 discounting,	 if	 required	 to	 maintain	 our competitive	position	and	our	share	of	industry	sales,	could	result	in	lower than	anticipated	price	realizations.

DEMAND	 FOR	 OUR	 PRODUCTS.	 Demand for	 our	 products	 is	 affected	 by general	 economic	 conditions	 in	 North	America,	 Europe,	 Latin	America and	Asia.	Changes	in	industrial	non-durable	goods	production,	consumer spending,	 commercial	 printing	 and	 advertising	 activity,	 white-collar employment	 levels,	 interest	 rates	 and	 currency	 exchange	 rates	 may adversely	affect	our	businesses	and	our	financial	results.

# RISKS	RELATING	TO	MARKET	AND	ECONOMIC	FACTORS

# CHANGES	IN	CREDIT	RATINGS	ISSUED	BY	NATIONALLY	RECOGNIZED	STATISTICAL

RATING	ORGANIZATIONS.	Maintaining	an	investment	grade	credit	rating	for our	long-term	debt	continues	to	be	an	important	element	in	our	overall financial	strategy.	Our	debt	ratings	are,	from	time	to	time,	reviewed	by the	rating	organizations	and	remain	subject	to	change,	and	a	downgrade in	rating	of	our	debt	could	increase	our	interest	cost	and	negatively	affect our	earnings.

PENSION	AND	HEALTH	CARE	COSTS.	Our	pension	and	health	care	costs	are dependent	upon	numerous	factors	resulting	from	actual	plan	experience and	assumptions	of	future	experience.	Pension	plan	assets	are	primarily made	up	of	equity	and	fixed	income	investments.	Fluctuations	in	actual equity	market	returns	as	well	as	changes	in	general	interest	rates	may result	 in	 increased	 or	 decreased	 pension	 costs	 in	 future	 periods. Likewise,	changes	in	assumptions	regarding	current	discount	rates	and expected	rates	of	return	on	plan	assets	could	also	increase	or	decrease pension	costs.

NATURAL	 DISASTERS.	 The	 occurrence	 of	 a	 natural	 disaster,	 such	 as	 a hurricane,	 tropical	 storm,	 earthquake,	 tornado,	 flooding	 or	 other unanticipated	problems,	could	cause	operational	disruptions	which	could impair	our	profitability.

CHANGES	IN	INTERNATIONAL	CONDITIONS.	Our	results	could	be	substantially affected	by	foreign	market	risks	in	the	countries	in	which	we	have

manufacturing	facilities	or	sell	our	products.	Specifically,	Brazil,	Russia, Poland	and	China,	where	substantial	manufacturing	 facilities	exist,	are countries	 that	are	exposed	 to	economic	and	political	 instability	 in	 their respective	regions	of	the	world.	Downturns	in	economic	activity,	adverse foreign	 tax	 consequences	 or	 any	 change	 in	 social,	 political	 or	 labor conditions	in	any	of	these	countries	or	regions	could	negatively	affect	our financial	results.

CHANGES IN CURRENCY EXCHANGE RATES .	 We are	 impacted	 by	 the movement	of	various	currencies	relative	to	the	U.S.	dollar.	From	time	to time,	 we	 may	 hedge	 a	 portion	 of	 the	 risk	 from	 our	 transactions	 and commitments	denominated	in	non-U.S.	dollar	currencies	when	we	deem it	appropriate	to	do	so.	There	can,	however,	be	no	assurance	that	we	will be	 able	 to	 fully	 protect	 ourselves	 against	 substantial	 foreign	 currency fluctuations.

# RISKS	RELATING	TO	THE	COMPANY'S	TRANSFORMATION	PLAN

# THE	 ABILITY TO	 SUCCESSFULLY	 EXECUTE	 SALES TRANSACTIONS	 CURRENTLY

UNDER	 CONTRACT.	 The	 Company's	 ability	 to	 successfully	 execute	 sales transactions	under	contract	(including	contracts	executed	pursuant	to	the Transformation	 Plan)	 and	 to	 realize	 the	 anticipated	 sales	 proceeds	 is dependent	 upon	 many	 factors,	 including	 the	 ability	 to	 successfully consummate	the	transactions	without	a	purchase	price	adjustment,	the successful	fulfillment	(or	waiver)	of	all	conditions	set	forth	in	the	sales agreements,	 and	 the	 successful	 closing	 of	 the	 transactions	 within	 the estimated	timeframes.

THE	ABILITY	TO	INVEST	PROCEEDS	WITH	ATTRACTIVE	FINANCIAL	RETURNS .	The Company	will	selectively	seek	attractive	 investment	opportunities	 for	a portion	of	the	proceeds	from	divestitures.	The	Company	may	be	unable to	identify	and	negotiate	acceptable	investments	with	attractive	returns.

# ABILITY TO REALIZE ANTICIPATED PROFIT IMPROVEMENT FROM THE TRANSFORMATION	 PLAN.	 The	 profitability	 of	 the	 Company's	 two	 platform businesses,	 uncoated	 papers	 (including	 distribution)	 and	 packaging,	 is subject	to	variable	demand	and	the	Company's	ability	to	execute	internal profit	 improvement	 initiatives,	 including	 ongoing	 manufacturing,	 supply chain	 and	 overhead	 cost	 reduction	 initiatives,	 as	 well	 as	 volume/mix improvements.	There	can	be	no	assurance	that	profit	improvements	will be	achieved.

# RISKS	RELATING	TO	LEGAL	PROCEEDINGS	AND	COMPLIANCE COSTS

UNANTICIPATED	 EXPENDITURES	 RELATED	 TO	 THE	 COST	 OF	 COMPLIANCE	 WITH ENVIRONMENTAL	 AND	 OTHER	 GOVERNMENTAL	 REGULATIONS .	 Our	 operations are	 subject to significant	 regulation	 by	 federal,	 state	 and	 local environmental and safety authorities, both domestically	 and internationally.	There	can	be	no	assurance	that	the	costs	of	compliance with	 existing	 and	 new	 regulations	 will	 not	 require	 significant	 capital expenditures,	 or	 that	 existing	 reserves	 for	 specific	 matters	 will,	 if regulations	change,	be	adequate	to	cover	future	unanticipated	costs.

RESULTS	OF	LEGAL	PROCEEDINGS.	The	costs	and	other	effects	of	pending litigation	 against	 the	 Company	 cannot	 be	 determined	 with	 certainty. Although	 the	 disclosure	 in	 Item 3. Legal	 Proceedings	 contains management's	current	views	of	the	impact	such	litigation	will	have	on	our financial	results,	 there	can	be	no	assurance	 that	 the	outcome	of	such proceedings	will	be	as	expected.

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

# ITEM	1B.	UNRESOLVED	STAFF	COMMENTS

# None.

# ITEM	2.	PROPERTIES

# FORESTLANDS

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

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

During	2006,	the	Company's	U.S.	forestlands	supplied	10.2	million	tons of	roundwood	to	its	U.S.	facilities,	representing	approximately	17%	of	its wood	 fiber	 requirements.	The	 balance	 of	 our	 fiber	 requirements	 came from	 residual	 chips	 supplied	 by	 our	 Wood	 Products	 operations,	 other roundwood	 and	 chips	 purchased	 from	 other	 suppliers,	 and	 from	 other private	 industrial	 and	 nonindustrial	 forestland	 owners,	 with	 an insignificant	amount	coming	from	public	lands	of	the	U.S.	government.	In addition,	in	2006,	3.4	million	tons	of	wood	from	our	forestlands	were	sold to	other	users.	In	2007,	the	Company	expects	that	approximately	65%	of its	 fiber	 requirements	 will	 come	 from	 roundwood,	 with	 over 80% purchased	 on	 the	 open	 market	 and	 less	 than	 20%	 obtained	 under existing	 fiber	 supply	 agreements.	 The	 remaining 35% of	 our	 fiber requirements	will	come	from	wood	chips	obtained	from	other	suppliers and	other	private	and	nonindustrial	forestland	owners	and	through	chip supply	agreements.

# MILLS	AND	PLANTS

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

The	Company's	facilities	are	in	good	operating	condition	and	are	suited for	the	purposes	for	which	they

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

# CAPITAL	INVESTMENTS	AND	DISPOSITIONS

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

# ITEM	3.	LEGAL	PROCEEDINGS

Information	concerning	the	Company's	legal	proceedings	is	set	forth	on pages	40	and	41	of	Item	7.	Management's	Discussion	and	Analysis	of Financial	Condition	and	Results	of	Operations,	and	on	pages	69	through 73	of	Item	8.	Financial	Statements	and	Supplementary	Data.

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

No	matters	were	submitted	to	a	vote	of	security	holders	during	the	fourth quarter	of	the	fiscal	year	ended	December	31,	2006.

# PART	II.

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

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

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

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

PURCHASES	OF	EQUITY	SECURITIES	BY	THE	ISSUER	AND	AFFILIATED	PURCHASERS

|  |  |  | Total	Number	of | Dollar	Value)	of |
| :--- | :--- | :--- | :--- | :--- |
|  |  |  | Shares\tPurchased | Shares\tthat\tMay |
|  |  |  | as\tPart\tof | Yet\tBe\tPurchased |
|  | Total\tNumber | Average\tPrice | Publicly | Under\tthe\tPlans |
|  | of\tShares | Paid\tper | Announced\tPlans | or |
| Period | Purchased | Share | or\tPrograms | Programs |
| January\t1,\t2006\t-\tJanuary\t31,\t2006 | 4,139 | $33.54 | – | – |
| February\t1,\t2006\t-\tFebruary\t28,\t2006 | 172,980 | 32.70 | – | – |
| March\t1,\t2006\t-\tMarch\t31,\t2006 | 36,300 | 35.22 | – | – |
| April\t1,\t2006\t-\tApril\t30,\t2006 | 836 | 34.57 | – | – |
| May\t1,\t2006\t-\tMay\t31,\t2006 | 1,260 | 37.06 | – | – |
| August\t1,\t2006\t-\tAugust\t31,\t2006 | 1,777 | 34.31 | – | – |
| September\t1,\t2006\t-\tSeptember\t30,\t2006 | 38,465,784(a) | 36.00(b) | 38,465,260 | – |
| November\t1,\t2006\t-\tNovember\t30,\t2006 | 4,263 | 33.16 | – | – |
| December\t1,\t2006\t-\tDecember\t31,\t2006 | 1,220,558 | 33.84(b) | – | – |
| Total | 39,907,897(c) | – | 38,465,260 | – |

(b) Excludes	expenses	paid	to	acquire	the	shares.

(c) 1,442,637	of	these	shares	were	not	purchased	pursuant	to	a	publicly	announced	plan	or	program.	These	were	principally	open-market	repurchases,	including	1,220,558	shares	repurchased	as part	of	the	Company's	Transformation	Plan.

No	activity	occurred	in	months	not	presented	above.

# PERFORMANCE	GRAPH

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

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

(1) The	companies	included	in	the	ROI	Peer	Group	are	Bowater	Inc.,	Domtar	Inc.,	MeadWestvaco	Corp.,	M-Real	Corp.,	Packaging	Corporation	of	America,	Sappi	Limited,	Smurfit-Stone	Container Corp.,	Stora	Enso	Group,	UPM	Corporation	and	Weyerhaeuser	Co.

# ITEM	6.	SELECTED	FINANCIAL	DATA

# FIVE-YEAR	FINANCIAL	SUMMARY(a)

# FINANCIAL	GLOSSARY

Current	ratio— current	assets	divided	by	current	liabilities.

Total	debt	to	capital	ratio—

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

# Return	on	equity—

net	 earnings	 divided by average common shareholders' equity (computed	monthly).

# Return	on	investment—

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

# FOOTNOTES	TO	FIVE-YEAR	FINANCIAL	SUMMARY

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

(b)Includes	restructuring	and	other	charges	of	$300	million	before	taxes ($184	million	after	taxes),	including	a	$157	million	charge	before	taxes ($95	 million	 after	 taxes)	 for	 organizational	 restructuring	 and	 other charges	 principally	 associated	 with	 the	 Company's	 Transformation Plan,	a	charge	of	$165	million	before	taxes	($102	million	after	taxes) for	losses	on	early	debt	extinguishment,	a	$97	million	charge	before taxes	($60	million	after	taxes)	for	legal	reserves,	a	$115	million	gain before	taxes	($70	million	after	taxes)	for	payments	received	relating	to the	 Company's	 participation	 in	 the	 U.S.	 Coalition	 for	 Fair	 Lumber Imports,	and	a	credit	of	$4	million	before	taxes	($3	million	after	taxes) for	other	items.	Also	included	are	a	$4.8	billion	gain	before	taxes	($2.9 billion	 after	 taxes)	 from	 sales	 of	 U.S.	 forestlands	 included	 in	 the Company's	Transformation	Plan;	a	charge	of	$759	million	before	and after	taxes	for	the	impairment	of	goodwill

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

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

(d)Includes	restructuring	and	other	charges	of	$340	million	before	taxes ($213	million	after	taxes),	including	a	$256	million	charge	before	taxes ($162	 million	 after	 taxes)	 for	 organizational	 restructuring	 and	 other charges	 principally	 associated	 with	 the	 Company's	 Transformation Plan,	a	$57	million	charge	before	taxes	($35	million	after	taxes)	for early	extinguishment	of	debt,	and	a	$27	million	charge	before	taxes ($16	million	after	taxes)	for	legal	reserves.	Also	included	are	a	$258 million	 pre-tax	 credit ($151	 million after	 taxes)	 for	 net	 insurance recoveries	related	to	the	hardboard	siding	and	roofing	litigation,	a	$4 million	credit	before	taxes	($3	million	after	taxes)	for	the	net	reversal	of restructuring	reserves	no	 longer	required,	a	pre-tax	charge	of	$111 million ($73 million	 after	 taxes)	 for	 net	 losses	 on	 sales	 and impairments	of	businesses	sold	or	held	for	sale,	and	interest	income	of $54	million	before	taxes	($33	million	after	taxes),	including	$43	million before	taxes	($26	million	after	taxes)	related	to	a	settlement	with	the U.S.	Internal	Revenue	Service	concerning	the	1997	through	2000	U.S. federal	income	tax	audit,	and	$11	million	before	taxes	($7	million	after taxes)

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

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

(f)Includes	a	$454	million	reduction	in	the	income	tax	provision,	including a	reduction	of	$627	million	 from	a	settlement	reached	with	 the	U.S. Internal	 Revenue	 Service	 concerning	 the	 1997	 through	 2000	 U.S. federal	income	tax	audit,	a	charge	of	$142	million	for	deferred	taxes related	to	earnings	repatriations	under	the	American	Jobs	Creation	Act of	2004,	and	$31	million	of	other	tax	charges.

(g)Includes	restructuring	and	other	charges	of	$164	million	before	taxes ($102	million	after	taxes),	including	a	$62	million	charge	before	taxes ($39	million	after	 taxes)	 for	organizational	restructuring	programs,	a $92	million	charge	before	taxes	($57	million	after	taxes)	for	early	debt extinguishment	costs,	and	a	$10	million	charge	before	taxes	($6	million after	taxes)	for	legal	settlements.	Also	included	are	pre-tax	credits	of $123	 million ($76	 million	 after	 taxes)	 for	 net	 insurance	 recoveries related	 to	 the	 hardboard	 siding	 and	 roofing	 litigation,	 a	 $35	 million credit	 before	 taxes	 ($21	 million	 after	 taxes)	 for	 the	 net	 reversal	 of restructuring	 reserves	 no	 longer	 required,	 and	 a	 pre-tax	 charge	 of $139	 million ($125	 million	 after	 taxes)	 for	 net	 losses	 on	 sales	 and impairments	of	businesses	sold	or	held	for	sale.

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

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

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

taxes),	including	a	$190	million	charge	before	taxes	($118	million	after taxes)	 for	 asset	 shutdowns	 of	 excess	 internal	 capacity	 and	 cost reduction	actions,	a	$63	million	charge	before	taxes	($39	million	after taxes)	for	legal	reserves,	and	a	$1	million	credit	before	taxes	($1	million charge	after	taxes)	for	early	debt	retirement	costs.	Also	included	are	a pre-tax	charge	of	$34	million	($33	million	after	taxes)	for	net	losses	on sales	and	impairments	of	businesses	held	for	sale,	and	a	credit	of	$26 million	 before	 taxes	 ($16	 million	 after	 taxes)	 for	 the	 net	 reversal	 of restructuring	reserves	no	longer	required.

(k)Includes	a	charge	of	$10	million	after	taxes	for	the	cumulative	effect	of an	accounting	change	for	the	adoption	of	SFAS	No.	143,	"Accounting for	Asset	 Retirement	 Obligations,"	 and	 a	 charge	 of	 $3	 million	 after taxes	for	the	cumulative	effect	of	an	accounting	change	related	to	the adoption	 of	 FIN	 46,	 "Consolidation	 of	 Variable	 Interest	 Entities,	 an Interpretation	of	ARB	No.	51."

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

(m)Includes	restructuring	and	other	charges	of	$654	million	before	taxes ($417	million	after	taxes),	including	a	$163	million	charge	before	taxes ($113	 million	 after	 taxes)	 for	 asset	 shutdowns	 of	 excess	 internal capacity	 and	 cost	 reduction	 actions,	 a	 $450	 million	 pre-tax	 charge ($278	million	after	taxes)	for	additional	exterior	siding	legal	reserves, and	a	charge	of	$41	million	before	taxes	($26	million	after	taxes)	for early	debt	retirement	costs.	Also	included	are	a	charge	of	$25	million before	 taxes	 (a	 credit	 of	 $60	 million	 after	 taxes)	 to	 adjust	 accrued costs	of	businesses	sold	or	held	for	sale,	and	a	pre-tax	credit	of	$68 million	 ($43	 million	 after	 taxes)	 for	 the	 reversal	 of	 2001	 and	 2000 reserves	no	longer	required.

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

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

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

# EXECUTIVE	SUMMARY

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

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

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

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

# Results	of	Operations

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

International	Paper	operates	in	six	segments:	Printing	Papers,	Industrial Packaging,	 Consumer	 Packaging,	 Distribution,	 Forest	 Products	 and Specialty	Businesses	and	Other.

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Industry\tsegment\toperating\tprofits | $ 2,074 | $1,622 | $1,703 |
| Corporate\titems,\tnet | (746) | (607) | (477) |
| Corporate\tspecial\titems* | 2,373 | (134) | (141) |
| Interest\texpense,\tnet | (521) | (595) | (712) |
| Minority\tinterest | (9) | (9) | (21) |
| Income\ttax\t(provision)\tbenefit | (1,889) | 407 | (114) |
| Discontinued\toperations | (232) | 416 | (273) |
| Net\tearnings\t(loss) | $ 1,050 | $1,100 | $(35) |

* Corporate	 special	 items	 include	 gains	 on	 Transformation	 Plan	 forestland	 sales,	 goodwill impairment	charges,	restructuring	and	other	charges,	net	losses	on	sales	and	impairments	of businesses,	insurance	recoveries	and	reversals	of	reserves	no	longer	required.

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

# Segment	Operating	Profits (in	millions)

The	principal	changes	in	operating	profits	by	segment	were	as	follows:

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

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

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

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

•	Forest	 Products' profits	 of	 $678	 million	 were $43	 million lower. Decreased	harvest	and	recreational	income	and	lower	earnings	from the	Real	Estate	division,	which	principally	sells	higher-and-better-use properties,	were	only	partially	offset	by	higher	earnings	from	forestland sales	and	lower	operating	costs.

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

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

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

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

Interest	expense,	net,	of	$521	million	in	2006	decreased	from	$595	million in	2005	and	$712	million	in	2004	reflecting	lower	average	debt	balances from	repayments	made	under	the	Company's	Transformation	Plan	and lower	interest	rates	from	debt	refinancings	and	repayments.	Additionally, the	2006	total	includes	a	pre-tax	credit	of	$6	million	for	interest	received from	the	Canadian	government	on	refunds	of	prior-year	softwood	lumber duties.	 Interest	expense,	net,	 in	2005	 includes	a	pre-tax	credit	of	$43 million	 related	 to	 an	 agreement	 reached	 with	 the	 Internal	 Revenue Service	concerning	the	Company's	1997	through	2000	federal	income	tax audits,	and	a	pre-tax	credit	of	$11	million	related	to	the	collection	of	a note	receivable	from	the	2001	sale	of	the	Flexible	Packaging	business.

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

# Discontinued	Operations

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

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

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

# Liquidity	and	Capital	Resources

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

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

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

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

# Critical	Accounting	Policies	and	Significant	Accounting	Estimates

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

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

# Legal

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

# CORPORATE	OVERVIEW

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

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

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

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

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

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

Earnings	From	Continuing	Operations (after	tax,	in	millions)

The	following	table	presents	a	reconciliation	of	International	Paper's	net earnings	(loss)	to	its	total	industry	segment	operating	profit:

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Net\tEarnings\t(Loss) | $ 1,050 | $1,100 | $(35) |
| Deduct\t-\tDiscontinued\toperations: |  |  |  |
| Earnings\tfrom\toperations | (85) | (55) | (348) |
| Loss\t(gain)\ton\tsales\tand\timpairments | 317 | (361) | 621 |
| Earnings\tFrom\tContinuing\tOperations | 1,282 | 684 | 238 |
| Add\tback\t(deduct): |  |  |  |
| Income\ttax\tprovision\t(benefit) | 1,889 | (407) | 114 |
| Minority\tinterest\texpense,\tnet\tof\ttaxes | 17 | 9 | 24 |
| Earnings\tFrom\tContinuing\tOperations\tBefore |  |  |  |
| Income\tTaxes\tand\tMinority\tInterest | 3,188 | 286 | 376 |
| Interest\texpense,\tnet | 521 | 595 | 712 |
| Minority\tinterest\tincluded\tin\toperations | (8) | — | (3) |
| Corporate\titems | 746 | 607 | 477 |
| Special\titems: |  |  |  |
| Restructuring\tand\tother\tcharges | 300 | 285 | 164 |
| Insurance\trecoveries | (19) | (258) | (123) |
| Gain\ton\tsale\tof\tforestlands | (4,788) | — | — |
| Impairments\tof\tgoodwill | 759 | — | — |
| Net\tlosses\ton\tsales\tand\timpairments\tof |  |  |  |
| businesses | 1,381 | 111 | 135 |
| Reserve\tadjustments | (6) | (4) | (35) |
|  | $ 2,074 | $1,622 | $1,703 |
| Industry\tSegment\tOperating\tProfit |  |  |  |
| Printing\tPapers | $677 | $473 | $508 |
| Industrial\tPackaging | 399 | 219 | 373 |
| Consumer\tPackaging | 131 | 121 | 155 |
| Distribution | 128 | 84 | 87 |
| Forest\tProducts | 678 | 721 | 542 |
| Specialty\tBusinesses\tand\tOther | 61 | 4 | 38 |
| Total\tIndustry\tSegment\tOperating\tProfit | $ 2,074 | $1,622 | $1,703 |

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

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

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

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

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

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

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

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

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

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

# Income	Taxes

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

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

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

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

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

# Corporate	Items	and	Interest	Expense

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

Interest	 expense,	 net,	 of	 $521	 million	 includes	 a	 pre-tax	 credit	 of	 $6 million	for	interest	received	from	the	Canadian	government	on	refunds	of prior-year	softwood	lumber	duties.	Interest	expense,	net,	for	2005	of	$595 million	includes	a	pre-tax	credit	of	$43	million	for	interest	related	to	the agreement	reached	with	the	U.S.	Internal	Revenue	Service	concerning the	Company's	1997	through	2000	U.S.	federal	income	tax	audits,	and	a pre-tax	credit	of	$11	million	related	to	the	collection	of	a	note	receivable from	the	2001	sale	of	the	Flexible	Packaging	business.	Excluding	special items,	interest	expense,	net,	of	$527	million	in	2006	decreased	from	$649 million	in	2005	and	$712	million	in	2004	reflecting	lower	average	debt balances	 and	 lower	 interest	 rates	 due	 to	 debt	 refinancings	 and repayments.

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

# Special	Items

# Restructuring	and	Other	Charges

International	Paper	continually	evaluates	its	operations	for	improvement opportunities	targeted	to	(a)	focus	our	portfolio	on	our	core	businesses, (b)	 rationalize	 and	 realign	 capacity	 to	 operate	 fewer	 facilities	 with	 the same	 revenue	 capability	 and	 close	 high	 cost	 facilities,	 and	 (c)	 reduce costs.	Annually,	strategic	operating	plans	are	developed	by	each	of	our businesses	to	demonstrate	that	they	will	achieve	a	return	at	least	equal	to their	cost	of	capital	over	an	economic	cycle.	If	it	subsequently	becomes apparent	 that	 a	 facility's	 plan	 will	 not	 be	 achieved,	 a	 decision	 is	 then made	to	(a)	invest	additional	capital	to	upgrade	the	facility,	(b)	shut	down the	 facility	 and	 record	 the	 corresponding	 charge,	 or	 (c)	 evaluate	 the expected	recovery	of	the	carrying	value	of	the	facility	to	determine	if	an impairment	of	the	asset	value	of	the	facility	has	occurred	under	SFAS No.	144.	In	recent	years,	this	policy	has	led	to	the	shutdown	of	a	number of	facilities	and	the	recording	of	significant	asset	impairment	charges	and severance	costs.	It	is	possible	that	additional	charges	and	costs	will	be incurred	in	future	periods	in	our	core	businesses	should	such	triggering events	occur.

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

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

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

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

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

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

Earnings	 also	 included	 a	 $19	 million	 pre-tax	 credit	 ($12	 million	 after taxes)	for	net	insurance	recoveries	related	to	the	hardboard	siding	and roofing	litigation,	a	$6	million	pre-tax	credit	($3	million	after	taxes)	for

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

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

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

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

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

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

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

•	a $62	 million charge	 before	 taxes ($39	 million after taxes) for a corporate-wide	organizational	restructuring	program,

•	a	$92	million	charge	before	taxes	($57	million	after	taxes)	for	losses	on early	extinguishment	of	debt,	and

•	a	 $10	 million	 charge	 before taxes ($6	 million	 after taxes) for legal settlements.

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

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

# Gain	on	Sale	of	Forestlands

During	 2006,	 in	 connection	 with	 the	 previously	 announced Transformation	 Plan,	 the	 Company completed sales totaling approximately 5.6 million	 acres	 of	 forestlands	 for	 proceeds	 of approximately	$6.6	billion,	including	$1.8	billion	in	cash	and	$4.8	billion	of installment	notes	supported	by	irrevocable	letters	of	credit.	The	first	of these	transactions	in	the	second	quarter	included	approximately	76,000 acres	sold	for	cash	proceeds	of	$97	million,	resulting	in	a	pre-tax	gain	of $62	million.	During	the	third	quarter,	476,000	acres	of	forestlands	were sold	for	$401	million,	including	$265	million	in	cash	and	$136	million	of installment	notes,	resulting	in	a	pre-tax	gain	of	$304	million.	Finally,	in	the fourth	 quarter,	 the	 Company	 completed	 sales	 of	 5.1	 million	 acres	 of forestlands	for	$6.1	billion,	including	$1.4	billion	in	cash	and	$4.7	billion of	installment	notes,	resulting	in	pre-tax	gains	totaling	$4.4	billion.	These transactions	 represent	 a	 permanent	 reduction	 in	 the	 Company's forestland	 asset	 base	 and	 are	 not	 a	 part	 of	 the	 normal,	 ongoing operations	 of	 the	 Forest	 Resources	 business.	 Thus,	 the	 net	 gains resulting	 from	 these	 sales	 totaling	 approximately $4.8 billion	 are separately	 presented	 in	 the	 accompanying	 consolidated	 statement	 of operations	under	the	caption	Gain	on	sale	of	forestlands.

# Impairments	of	Goodwill

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

# Net	Losses	on	Sales	and	Impairments	of	Businesses

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

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

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

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

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

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

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

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

2005:	In	the	fourth	quarter	of	2005,	a	pre-tax	charge	of	$46	million	($30 million	after	taxes)	was	recorded	for	adjustments	of	losses	of	businesses held	for	sale,	principally	$45	million	to	write	down	the	carrying	value	of the	Company's	Polyrey	business	in	France	to	its	estimated	net	realizable value.

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

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

Also	during	the	first	quarter	of	2005,	International	Paper	announced	that it	had	signed	an	agreement	to

sell	 its	 Industrial	 Papers	 business	 to	 an	 affiliate	 of	 Kohlberg	 and Company,	LLC.	A	$49	million	pre-tax	loss	($35	million	after	taxes)	was recorded	in	the	first	quarter	to	write	down	the	net	assets	of	the	Industrial Papers	 business	 and	 related	 corporate	 assets	 to	 their	 estimated	 net realizable	 value.	 The	 sale	 of	 Industrial	 Papers	 was	 completed	 in	 the second	quarter	of	2005.

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

2004:	In	December	2004,	International	Paper	committed	to	plans	for	the sale	 in	 2005	 of	 its	 Fine	 Papers	 business	 and	 its	 Maresquel	 mill	 and Papeteries	 de	 France	 distribution	 business	 in	 Europe.	 As	 a	 result, charges	of	$11	million	before	taxes	($8	million	after	taxes),	$34	million before	and	after	 taxes,	and	$11	million	before	 taxes	($12	million	after taxes),	 respectively,	 were	 recorded	 to	 write	 down	 the	 assets	 of	 these entities	to	their	estimated	fair	values	less	costs	to	sell.	In	October	2004, International	Paper	sold	two	box	plants	located	in	China	to	International Paper	Pacific	Millennium,	resulting	 in	a	pre-tax	 loss	of	$14	million	($4 million	after	taxes).

In	the	third	quarter	of	2004,	International	Paper	signed	an	agreement	to sell	 Scaldia	 Papier	 B.V.,	 and	 its	 subsidiary,	 Recom	 B.V.	 in	 the Netherlands,	to	Stora	Enso	for	approximately	$36	million	in	cash.	This sale	was	completed	 in	 the	 third	quarter	and	resulted	 in	a	 loss	of	$34 million	(no	impact	from	taxes	or	minority	interest).	In	addition,	a	$4	million loss	(no	impact	from	taxes	or	minority	interest)	was	recorded	to	adjust the	estimated	loss	on	sale	of	Papeteries	de	Souche	L.C.	in	France.	This sale	was	completed	in	the	second	quarter	of	2005	for	approximately	$14 million	in	proceeds.

In	the	second	quarter	of	2004,	a	$27	million	loss	before	and	after	taxes was	recorded	to	write	down	the	assets	of	Papeteries	de	Souche	L.C.	in France	to	their	estimated	realizable	value.

In	addition,	a	$4	million	 loss	before	 taxes	($2	million	after	 taxes)	was recorded	to	write	down	the	assets	of	Food	Pack	S.A.	in	Chile	to	their estimated	 realizable	 value	 (included	 in	 the	 Consumer	 Packaging segment).

# Industry	Segment	Operating	Profits

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

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

Lack-of-order	 downtime	 in	 2006	 totaled	 approximately	 155,000	 tons, compared	with	830,000	tons	in	2005	and	70,000	tons	in	2004,	as	the Company	adjusted	production	in	line	with	customer	demand.	The	2005 total	 included	 approximately	 290,000	 tons	 related	 to	 uncoated	 paper machines	at	our	mills	 in	Pensacola,	Florida;	Jay,	Maine;	and	Bastrop, Louisiana;	that	were	permanently	closed	in	the	fourth	quarter	of	2005.

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

# DESCRIPTION	OF	INDUSTRY	SEGMENTS

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

# Printing	Papers

International	Paper	is	one	of	the	world's	leading	producers	of	printing	and writing	papers.	Products	 in	 this	segment	 include	uncoated	and	coated papers,	market	pulp	and	uncoated	bristols.

UNCOATED	PAPERS:	This	business	produces	papers	for	use	in	desktop	and laser	copiers	and	digital	imaging	printing	as	well	as	in	advertising	and promotional	 materials	 such	 as	 brochures,	 pamphlets,	 greeting	 cards, books,	annual	reports	and	direct	mail	publications.	Uncoated	papers	also produces	a	variety	of	grades	that	are	converted	by	our	customers	into envelopes,	tablets,	business	forms	and	file	folders.	Uncoated	papers	are sold	 under	 private	 label	 and	 International	 Paper	 brand	 names	 that include	Hammermill,	 Springhill,	 Williamsburg,	 Postmark,	Accent,	 Great White,	Ballet	and	Rey.	The	mills	producing	uncoated	papers	are	located in	the	United	States,	Scotland,	France,	Poland	and	Russia.	These	mills have	 uncoated	 paper	 production	 capacity	 of	 approximately	 5.4	 million tons	annually.

COATED	PAPERS:	This	business	produces	coated	papers	used	in	a	variety of	printing	and	publication	end	uses	such	as	catalogs,	direct	mailings, magazines,	inserts	and	commercial	printing.	Products	include	coated	free sheet,	 coated	 groundwood	 and	 supercalendered	 groundwood	 papers. This	business	was	sold	in	the	third	quarter	of	2006.

MARKET	PULP:	Market	pulp	is	used	in	the	manufacture	of	printing,	writing and	specialty	papers,	towel	and	tissue	products	and	filtration	products. Pulp	 is	 also	 converted	 into	 products	 such	 as	 diapers	 and	 sanitary napkins.	Pulp	products	include	fluff	and	southern	softwood	pulp,	as	well as	northern,	southern	and	birch	hardwood	paper	pulps.	These	products are	produced	in	the	United	States,	France,	Poland	and	Russia,	and	are sold	 around	 the	 world.	 International	 Paper	 facilities	 have	 annual	 dried pulp	capacity	of	about	1.2	million	tons.

BRAZILIAN	PAPER:	Brazilian	operations	function	through	International	Paper do	Brasil,	Ltda,	which	owns	or	manages	approximately	370,000	acres	of forestlands	 in	 Brazil.	 Our	 annual	 production	 capacity	 in	 Brazil	 is approximately	435,000	tons	of	uncoated	papers.

# Industrial	Packaging

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

# Consumer	Packaging

CONSUMER	 PACKAGING:	 Our	 coated	 paperboard	 business	 produces	 high quality	 coated	 paperboard	 for	 a	 variety	 of	 packaging	 and	 commercial printing	 end	 uses.	 Our	Everest®,	Fortress®,	 and	Starcote®	 brands	 are used	 in	 packaging	 applications	 for	 everyday	 products	 such	 as	 food, cosmetics,	 pharmaceuticals,	 computer	 software	 and	 tobacco	 products. Our	Carolina®	brand	 is	used	 in	commercial	printing	end	uses	such	as greeting	 cards,	 paperback	 book	 covers,	 lottery	 tickets,	 direct	 mail	 and point-of-purchase	advertising.	International	Paper	is	the	world's	 largest producer	 of	 solid	 bleached	 sulfate	 board	 with	 annual	 U.S.	 production capacity	 of	 about 1.9	 million tons.	 Mills	 producing	 coated	 board	 in Poland,	 Russia	 and	 China	 complement	 our	 U.S.	 capacity,	 uniquely positioning	 us	 to	 provide	 value-added,	 innovative	 products	 for	 global customers.

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

# Distribution

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

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

# Forest	Products

FOREST	RESOURCES:	International	Paper	owns	or	manages	approximately 500,000	acres	of	forestlands	in	the	United	States,	mostly	in	the	South.	All lands	 are	 independently	 third-party	 certified	 under	 the	 operating standards	 of	 the	 Sustainable	 Forestry	 Initiative	 (SFITM).	 As	 part	 of	 the Company's	 Transformation	 Plan,	 approximately 5.6	 million acres	 of forestlands	were	sold	in	2006.	Our	remaining	forestlands	are	managed as	a	portfolio	to	optimize	the	economic	value	to	our	shareholders.	Most	of our	portfolio	represents	properties	that	are	likely	to	be	sold	to	investors and	other	buyers	for	various	uses	or	held	for	real	estate	development.

# Specialty	Businesses	and	Other

CHEMICALS:	Arizona	Chemical	 is	a	 leading	producer	of	specialty	resins based	on	crude	tall	oil,	a	byproduct	of	the	wood	pulping	process.	These products,	used	in	adhesives	and	inks,	are	made	at	11	plants	in	the	United States	and	Europe.	This	business	is	currently	subject	to	a	definitive	sale agreement	expected	to	close	in	the	first	quarter	of	2007.

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

# INDUSTRY	SEGMENT	RESULTS

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Sales | $6,930 | $7,170 | $7,135 |
| Operating\tProfit | $677 | $473 | $508 |

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

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

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

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

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

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

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Sales | $4,925 | $4,625 | $4,545 |
| Operating\tProfit | $399 | $219 | $373 |

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

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

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

INTERNATIONAL PAPER DISTRIBUTION LIMITED, our	 Asian	 box	 and containerboard	business,	had	net	sales	for	2006	of	$182	million.	In	2005, net	 sales	 were $104 million	 subsequent	 to	 International	 Paper's acquisition	of	a	majority	interest	in	August	2005.	This	business	generated a	small	operating	profit	in	2006,	compared	with	a	small	loss	in	2005.

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

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

CONSUMER	PACKAGING	net	sales	increased	9%	compared	with	2005	and 7%	 compared	 with	 2004.	 Operating	 profits	 rose	 8%	 from	 2005,	 but declined	 15%	 from	 2004	 levels.	 Compared	 with	 2005,	 higher	 sales volumes	 ($9	 million),	 improved	 average	 sales	 price	 realizations ($33 million),	reduced	lack-of-order	downtime	($18	million),	and	favorable	mill operations	($25	million)	were	partially	offset	by	higher	raw	material	costs ($19	million)	and	freight	costs	($21	million),	unfavorable	mix	($14	million) and	other	costs	($21	million).

COATED	 PAPERBOARD	net	sales	of	$1.5	billion	in	2006	were	higher	than $1.3	billion	in	2005	and	$1.1	billion	in	2004.	Sales	volumes	increased	in 2006	 compared	 with	 2005,	 particularly	 in	 the	 folding	 carton	 board segment,	reflecting	improved	demand	for	coated	paperboard	products.	In 2006,	 our	 coated	 paperboard	 mills	 took 4,000 tons	 of	 lack-of-order downtime,	compared	with	82,000	tons	of	lack-of-order	downtime	in	2005. Average	sales	price

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

FOODSERVICE	net	sales	declined	to	$396	million	in	2006,	compared	with $437	million	in	2005	and	$480	million	in	2004,	due	principally	to	the	sale of	the	Jackson,	Tennessee	plant	in	July	2005.	Sales	volumes	were	lower in	2006	than	in	2005,	although	average	sales	prices	were	higher	due	to the	 realization	 of	 price	 increases	 implemented	 during	 2005.	 Operating profits	for	2006	improved	over	2005	and	2004	levels	largely	due	to	the benefits	from	higher	sales	prices.	Raw	material	costs	for	bleached	board were	higher	than	in	2005,	but	manufacturing	costs	were	more	favorable due	to	increased	productivity	and	reduced	waste.

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

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

Our	Distribution	business,	principally	represented	by	our	 xpedx	business, markets	 a	 diverse	 array	 of	 products	 and	 supply	 chain	 services	 to customers	in

many	 business	 segments.	 Customer	 demand	 is	 generally	 sensitive	 to changes	 in	 general	 economic	 conditions,	 although	 the	 commercial printing	 segment	 is	 also	 dependent	 on	 corporate	 advertising	 and promotional	 spending.	 Providing	 customers	 with	 the	 best	 choice	 and value	 in	both	products	and	supply	chain	services	 is	a	key	competitive factor.	Additionally,	efficient	customer	service,	cost-effective	logistics,	and focused	working	capital	management	are	key	factors	in	this	segment's profitability.

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Sales | $6,785 | $6,380 | $6,065 |
| Operating\tProfit | $128 | $84 | $87 |

DISTRIBUTION	 2006	 net	 sales	 increased	 6%	 from	 2005	 and	 12%	 from 2004.	Operating	profits	in	2006	were	52%	higher	than	in	2005	and	47% higher	 than	 in	 2004.	 Sales	 volumes	 rose	 for	 all	 segments,	 but	 were particularly	 strong	 for	 packaging	 and	 facility	 supplies.	 Average	 sales prices	 also	 increased	 in	 all	 segments.	 The	 improvement	 in	 operating results	 reflects	 the	 higher	 revenues	 and	 improvements	 in	 operating expenses	resulting	from	facility	realignments	and	cost	reduction	actions begun	 in	 the	 second	 half	 of	 2005	 designed	 to	 increase	 the	 ongoing efficiency	of	the	xpedx	distribution	system.

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Sales | $ 765 | $ 995 | $ 875 |
| Operating\tProfit:\nForest\tResources\t- |  |  |  |
| Sales\tof\tForestlands | $ 447 | $ 400 | $ 315 |
| Havest\t&\tRecreational\tIncome | 222 | 269 | 281 |
| Forestland\tExpenses | (115) | (146) | (178) |
| Real\tEstate\tOperations | 124 | 198 | 124 |
| Operating\tProfit | $ 678 | $ 721 | $ 542 |

FOREST	 RESOURCES	sales in	2006	decreased	23%	 from	2005	and	13% from	2004.	Operating	profits	were	down	6%	from	2005,	but	were	up	25% from	2004.	As	part	of	the	Company's	announced	Transformation	Plan, 5.6	million	acres	of	forestland	were	sold	in	2006,	primarily	in	the	fourth quarter,	 resulting	 in	 a	 significant	 decline	 in	 forestland	 acreage.	 The Company	 intends	 to	 focus	 future	 operations	 on	 maximizing	 proceeds from	the	sale	of	the	remaining	forestlands.

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

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

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

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

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

ARIZONA	CHEMICAL	sales	were	$769	million	in	2006,	compared	with	$692 million	in	2005	and	$672	million	in	2004.	Sales	volumes	declined	in	2006 compared	with	2005,	but	average	sales	price	realizations	in	2006	were higher	in	both	the	United	States	and	Europe.	Operating	earnings	in	2006 were	significantly	higher	than	in	2005	and	more	than	49%	higher	than	in 2004.	The	increase	over	2005	reflects	the	impact	of	the	higher	average sales	price	realizations	and	lower	manufacturing	costs,	partially	offset	by higher	prices	for	crude	tall	oil	(CTO).	Earnings	for	2005	also	included	a $13	million	charge	related	to	a	plant	shutdown	in	Norway.

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

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

# Overview

A	 major	 factor	 in	 International	 Paper's	 liquidity	 and	 capital	 resource planning	is	its	generation	of	operating	cash	flow,	which	is	highly	sensitive to	 changes	 in	 the	 pricing	 and	 demand	 for	 our	 major	 products.	 While changes	in	key	cash	operating	costs,	such	as	energy	and	raw	material costs,	do	have	an	effect	on	operating	cash	generation,	we	believe	that our	strong	focus	on	cost	controls	has	improved	our	cash	flow	generation over	an	operating	cycle.

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

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

Management	believes	it	is	important	for	International	Paper	to	maintain an	investment-grade	credit	rating	to	facilitate	access	to	capital	markets	on favorable	 terms.	At	 December	 31,	 2006,	 the	 Company	 held	 long-term credit	 ratings	 of	 BBB	 (stable	 outlook)	 and	 Baa3	 (stable	 outlook)	 from Standard	&	Poor's	and	Moody's	Investor	Services,	respectively.

# Cash	Provided	by	Operations

Cash	 provided	 by	 continuing	 operations	 totaled	 $1.0	 billion	 for	 2006, compared	with	$1.2	billion	for	2005	and	$1.7	billion	in	2004.	The	2006 amount	is	net	of	a	$1.0	billion	voluntary	cash	pension	plan	contribution made	 in	 the	 fourth	 quarter	 of	 2006.	 The	 major	 components	 of	 cash provided	 by	 continuing	 operations	 are	 earnings	 from	 continuing operations

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

International	Paper's	investments	in	accounts	receivable	and	 inventory less	 accounts	 payable	 and	 accrued	 liabilities,	 totaled	 $997	 million	 at December	31,	2006.	Cash	used	 for	 these	working	capital	components increased	by	$354	million	in	2006,	compared	with	a	$558	million	increase in	2005	and	a	$117	million	increase	in	2004.	The	increase	in	2006	was principally	due	to	decreases	in	accounts	payable	and	accrued	liabilities.

# Investment	Activities

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

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers | $537 | $592 | $453 |
| Industrial\tPackaging | 257 | \t 180 | \t 161 |
| Consumer\tPackaging | 116 | \t 126 | \t 198 |
| Distribution | 6 | 9 | 5 |
| Forest\tProducts | 72 | 66 | 76 |
| Subtotal | 988 | \t 973 | \t 893 |
| Corporate\tand\tother | 21 | 19 | 32 |
| Total\tfrom\tcontinuing\toperations | $1,009 | $992 | $925 |

We	expect	capital	expenditures	in	2007	to	be	about	$1.2	billion,	or	about equal	 to	 estimated	 depreciation	 and	 amortization.	 We	 will	 continue	 to focus	 our	 future	 capital	 spending	 on	 improving	 our	 key	 platform businesses	 in	North	America	and	on	 investments	 in	geographic	areas with	strong	growth	opportunities.

# Acquisitions

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

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

# Other	Acquisitions

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

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

Each	of	 the	above	acquisitions	was	accounted	 for	using	 the	purchase method.	The	operating	results	of	these	acquisitions	have	been	included in	the	consolidated	statement	of	operations	from	the	dates	of	acquisition.

# Financing	Activities

2006:	Financing	activities	during	2006	 included	debt	 issuances	of	$223 million	and	retirements	of	$5.4	billion,	for	a	net	debt	reduction	of	$5.2 billion.

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

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

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

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

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

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

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

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

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

In	December	2005,	International	Paper	used	proceeds	from	the	above borrowings,	and	 from	 the	sale	of	CHH	 in	 the	 third	quarter	of	2005,	 to repay	approximately	$190	million	of	notes	with	coupon	rates	ranging	from 3.8%	to	10%	and	original	maturities	from	2008	to	2029.

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

In	June	2005,	International	Paper	repaid	approximately	$400	million	of	a subsidiary's	long-term	debt	with	an	interest	rate	of	LIBOR	plus	62.5	basis points	and	a	maturity	date	of	June	2007.

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

Other	financing	activity	in	2005	included	the	repatriation	of	$900	million	of cash	in	the	fourth	quarter	and	$1.2	billion	of	cash	in	the	second	quarter from	 certain	 of	 International	 Paper's	 foreign	 subsidiaries,	 and	 the issuance	 of	 approximately	 3.0	 million	 common	 shares	 under	 various incentive	 plans,	 including	 stock	 option	 exercises	 that	 generated	 $23 million	of	cash.

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

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

Also	 in	August	 2004,	 an	 International	 Paper	 wholly-	 owned	 subsidiary issued 500	 million euro-denominated	 long-term	 debt	 (equivalent	 to approximately	 $619	 million	 at	 issuance)	 with	 an	 initial	 interest	 rate	 of EURIBOR	plus	55	basis	points	and	a	maturity	in	August	2009.

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

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

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

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

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

Common	shareholders'	equity	decreased	by	$388	million	during	2006, principally	 reflecting	 repurchases	 of	 common	 stock	 ($1.4	 billion)	 and payments	of	dividends	($485	million),	partially	offset	by	net	earnings	for the	 year	 ($1.1	 billion)	 and	 the	 change	 in	 cumulative	 foreign	 currency translation	adjustment	($220	million).

# Off-Balance	Sheet	Variable	Interest	Entities

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

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

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

# Capital	Resources	Outlook	for	2007

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

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

The	Company	will	continue	to	rely	upon	debt	and	capital	markets	for	the majority	of	any	necessary	long-term	funding	not	provided	by	operating cash	flow	or	divestiture	proceeds.	Funding	decisions	will	be	guided	by our	 capital	 structure	 planning	 and	 liability	 management	 practices.	 The primary	 goals	 of	 the	 Company's	 capital	 structure	 planning	 are	 to maximize	financial	flexibility	and	preserve	liquidity	while	reducing	interest expense.	The	majority	of	International	Paper's	debt	is	accessed	through global	public	capital	markets	where	we	have	a	wide	base	of	investors.

The	 Company	 was	 in	 compliance	 with	 all	 its	 debt	 covenants	 at December	31,	2006.	Principal	financial	covenants	include	maintenance	of a	 minimum	 net	 worth,	 defined	 as	 the	 sum	 of	 common	 stock,	 paid-in capital	 and	 retained	 earnings,	 less	 treasury	 stock,	 plus	 any	 goodwill impairment	charges,	of	$9	billion;	and	a	maximum	total	debt	to	capital ratio,	defined	as	total	debt	divided	by	total	debt	plus	net	worth,	of	60%.

Maintaining	an	investment	grade	credit	rating	is	an	important	element	of International	 Paper's	 financing	 strategy.	 In	 the	 third	 quarter	 of	 2006, Standard	&	Poor's	reaffirmed	the	Company's	long-term	credit	rating	of BBB,	revised	its	ratings	outlook	from	negative	to	stable,	and	upgraded	its short-term	 credit	 rating	 from	 A-3	 to	 A-2.	 At	 December	 31,	 2006,	 the Company	also	held	long-term	credit	ratings	of	Baa3	(stable	outlook)	and a	short-term	credit	rating	of	P-3	from	Moody's	Investor	Services.

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

| In	millions | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Total\tdebt\t(a) | $692 | $129 | $1,143 | $1,198 | $381 | $3,680 |
| Lease\tobligations\t(b) | 144 | \t 117 | 94 | 74 | 60 | 110 |
| Purchase\tobligations\t(c,d) | \t 2,329 | \t 462 | 362 | 352 | \t 323 | 1,794 |
| Total | $3,165 | $708 | $1,599 | $1,624 | $764 | $5,584 |

(a)Total	debt	includes	scheduled	principal	payments	only.

(d)Includes	 $2.2	 billion	 relating	 to fiber	 supply	 agreements	 entered into	 at the time	 of the Transformation	Plan	forestland	sales.

# TRANSFORMATION	PLAN

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

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

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

•	Up	to	$3	billion	to	return	value	to	shareholders,

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

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

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

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

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

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

As	part	of	 its	selective	reinvestment	plan,	 the	Company	has identified opportunities	totaling	approximately	$2.0	billion,	including:

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

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

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

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

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

# CRITICAL	ACCOUNTING	POLICIES

The	 preparation	 of	 financial	 statements	 in	 conformity	 with	 generally accepted	accounting	principles	in	the	United	States	requires	International Paper	to	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	 Nos.	 132	 and	 132(R),	 "Employers' Disclosures	About	 Pension	 and	 Other	 Postretirement	 Benefits,"	 SFAS No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other Postretirement	 Plans,"	 and	 SFAS	 No. 109, "Accounting	 for	 Income Taxes."	The	following	is	a	discussion	of	the	impact	of	these	accounting policies	on	International	Paper:

CONTINGENT	 LIABILITIES.	Accruals	for	contingent	liabilities,	including	legal and	 environmental	 matters,	 are	 recorded	 when	 it	 is	 probable	 that	 a liability	has	been	incurred	or	an	asset	impaired	and	the	amount	of	the loss	can	be	reasonably	estimated.	Liabilities	accrued	 for	 legal	matters require	judgments	regarding	projected	outcomes	and	range	of	loss	based on	 historical	 experience	 and	 recommendations	 of	 legal	 counsel. Additionally,	 as	 discussed	 in	 Note	 10	 of	 the	 Notes	 to	 Consolidated Financial	Statements	in	Item	8.	Financial	Statements	and	Supplementary Data,	reserves	for	projected	future	claims	settlements	relating	to	exterior siding	and	roofing	products	previously	manufactured	by	Masonite	require judgments	 regarding	 projections	 of	 future	 claims	 rates	 and	 amounts. International	Paper	utilizes	an	independent	third	party	consultant	to	assist in	 developing	 these	 estimates.	 Liabilities	 for	 environmental	 matters require	evaluations	of	relevant	environmental	regulations	and	estimates of	future

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

IMPAIRMENT	OF	LONG-LIVED	ASSETS	AND	GOODWILL. 	An	impairment	of	a	long- lived	 asset	 exists	 when	 the	 asset's	 carrying	 amount	 exceeds	 its	 fair value,	 and	 is	 recorded	 when	 the	 carrying	 amount	 is	 not	 recoverable through	 future	 operations.	 A	 goodwill	 impairment	 exists	 when	 the carrying	 amount	 of	 goodwill	 exceeds	 its	 fair	 value.	 Assessments	 of possible	impairments	of	long-lived	assets	and	goodwill	are	made	when events	or	changes	in	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	 impairment charges	for	these	assets	require	the	estimation	of	future	cash	flows	and the	fair	market	value	of	the	related	assets.

PENSION	AND	POSTRETIREMENT	BENEFIT	OBLIGATIONS. 	The	charges	recorded for	pension	and	other	postretirement	benefit	obligations	are	determined annually	in	conjunction	with	International	Paper's	consulting	actuary,	and are	dependent	upon	various	assumptions	 including	 the	expected	 long- term	 rate	 of	 return	 on	 plan	 assets,	 discount	 rates,	 projected	 future compensation	increases,	health	care	cost	trend	rates	and	mortality	rates.

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

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

# SIGNIFICANT	ACCOUNTING	ESTIMATES

PENSION	 AND	 POSTRETIREMENT	 BENEFIT	 ACCOUNTING.	 The	 calculations	 of pension	 and	 postretirement	 benefit	 obligations	 and	 expenses	 require decisions	about	a	number	of	key	assumptions	that	can	significantly	affect liability	and	expense	amounts,	including	the	expected	long-term	rate	of return	on	plan	assets,	the	discount	rate	used	to	calculate	plan	liabilities, the	projected	rate	of	future	compensation	increases	and	health	care	cost trend	rates.

Benefit	obligations	and	 fair	values	of	plan	assets	as	of	December	31, 2006,	for	International	Paper's	pension	and	postretirement	plans	are	as follows:

|  | Benefit | Fair	Value	of |
| :--- | :--- | :--- |
| In\tmillions | Obligation | Plan\tAssets |
| U.S.\tqualified\tpension | $8,910 | $8,366 |
| U.S.\tnonqualified\tpension | 327 | – |
| U.S.\tpostretirement | 624 | – |
| Non-U.S.\tpension | 248 | 179 |
| Non-U.S.\tpostretirement | 17 | – |

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

|  | 2007 | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- | :--- |
| Discount\trate | 5.75% | 5.50% | 5.75% | 6.00% |
| Expected\tlong-term\treturn\ton\tplan\tassets | 8.50% | 8.50% | 8.50% | 8.75% |
| Rate\tof\tcompensation\tincrease | 3.75% | 3.25% | 3.25% | 3.25% |

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

International	 Paper	 determines	 these	 actuarial	 assumptions,	 after consultation	with	our	actuaries,	on	December	31	of	each	year	to	calculate liability	 information	 as	 of	 that	 date	 and	 pension	 and	 postretirement expense	 for	 the	 following	 year.	 The	 discount	 rate	 assumption	 is determined	based	on	a	yield	curve	that	incorporates	approximately	500- 550	Aa-graded	bonds.	The	plan's	projected	cash	flows	are	then	matched to	this	yield	curve	to	develop	the	discount	rate.

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

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

The	 following	 chart,	 prepared	 by	 International	 Paper,	 illustrates	 the quarterly	performance	ranking	of	our	pension	fund	investments	compared with	over	300	other	corporate	and	public	pension	funds.	The	peer	group, of	which	International	Paper	is	one,	is	the	"State	Street	Corporate	and Public	 Master	 Trusts	 Universe."	 For	 the	 last	 five	 years,	 International Paper's	pension	fund	performance	has	averaged	in	the	top	75%	of	this peer	group.

SFAS	 No. 87, "Employers'	 Accounting	 for	 Pensions,"	 provides	 for delayed	 recognition	 of	 actuarial	 gains	 and	 losses,	 including	 amounts arising	from	changes	in	the	estimated	projected	plan	benefit	obligation due	to	changes	in	the	assumed	discount	rate,	differences	between	the actual	 and	 expected	 return	 on	 plan	 assets,	 and	 other	 assumption changes.	These	net	gains	and	losses	are	recognized	in	pension	expense prospectively	 over	 a	 period	 that	 approximates	 the	 average	 remaining service	period	of

active	 employees	 expected	 to	 receive	 benefits	 under	 the	 plans (approximately	11	years)	to	the	extent	that	they	are	not	offset	by	gains and	losses	in	subsequent	years.	The	estimated	net	loss	and	prior	service cost	that	will	be	amortized	from	OCI	into	net	periodic	pension	cost	over the	next	fiscal	year	are	$186	million	and	$20	million,	respectively.

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

| In	millions | 2006 | 2005 | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Pension\texpense\t(income) |  |  |  |  |  |
| U.S.\tplans\t(non-cash) | $377 | $243 | $111 | $60 | $ (75) |
| Non-U.S.\tplans | 17 | 15 | 15 | 12 | 9 |
| Postretirement\texpense |  |  |  |  |  |
| U.S.\tplans | 7 | 20 | 53 | 55 | 59 |
| Non-U.S.\tplans | 3 | 3 | 2 | 2 | 2 |
| Net\texpense\t(income) | $404 | $281 | $181 | $129 | $(5) |

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

Assuming	that	discount	rates,	expected	long-term	returns	on	plan	assets and	rates	of	future	compensation	increases	remain	the	same	as	in	2006, projected	future	net	periodic	pension	and	postretirement	plan	expenses would	be	as	follows:

| In	millions | 2008	(a) | 2007	(a) |
| :--- | :--- | :--- |
| Pension\texpense |  |  |
| U.S.\tplans\t(non-cash) | $125 | $195 |
| Non-U.S.\tplans | 6 | 6 |
| Postretirement\texpense |  |  |
| U.S.\tplans | 18 | 14 |
| Non-U.S.\tplans | 2 | 3 |
| Net\texpense | $151 | $218 |

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

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

The	market	value	of	plan	assets	for	International	Paper's	U.S.	qualified pension	plan	at	December	31,	2006	totaled	approximately	$8.4	billion, consisting	 of	 approximately	 57%	 equity	 securities,	 34%	 fixed	 income securities,	 and	 9%	 real	 estate	 and	 other	 assets.	 Plan	 assets	 included approximately	$430,000	of	International	Paper	common	stock.

International	Paper	makes	contributions	that	are	sufficient	to	fully	fund	its actuarially	determined	costs,	generally	equal	 to	 the	minimum	amounts required	 by	 the	 Employee	 Retirement	 Income	 Security	 Act	 (ERISA). International	 Paper	 made	 voluntary	 contributions	 of	 $1.0	 billion	 to	 the qualified	defined	benefit	plan	in	the	fourth	quarter	of	2006,	and	does	not expect	to	make	any	contributions	in	2007.	The	nonqualified	plan	is	only funded	to	the	extent	of	benefits	paid,	which	are	expected	to	be	$41	million in	2007.

ACCOUNTING FOR STOCK OPTIONS. International	 Paper	 adopted	 the provisions	of	SFAS	No.	123(R),	"Share-Based	Payment"	to	account	for stock	options	in	the	first	quarter	of	2006	using	the	modified	prospective method.	Under	this	method,	expense	for	stock	options	is	recorded	over the	related	service	period	based	on	the	grant-date	fair	market	value.	Had SFAS	No.	123(R)	been	applied	in	2005	and	2004,	additional	expense	of $57	million	in	2005	and	$38	million	in	2004	would	have	been	recorded.

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

Before	 minority	 interest	 and	 discontinued	 operations,	 the	 Company's effective	income	tax	rates	were	59%,	(142)%	and	30%	for	2006,	2005 and	2004,	respectively.	These	effective	tax	rates	include	the	tax	effects of	certain	special	and	unusual	items	that	can	affect	the	effective	income tax	 rate	 in	 a	 given	 year,	 but	 may	 not	 recur	 in	 subsequent	 years. Management	believes	that	the	effective	tax	rate	computed	after	excluding these	special	or	unusual	items	may	provide	a	better	estimate	of	the	rate that	might	be	expected	in	future	years	if	no	additional	special	or	unusual items	were	to	occur	in	those	years.	Excluding	these	special	and	unusual items,	the	effective	income	tax	rate	for	2006	was	29%	of	pre-tax	earnings compared	with	20%	in	2005	and	19%	in	2004.	The	increase	in	the	rate	in 2006	 reflects	 a	 higher	 proportion	 of	 earnings	 in	 higher	 tax	 rate jurisdictions.	We	estimate	that	the	2007	effective	income	tax	rate	will	be 30-32%	based	on	expected	earnings	and	business	conditions,	which	are subject	to	change.

# RECENT	ACCOUNTING	DEVELOPMENTS

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

EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT	 PLANS. In	 September	 2006,	 the	 Financial	 Accounting Standards	Board	(FASB)	issued	SFAS	No.	158,	"Employers'	Accounting for	 Defined	 Benefit	 Pension	 and	 Other	 Postretirement	 Plans	 –	 an Amendment	 of	 FASB	 Statements	 No.	 87,	 88,	 106,	 and	 132(R)."	 This statement	 requires	 a	 calendar	 year-end	 company	 with	 publicly	 traded equity	 securities	 that	 sponsors	 a	 postretirement	 benefit	 plan	 to	 fully recognize,	as	an	asset	or	liability,	the	overfunded	or	underfunded	status of	its	benefit	plan(s)	in	its	2006	year-end	balance	sheet.	The	Company adopted	 the	 provisions	 of	 this	 standard	 as	 of	 December	 31,	 2006, recording	an	additional	liability	of	$492	million	and	an	after-tax	charge	to Other	comprehensive	income	of	$350	million	for	its	defined	benefit	and postretirement	benefit	plans.

FAIR	 VALUE	 MEASUREMENTS. In	 September	 2006,	 the	 FASB	 also	 issued SFAS	 No.	 157,	 "Fair	 Value	 Measurements,"	 which	 provides	 a	 single definition	of	fair	value,	together	with	a	framework	for	measuring	it,	and requires	 additional	 disclosure	 about	 the	 use	 of	 fair	 value	 to	 measure assets	and	liabilities.	It	also	emphasizes	that	fair	value	is	a	market-based measurement,	not	an	entity-specific

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

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

ACCOUNTING	FOR	UNCERTAINTY IN INCOME	TAXES. 	In	June	2006,	the	FASB issued	FASB	Interpretation	No.	48	(FIN	48),	"Accounting	for	Uncertainty in	Income	Taxes,	an	Interpretation	of	FASB	Statement	No.	109."	FIN	48 prescribes	 a	 recognition	 threshold	 and	 measurement	 attribute	 for	 the financial	statement	recognition	and	measurement	of	a	tax	position	taken or	expected	to	be	taken	in	a	tax	return.	This	interpretation	also	provides guidance	on	classification,	interest	and	penalties,	accounting	in	interim periods	and	transition,	and	significantly	expands	income	tax	disclosure requirements.	It	applies	to	all	tax	positions	accounted	for	in	accordance with	 SFAS	 No.	 109	 and	 is	 effective	 for	 fiscal	 years	 beginning	 after December	15,	2006.	International	Paper	will	apply	the	provisions	of	this interpretation	 beginning	 in	 the	 first	 quarter	 of	 2007,	 and	 currently estimates	that	the	cumulative	effect	of	its	initial	application	on	beginning of	 the	 year	 retained	 earnings	 will	 be	 a	 charge	 of	 approximately	 $75 million,	 which	 is	 subject	 to	 revision	 as	 management	 completes	 its analysis.

ACCOUNTING	FOR	CERTAIN	HYBRID	FINANCIAL	INSTRUMENTS.	In	February	2006, the	FASB	issued	SFAS	No.	155,	"Accounting	for	Certain	Hybrid	Financial Instruments	–	an	Amendment	of	FASB	Statements	No.	133	and	140," which	provides	entities	with	relief	 from	having	 to	separately	determine the	fair	value	of	an	embedded	derivative	that	would	otherwise	be	required to	be	bifurcated	from	its	host	contract	in	accordance	with	SFAS	No.	133. This	statement	allows	an	entity	to	make	an	irrevocable

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

ACCOUNTING	 CHANGES	AND	 ERROR	 CORRECTIONS. 	In	May	2005,	the	FASB issued	 SFAS	 No.	 154,	 "Accounting	 Changes	 and	 Error	 Corrections," which	changes	 the	requirements	 for	 the	accounting	and	reporting	of	a change	in	accounting	principle.	SFAS	No.	154	is	effective	for	accounting changes	and	corrections	of	errors	made	in	fiscal	years	beginning	after December	 15,	 2005.	 This	 statement	 does	 not	 change	 the	 transition provisions	of	any	existing	accounting	pronouncements,	 including	 those that	are	in	a	transition	phase	as	of	the	effective	date	of	the	statement.

ACCOUNTING	 FOR	 CONDITIONAL	 ASSET	 RETIREMENT	 OBLIGATIONS. In	 March 2005,	the	FASB	issued	Interpretation	No.	47,	"Accounting	for	Conditional Asset	Retirement	Obligations."	This	interpretation	clarifies	that	the	term "conditional	 asset	 retirement	 obligation,"	 as	 used	 in	 FASB	 Statement No.	 143,	 refers	 to	 the	 fact	 that	 a	 legal	 obligation	 to	 perform	 an	 asset retirement	activity	is	unconditional	even	though	uncertainty	exists	about the	 timing	and	(or)	method	of	settlement.	Uncertainty	about	 the	 timing and	(or)	method	of	settlement	of	a	conditional	asset	retirement	obligation should	be	factored	into	the	measurement	of	the	liability	when	sufficient information	exists	to	make	a	reasonable	estimate	of	the	fair	value	of	the obligation.	 International	 Paper	 adopted	 the	 provisions of this interpretation	in	the	fourth	quarter	of	2005	with	no	material	effect	on	its consolidated	financial	statements.

The	Company's	principal	conditional	asset	retirement	obligations	relate	to the	 potential	 future	 closure	 or	 redesign	 of	 certain	 of	 its	 production facilities.	 In	 connection	 with	 any	 such	 activity,	 it	 is	 possible	 that	 the Company	may	be	required	to	take	steps	to	remove	certain	materials	from the	facilities,	or	to	remediate	in	accordance	with	federal	and	state	laws that	govern	the	handling	of	certain	hazardous	or	potentially	hazardous materials.	Applicable	regulations	and	standards	provide	that	the	removal of	 certain	 materials	 would	 only	 be	 required	 if	 the	 facility	 were	 to	 be demolished	 or	 underwent	 major	 renovations.	 At	 this	 time,	 any	 such obligations	have	an

indeterminate	settlement	date,	and	the	Company	believes	that	adequate information	does	not	exist	to	apply	an	expected-present-value	technique to	 estimate	 any	 such	 potential	 obligations.	Accordingly,	 the	 Company does	not	record	a	liability	for	such	remediation	until	a	decision	is	made that	allows	reasonable	estimation	of	the	timing	of	such	remediation.

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

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

SHARE-BASED PAYMENT TRANSACTIONS. In	 December	 2004,	 the	 FASB issued	 SFAS	 No.	 123	 (revised	 2004),	 "Share-Based	 Payment,"	 that requires	 compensation	 costs	 related	 to	 share-based	 payment transactions	to	be	recognized	in	the	financial	statements.	The	amount	of the	compensation	cost	is	measured	based	on	the	grant-date	fair	value	of the	equity	or	liability	instruments	issued.	In	addition,	liability	awards	are remeasured	each	reporting	period.	Compensation	cost	is	recognized	over the	period	that	an	employee	provides	service	in	exchange	for	the	award. This	statement	applies	to	all	awards	granted	after	the	required	effective date	and	to	awards	modified,	repurchased,	or	cancelled	after

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

EXCHANGES	OF	NONMONETARY	ASSETS.	In	December	2004,	the	FASB	issued SFAS	No.	153,	"Exchanges	of	Nonmonetary	Assets,	an	Amendment	of APB	 Opinion	 No. 29," that	 replaces	 the	 exception	 from	 fair	 value measurement	 in	 APB	 Opinion	 No.	 29,	 "Accounting	 for	 Nonmonetary Transactions,"	for	nonmonetary	exchanges	of	similar	productive	assets with	a	general	exception	from	fair	value	measurement	for	exchanges	of nonmonetary	 assets	 that	 do	 not	 have	 commercial	 substance.	 A nonmonetary	 exchange	 has	 commercial	 substance	 if	 the	 future	 cash flows	of	the	entity	are	expected	to	change	significantly	as	a	result	of	the exchange.	International	Paper	applied	the	provisions	of	SFAS	No.	153 prospectively	in	the	first	quarter	of	2006,	with	no	material	effect	on	its consolidated	financial	statements.

INVENTORY	COSTS.	In	November	2004,	the	FASB	issued	SFAS	No.	151, "Inventory	 Costs,	 an	 Amendment	 of	 ARB	 No.	 43,	 Chapter	 4."	 This statement	requires	that	abnormal	amounts	of	idle	facility	expense,	freight, handling	 costs	 and	 wasted	 material	 be	 recognized	 as	 current-period charges.	This	statement	also	introduces	the	concept	of	"normal	capacity" and	 requires	 the	 allocation	 of	 fixed	 production	 overhead	 to	 inventory based	 on	 the	 normal	 capacity	 of	 the	 production	 facilities.	 Unallocated overhead	must	be	recognized	as	an	expense	in	the	period	in	which	it	is incurred.	International	Paper	adopted	SFAS	No.	151	in	the	first	quarter	of 2006,	with	no	material	impact	on	its	consolidated	financial	statements.

# ACCOUNTING	FOR	MEDICARE	BENEFITS.	In	May	2004,	the	FASB	issued	FSP

FAS	 106-2,	 "Accounting	 and	 Disclosure	 Requirements	 Related	 to	 the Medicare	 Prescription	 Drug,	 Improvement	 and	 Modernization	 Act	 of 2003,"	that	provides	guidance	on	the	accounting	and	required	disclosures for	 the	 effects	 of	 the	 Medicare	 Prescription	 Drug,	 Improvement	 and Modernization	Act	of	2003.	International	Paper	adopted	FSP	FAS	106-2 prospectively	in	the	third	quarter	of	2004.

# LEGAL	PROCEEDINGS

# Environmental	Matters

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

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

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

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

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

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

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

As	of	February	2007,	there	were	no	other	pending	judicial	proceedings brought	by	government	authorities	against	International	Paper	for	alleged violations	of	applicable	environmental	laws	or	regulations.

International	 Paper	 is	 involved	 in	 other	 contractual	 disputes, administrative	and	legal	proceedings	and	investigations	of	various	types. While	 any	 litigation,	 proceeding	 or	 investigation	 has	 an	 element	 of uncertainty,	we	believe	that	the	outcome	of	any	proceeding,	lawsuit	or claim	that	is	pending	or	threatened,	or	all	of	them	combined,	will	not	have a	material	adverse	effect	on	our	consolidated	financial	statements.

# Litigation

We	 routinely	 assess	 the	 likelihood	 of	 any	 adverse	 judgments	 or outcomes	of	our	litigation	matters,	as	well	as	ranges	of	probable	losses.	A determination	of	the	amount	of	the	reserves	required,	if	any,	for	these contingencies	 is	 based	 largely	 on	 those	 assessments.	 Ultimately, however,	the	determination	of	any	reserve	balance	is	based	on	good	faith estimates	 and	 judgments	 which,	 given	 the	 unpredictable	 nature	 of litigation,	could	prove	to	be	inaccurate.	As	a	result,	the	reserve	amounts in	any	given	matter	may	change	at	any	time	in	the	 future	due	 to	new unexpected	developments.	Analysis	of	our	significant	litigation	activity	is discussed	below,	and

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

# Antitrust	Matters

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

Current	management	has	a	strong	commitment	to	antitrust	compliance. This	 is	 evidenced	 by	 the	 Company's	 adoption	 of	 a	 Code	 of	 Business Ethics	 which	 applies	 to	 employees	 and	 executives	 alike,	 and	 robust systems	 to	ensure	compliance	with	antitrust	 laws,	regulations	and	our own	policies.	We	place	a	very	high	priority	on	training	our	employees	on current	antitrust	laws	around	the	world	and	proper	conduct	under	those laws.	In	this	effort,	we	employ	both	live	and	on-line	training	programs,	and distribute	the	Company's	Antitrust	Compliance	Manual.	In	addition,	the Company	 has	 a	 toll-free	 hotline	 which	 enables	 employees	 to	 make anonymous	reports	about	suspected	violation	of	law	or	Company	policy. This	reporting	system	is	also	available	to	the	general	public	with	access information	publicized	on	our	Internet	site.	We	believe	that	these	efforts, together	with	strong	leadership	about	the	importance	of	compliance,	will minimize	the	Company's	exposure	in	this	area.

# EFFECT	OF	INFLATION

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

# FOREIGN	CURRENCY	EFFECTS

International	 Paper	 has	 operations	 in	 a	 number	 of	 countries.	 Its operations	in	those	countries	export	to,	and	compete	with	imports	from, other	 regions.	 As	 such,	 currency	 movements	 can	 have	 a	 number	 of direct	and	indirect	impacts	on	the	Company's	financial	statements.	Direct impacts	include	the	translation	of	international	operations'	local	currency financial	statements	into	U.S.	dollars.	Indirect	impacts	include	the	change in	competitive	-

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

# MARKET	RISK

We	use	financial	instruments,	including	fixed	and	variable	rate	debt,	to finance	 operations,	 for	 capital	 spending	 programs	 and	 for	 general corporate	purposes.	Additionally,	financial	instruments,	including	various derivative	 contracts,	 are	 used	 to	 hedge	 exposures	 to	 interest	 rate, commodity	 and	 foreign	 currency	 risks.	 We	 do	 not	 use	 financial instruments	 for	 trading	 purposes.	 Information	 related	 to	 International Paper's	 debt	 obligations	 is	 included	 in	 Note 12 of	 the	 Notes	 to Consolidated	Financial	Statements	in	Item	8.	Financial	Statements	and Supplementary	Data.	A	discussion	of	derivatives	and	hedging	activities	is included	in	Note	13	of	the	Notes	to	Consolidated	Financial	Statements	in Item	8.	Financial	Statements	and	Supplementary	Data.

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

# Interest	Rate	Risk

Our	exposure	to	market	risk	for	changes	in	interest	rates	relates	primarily to	short-	and	long-term	debt	obligations	and	investments	in	marketable securities.	 We	 invest	 in	 investment-grade	 securities	 of	 financial institutions	 and	 industrial	 companies	 and	 limit	 exposure	 to	 any	 one issuer.	Our	investments	in	marketable	securities	at	December	31,	2006 are	 stated	 at	 cost,	 which	 approximates	 market	 due	 to	 their	 short-term nature.	Our	interest	rate	risk	exposure	related	to	these	investments	was immaterial.

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

net	 fair	value	 liability	of	 financial	 instruments	with	exposure	 to	 interest rate	risk	was	approximately	$3.8	billion	and	$8.6	billion,	respectively.	The potential	loss	in	fair	value	resulting	from	a	10%	adverse	shift	in	quoted interest	 rates	 would	 have	 been	 approximately	 $133	 million	 and	 $326 million	at	December	31,	2006	and	2005,	respectively.

# Commodity	Price	Risk

The	objective	of	our	commodity	exposure	management	 is	 to	minimize volatility	in	earnings	due	to	large	fluctuations	in	the	price	of	commodities. Commodity	swap	and	option	contracts	have	been	used	to	manage	risks associated	with	market	 fluctuations	 in	energy	prices.	At	December	31, 2006,	the	net	fair	value	of	such	outstanding	energy	hedge	contracts	was approximately	a	$12	million	liability.	At	December	31,	2005,	the	net	fair value	of	such	outstanding	energy	hedge	contracts	was	immaterial.	The potential	loss	in	fair	value	resulting	from	a	10%	adverse	change	in	the underlying	commodity	prices	would	have	been	approximately	$10	million for	December	31,	2006.

# Foreign	Currency	Risk

International	Paper	 transacts	business	 in	many	currencies	and	 is	also subject	 to	 currency	 exchange	 rate	 risk	 through	 investments	 and businesses	 owned	 and	 operated	 in	 foreign	 countries.	 Our	 objective	 in managing	the	associated	foreign	currency	risks	is	to	minimize	the	effect of	adverse	exchange	rate	 fluctuations	on	our	after-tax	cash	 flows.	We address	these	risks	on	a	limited	basis	through	financing	a	portion	of	our investments	in	overseas	operations	with	borrowings	denominated	in	the same	currency	as	the	operation's	functional	currency,	or	by	entering	into cross-currency	and	interest	rate	swaps,	or	foreign	exchange	contracts.	At December	31,	2006	and	2005,	the	net	fair	value	of	financial	instruments with	exposure	to	foreign	currency	risk	was	approximately	a	$95	million asset	and	a	$211	million	liability,	respectively.	The	potential	loss	in	fair value	 for	 such	 financial	 instruments	 from	 a	 10%	 adverse	 change	 in quoted	foreign	currency	exchange	rates	would	have	been	approximately $43	million	and	$20	million	at	December	31,	2006	and	2005,	respectively.

# ITEM	7A.	QUANTITATIVE	AND	QUALITATIVE	DISCLOSURES ABOUT	MARKET	RISK

See	the	discussion	under	Item	7.	Management's	Discussion	and	Analysis of	Financial	Condition	and	Results	of	Operations	on	page	42,	and	under Item	8.	Financial	Statements	and	Supplementary	Data	in	Note	13	of	the Notes	to	Consolidated	Financial	Statements	on	pages	77	through	79.

# ITEM	8.	FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

# INFORMATION	BY	INDUSTRY	SEGMENT	AND	GEOGRAPHIC	AREA

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

For	 management	 purposes,	 International	 Paper	 reports	 the	 operating performance	 of	 each	 business	 based	 on	 earnings	 before	 interest	 and income	taxes	("EBIT")	excluding	special	and	extraordinary	items,	gains	or losses	 on	 sales	 of	 businesses	 and	 cumulative	 effects	 of	 accounting changes.	 Intersegment	 sales	 and	 transfers	 are	 recorded	 at	 current market	prices.

External	Sales	by	Major	Product	is	determined	by	aggregating	sales	from each	segment	based	on	similar	products	or	services.	External	sales	are defined	as	those	that	are	made	to	parties	outside	International	Paper's consolidated	group,	whereas	sales	by	segment	in	the	Net	Sales	table	are determined	 by	 the	 management	 approach	 and	 include	 intersegment sales.

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

# INFORMATION	BY	INDUSTRY	SEGMENT

# NET	SALES

# ASSETS

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers | $7,961 | $8,146 | $8,321 |
| Industrial\tPackaging | 4,244 | 4,042 | 3,954 |
| Consumer\tPackaging | 2,578 | 2,420 | 2,454 |
| Distribution | 1,596 | 1,624 | 1,515 |
| Forest\tProducts | 274 | 2,234 | 2,375 |
| Specialty\tBusinesses\tand\tOther\t(a) | 498 | 652 | 652 |
| Corporate\tand\tother\t(d) | 6,883 | 9,653 | \t 14,946 |
| Assets | $24,034 | $28,771 | $34,217 |

# CAPITAL	SPENDING

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers | $537 | $592 | $453 |
| Industrial\tPackaging | 257 | \t 180 | \t 161 |
| Consumer\tPackaging | 116 | \t 126 | \t 198 |
| Distribution | 6 | 9 | 5 |
| Forest\tProducts | 72 | 66 | 76 |
| Specialty\tBusinesses\tand\tOther\t(a) | – | – | – |
| Subtotal | 988 | \t 973 | \t 893 |
| Corporate\tand\tother | 21 | 19 | 32 |
| Total\tfrom\tContinuing\tOperations | $1,009 | $992 | $925 |

# DEPRECIATION	AND	AMORTIZATION	(e)

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers | $500 | $677 | $691 |
| Industrial\tPackaging | 233 | 218 | 219 |
| Consumer\tPackaging | 212 | 152 | 150 |
| Distribution | 18 | 19 | 17 |
| Forest\tProducts | 45 | 51 | 61 |
| Specialty\tBusinesses\tand\tOther\t(a) | 24 | 31 | 27 |
| Corporate | 126 | 126 | 97 |
| Depreciation\tand\tAmortization | $1,158 | $1,274 | $1,262 |

# EXTERNAL	SALES	BY	MAJOR	PRODUCT

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Printing\tPapers | $6,060 | $6,435 | $5,961 |
| Industrial\tPackaging | 5,111 | 4,591 | 4,334 |
| Consumer\tPackaging | 2,638 | 2,379 | 2,407 |
| Distribution | 6,743 | 6,389 | 6,306 |
| Forest\tProducts | 676 | 1,205 | 1,037 |
| Other\t(f) | 767 | 701 | 676 |
| Net\tSales | $21,995 | $21,700 | $20,721 |

# INFORMATION	BY	GEOGRAPHIC	AREA

(a)Includes	Arizona	Chemical	and	certain	other	smaller	businesses	identified	in	the	Company's divestiture	program.

(b)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	for	these	subsidiaries	is	added	here	to	present	consolidated	earnings	from continuing	 operations	 before	 income	 taxes,	 minority	 interest,	 extraordinary	 items,	 and cumulative	effect	of	accounting	changes.

(c)Includes	$55	million	of	charges	in	2005	that	were	recorded	in	business	segment	operating profits.

(d)Includes	corporate	assets	and	assets	of	discontinued	operations.

(e)Includes	cost	of	timber	harvested.

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

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

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

# REPORT	OF	MANAGEMENT	ON:

# 		FINANCIAL	STATEMENTS

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

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

The	accompanying	consolidated	financial	statements	have	been	audited by	the	independent	registered	public	accounting	firm,	Deloitte	&	Touche LLP.	During	their	audits,	Deloitte	&	Touche	LLP	was	given	unrestricted access	to	all	financial	records	and	related	data,	including	minutes	of	all meetings	of	stockholders	and	the	board	of	directors	and	all	committees	of the	 board.	 Management	 believes	 that	 all	 representations	 made	 to	 the independent	auditors	during	their	audits	were	valid	and	appropriate.

# INTERNAL	CONTROLS	OVER	FINANCIAL	REPORTING

The	management	of	International	Paper	Company	is	also	responsible	for establishing	 and	 maintaining	 adequate	 internal	 controls	 over	 financial reporting	 including	 the	 safeguarding	 of	 assets	 against	 unauthorized acquisition,	use	or	disposition.	These	controls	are	designed	 to	provide reasonable	 assurance	 to	 management	 and	 the	 board	 of	 directors regarding	preparation	of	reliable	published	financial	statements	and	such asset	safeguarding.	All	internal	control	systems	have	inherent	limitations, including	the	possibility	of	circumvention	and	overriding	of	controls,	and therefore	 can	 provide	 only	 reasonable	 assurance	 as	 to	 such	 financial statement	preparation	and	asset	safeguarding.	The	system	is	supported by

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

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

The	Company's	independent	registered	public	accounting	firm,	Deloitte	& Touche	LLP,	have	issued	their	report	on	management's	assessment	and a	 report	 on	 the	 effectiveness	 of	 the	 Company's	 internal	 control	 over financial	reporting.	The	report	appears	on	page	48.

# INTERNAL	CONTROL	ENVIRONMENT	AND	BOARD	OF DIRECTORS	OVERSIGHT

Our	internal	control	environment	includes	an	enterprise-wide	attitude	of integrity	and	control	consciousness	that	establishes	a	positive	"tone	at the	 top."	This	 is	exemplified	by	our	ethics	program	 that	 includes	 long- standing	principles	and	policies	on	ethical	business	conduct	that	require employees	 to	 maintain	 the	 highest	 ethical	 and	 legal	 standards	 in	 the conduct	of	International	Paper	business,	which	have	been	distributed	to all	employees;	a	toll-free	telephone	helpline	whereby	any	employee	may anonymously	report	suspected	violations	of	law	or	International	Paper's policy;	and	an	office	of	ethics	and	business	practice.	The	internal	control system	further	includes	careful	selection	and	training	of	supervisory	and management	personnel,	appropriate	delegation	of	authority	and	division of	 responsibility,	 dissemination	 of	 accounting	 and	 business	 policies throughout	 International	 Paper,	 and	 an	 extensive	 program	 of	 internal audits.	 When	 deficiencies	 are	 identified	 by	 these	 internal	 control activities,	appropriate	corrective	actions	are	taken	by	management.

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

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

recommending	the	inclusion	of	such	financial	statements	in	this	Annual Report	on	Form	10-K	will	be	set	forth	in	our	Proxy	Statement.

# JOHN	V.	FARACI

# CHAIRMAN	AND	CHIEF	EXECUTIVE	OFFICER

# MARIANNE	M.	PARRS

EXECUTIVE	VICE	PRESIDENT	AND	CHIEF	FINANCIAL	OFFICER

# REPORT	OF	DELOITTE	&	TOUCHE	LLP,	INDEPENDENT

# REGISTERED	PUBLIC	ACCOUNTING	FIRM,	ON	CONSOLIDATED FINANCIAL	STATEMENTS

To	the	Shareholders	of	International	Paper	Company:

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

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

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

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

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

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

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

We have audited management's assessment, included in the accompanying	Report	of	Management	on	Internal	Controls	over	Financial Reporting, that International Paper	 Company and subsidiaries (the "Company")	maintained	effective	internal	control	over	financial	reporting as	 of	 December	 31,	 2006,	 based	 on criteria	 established in Internal Control	–Integrated	Framework	issued	by	the	Committee	of	Sponsoring Organizations of the Treadway Commission. The Company's management	is	responsible	for	maintaining	effective	internal	control	over financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal control	over	financial	reporting.	Our	responsibility	is	to	express	an	opinion on	management's	assessment	and	an	opinion	on	the	effectiveness	of	the Company's	internal	control	over	financial	reporting	based	on	our	audit.

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

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive	and	principal	financial	officers,	or	persons	performing	similar functions, and effected by the company's board of directors, management,	 and	 other	 personnel to	 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. A company's internal control over financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and fairly reflect the transactions and dispositions of the assets of the company;	(2)	provide	reasonable	assurance	that	transactions

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

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

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

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

Memphis,	Tennessee February	26,	2007

# International	Paper

# CONSOLIDATED	STATEMENT	OF	OPERATIONS

| In	millions,	except	per	share	amounts,	for	the	years	ended	December	31 | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| NET\tSALES | $21,995 | $21,700 | $20,721 |
| COSTS\tAND\tEXPENSES |  |  |  |
| Cost\tof\tproducts\tsold | \t 16,248 | \t 16,334 | \t 15,204 |
| Selling\tand\tadministrative\texpenses | 1,848 | 1,784 | 1,817 |
| Depreciation,\tamortization\tand\tcost\tof\ttimber\tharvested | 1,158 | 1,274 | 1,262 |
| Distribution\texpenses | 1,075 | 1,025 | 985 |
| Taxes\tother\tthan\tpayroll\tand\tincome\ttaxes | 215 | 213 | 220 |
| Restructuring\tand\tother\tcharges | 300 | 340 | 164 |
| Insurance\trecoveries | (19) | (258) | (123) |
| Gain\ton\tsale\tof\tforestlands\t(Note\t7) | (4,788) | – | – |
| Impairments\tof\tgoodwill\t(Note\t11) | 759 | – | – |
| Net\tlosses\ton\tsales\tand\timpairments\tof\tbusinesses | 1,496 | 111 | 139 |
| Reversals\tof\treserves\tno\tlonger\trequired,\tnet | (6) | (4) | (35) |
| Interest\texpense,\tnet | 521 | 595 | 712 |
| EARNINGS\tFROM\tCONTINUING\tOPERATIONS\tBEFORE\tINCOME\tTAXES\tAND\tMINORITY\tINTEREST | 3,188 | 286 | 376 |
| Income\ttax\tprovision\t(benefit) | 1,889 | (407) | 114 |
| Minority\tinterest\texpense,\tnet\tof\ttaxes | 17 | 9 | 24 |
| EARNINGS\tFROM\tCONTINUING\tOPERATIONS | 1,282 | 684 | 238 |
| Discontinued\toperations,\tnet\tof\ttaxes\tand\tminority\tinterest | (232) | 416 | (273) |
| NET\tEARNINGS\t(LOSS) | $1,050 | $1,100 | $(35) |
| BASIC\tEARNINGS\t(LOSS)\tPER\tCOMMON\tSHARE |  |  |  |
| Earnings\tfrom\tcontinuing\toperations | $2.69 | $1.41 | $0.49 |
| Discontinued\toperations,\tnet\tof\ttaxes\tand\tminority\tinterest | (0.48) | 0.85 | (0.56) |
| Net\tearnings\t(loss) | $2.21 | $2.26 | $(0.07) |
| DILUTED\tEARNINGS\t(LOSS)\tPER\tCOMMON\tSHARE |  |  |  |
| Earnings\tfrom\tcontinuing\toperations | $2.65 | $1.40 | $0.49 |
| Discontinued\toperations,\tnet\tof\ttaxes\tand\tminority\tinterest | (0.47) | 0.81 | (0.56) |
| Net\tearnings\t(loss) | $2.18 | $2.21 | $(0.07) |

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

| In	millions	at	December	31 | 2006 | 2005 |
| :--- | :--- | :--- |
| ASSETS |  |  |
| Current\tAssets |  |  |
| Cash\tand\ttemporary\tinvestments | $1,624 | $1,641 |
| Accounts\tand\tnotes\treceivable,\tless\tallowances\tof\t$85\tin\t2006\tand\t$94\tin\t2005 | 2,704 | 2,416 |
| Inventories | 1,909 | 1,932 |
| Assets\tof\tbusinesses\theld\tfor\tsale | 1,778 | 5,382 |
| Deferred\tincome\ttax\tassets | 490 | 278 |
| Other\tcurrent\tassets | 132 | 110 |
| Total\tCurrent\tAssets | 8,637 | \t 11,759 |
| Plants,\tProperties\tand\tEquipment,\tnet | 8,993 | 9,073 |
| Forestlands | 259 | 2,127 |
| Investments | 641 | 616 |
| Goodwill | 2,929 | 3,621 |
| Assets\tHeld\tfor\tExchange\t(Note\t18) | 1,324 | – |
| Deferred\tCharges\tand\tOther\tAssets | 1,251 | 1,575 |
| Total\tAssets | $24,034 | $28,771 |
| LIABILITIES\tAND\tCOMMON\tSHAREHOLDERS'\tEQUITY |  |  |
| Current\tLiabilities |  |  |
| Notes\tpayable\tand\tcurrent\tmaturities\tof\tlong-term\tdebt | $692 | $1,178 |
| Accounts\tpayable | 1,907 | 1,771 |
| Accrued\tpayroll\tand\tbenefits | 466 | 351 |
| Liabilities\tof\tbusinesses\theld\tfor\tsale | 333 | 621 |
| Other\taccrued\tliabilities | 1,243 | 1,034 |
| Total\tCurrent\tLiabilities | 4,641 | 4,955 |
| Long-Term\tDebt | 6,531 | \t 11,019 |
| Deferred\tIncome\tTaxes | 2,233 | 684 |
| Other\tLiabilities | 2,453 | 3,577 |
| Minority\tInterest | 213 | 185 |
| Commitments\tand\tContingent\tLiabilities\t(Note\t10) |  |  |
| Common\tShareholders'\tEquity |  |  |
| Common\tstock,\t$1\tpar\tvalue,\t2006-493.3\tshares,\t2005-490.5\tshares | 493 | 491 |
| Paid-in\tcapital | 6,735 | 6,627 |
| Retained\tearnings | 3,737 | 3,172 |
| Accumulated\tother\tcomprehensive\tloss | (1,564) | (1,935) |
|  | 9,401 | 8,355 |
|  | 1,438 | 4 |
| Total\tCommon\tShareholders'\tEquity | 7,963 | 8,351 |
| Total\tLiabilities\tand\tCommon\tShareholders'\tEquity | $24,034 | $28,771 |

# CONSOLIDATED	STATEMENT	OF	CASH	FLOWS

| In	millions	for	the	years	ended	December	31 | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| OPERATING\tACTIVITIES |  |  |  |
| Net\tearnings\t(loss) | $ 1,050 | $ 1,100 | $(35) |
| Discontinued\toperations,\tnet\tof\ttaxes\tand\tminority\tinterest | 232 | (416) | 273 |
| Earnings\tfrom\tcontinuing\toperations | 1,282 | 684 | 238 |
| Depreciation,\tamortization\tand\tcost\tof\ttimber\tharvested | 1,158 | 1,274 | 1,262 |
| Tax\tbenefit\t–\tnon-cash\tsettlement\tof\ttax\taudits | – | (627) | – |
| Deferred\tincome\ttax\tprovision\t(benefit),\tnet | 1,619 | (29) | (82) |
| Restructuring\tand\tother\tcharges | 300 | 340 | 164 |
| Insurance\trecoveries | (19) | (258) | (123) |
| Payments\trelated\tto\trestructuring\tand\tlegal\treserves | (79) | (184) | (220) |
| Reversals\tof\treserves\tno\tlonger\trequired,\tnet | (6) | (4) | (35) |
| Periodic\tpension\texpense,\tnet | 377 | 243 | 111 |
| Proceeds\ton\tMaine\ttimberlands\ttransaction | – | – | 242 |
| Net\tlosses\ton\tsales\tand\timpairments\tof\tbusinesses\theld\tfor\tsale | 1,496 | 111 | 139 |
| Gain\ton\tsales\tof\tforestlands | (4,788) | – | – |
| Impairment\tof\tgoodwill | 759 | – | – |
| Other,\tnet | 265 | 230 | 147 |
| Voluntary\tpension\tplan\tcontribution | (1,000) | – | – |
| Changes\tin\tcurrent\tassets\tand\tliabilities |  |  |  |
| Accounts\tand\tnotes\treceivable | (39) | 59 | (39) |
| Inventories | (43) | 8 | (84) |
| Accounts\tpayable\tand\taccrued\tliabilities | (202) | (634) | 57 |
| Other | (70) | 9 | (51) |
| Cash\tprovided\tby\toperations\t–\tcontinuing\toperations | 1,010 | 1,222 | 1,726 |
| Cash\tprovided\tby\toperations\t–\tdiscontinued\toperations | 213 | 288 | 662 |
| Cash\tProvided\tby\tOperations | 1,223 | 1,510 | 2,388 |
| INVESTMENT\tACTIVITIES |  |  |  |
| Invested\tin\tcapital\tprojects |  |  |  |
| Continuing\toperations | (1,009) | (992) | (925) |
| Businesses\tsold\tand\theld\tfor\tsale | (64) | (103) | (194) |
| Acquisitions,\tnet\tof\tcash\tacquired | (103) | (116) | (186) |
| Net\tproceeds\tfrom\tdivestitures | 1,833 | 1,440 | 867 |
| Net\tproceeds\tfrom\tsales\tof\tforestlands | 1,635 | – | – |
| Cash\tdeposit\tfor\tasset\texchange | (1,137) | – | – |
| Other | (48) | 99 | 364 |
| Cash\tprovided\tby\t(used\tfor)\tinvestment\tactivities\t–\tcontinuing\toperations | 1,107 | 328 | (74) |
| Cash\t(used\tfor)\tprovided\tby\tinvestment\tactivities\t–\tdiscontinued\toperations | (73) | (321) | 129 |
| Cash\tProvided\tby\tInvestment\tActivities | 1,034 | 7 | 55 |
| FINANCING\tACTIVITIES |  |  |  |
| Issuance\tof\tcommon\tstock | 32 | 23 | 164 |
| Repurchases\tof\tcommon\tstock | (1,433) | – | – |
| Issuance\tof\tdebt | 223 | 968 | 2,536 |
| Reduction\tof\tdebt | (5,391) | (2,669) | (4,217) |
| Monetization\tof\tTimber\tNotes\t(Note\t8) | 4,850 | – | – |
| Change\tin\tbook\toverdrafts | 10 | 4 | (145) |
| Dividends\tpaid | (485) | (490) | (485) |
| Other | (131) | (39) | (80) |
| Cash\tused\tfor\tfinancing\tactivities\t–\tcontinuing\toperations | (2,325) | (2,203) | (2,227) |
| Cash\tprovided\tby\t(used\tfor)\tfinancing\tactivities\t–\tdiscontinued\toperations | 21 | (174) | (208) |
| Cash\tUsed\tFor\tFinancing\tActivities | (2,304) | (2,377) | (2,435) |
| Effect\tof\tExchange\tRate\tChanges\ton\tCash\t-\tContinuing\tOperations | 29 | (90) | 110 |
| Effect\tof\tExchange\tRate\tChanges\ton\tCash\t-\tDiscontinued\tOperations | 1 | (5) | 115 |
| Change\tin\tCash\tand\tTemporary\tInvestments | (17) | (955) | 233 |
| Cash\tand\tTemporary\tInvestments |  |  |  |
| Beginning\tof\tthe\tperiod | 1,641 | 2,596 | 2,363 |
| End\tof\tthe\tperiod | 1,624 | 1,641 | 2,596 |
| Less\t-\tCash,\tEnd\tof\tYear\t–\tDiscontinued\tOperations | – | – | (416) |
| Cash,\tEnd\tof\tYear\t–\tContinuing\tOperations | $ 1,624 | $ 1,641 | $ 2,180 |

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

# CONSOLIDATED	STATEMENT	OF	CHANGES	IN	COMMON	SHAREHOLDERS'	EQUITY

|  |  | Common	Stock | Common	Stock |  |  | Accumulated |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Issued |  |  | Other | Treasury\tStock | Treasury\tStock | Total |
|  |  |  |  |  |  | Comprehensive |  |  | Common |
| In\tmillions,\texcept\tshares\tin\tthousands\tand\tper\tshare | In\tmillions,\texcept\tshares\tin\tthousands\tand\tper\tshare |  |  | Paid-in | Retained | Income\t(Loss) |  |  | Shareholders' |
| amounts |  | Shares | Amount | Capital | Earnings | (1) | Shares | Amount | Equity |
| BALANCE,\tJANUARY\t1,\t2004 | BALANCE,\tJANUARY\t1,\t2004 | 485,162 | $485 | $6,500 | $3,082 | $(1,690) | 3,668 | $140 | $8,237 |
| Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | 2,333 | 2 | 62 | – | – | (3,652) | (140) | 204 |
| Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | – | – | – | (485) | – | – | – | (485) |
| Comprehensive\tincome\t(loss): |  |  |  |  |  |  |  |  |  |
| Net\tloss | Net\tloss | – | – | – | (35) | – | – | – | (35) |
| Minimum\tpension\tliability\tadjustment: |  |  |  |  |  |  |  |  |  |
| U.S.\tplans\t(less\ttax\tof\t$20) | U.S.\tplans\t(less\ttax\tof\t$20) | – | – | – | – | 33 | – | – | 33 |
| Non-U.S.\tplans\t(less\ttax\tof\t$5) | Non-U.S.\tplans\t(less\ttax\tof\t$5) | – | – | – | – | 1 | – | – | 1 |
| Change\tin\tcumulative\tforeign\tcurrency\ttranslation\tadjustment\t(less\ttax\tof\t$17) | Change\tin\tcumulative\tforeign\tcurrency\ttranslation\tadjustment\t(less\ttax\tof\t$17) | – | – | – | – | 255 | – | – | 255 |
| Net\tgains\ton\tcash\tflow\thedging\tderivatives: |  |  |  |  |  |  |  |  |  |
| Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$19) | Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$19) | – | – | – | – | 70 | – | – | 70 |
| Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome\t(less\ttax | Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome\t(less\ttax |  |  |  |  |  |  |  |  |
| of\t$13) | of\t$13) | – | – | – | – | (26) | – | – | (26) |
| Total\tcomprehensive\tincome | Total\tcomprehensive\tincome |  |  |  |  |  |  |  | 298 |
| BALANCE,\tDECEMBER\t31,\t2004 | BALANCE,\tDECEMBER\t31,\t2004 | 487,495 | 487 | \t 6,562 | 2,562 | (1,357) | 16 | – | 8,254 |
| Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | 3,006 | 4 | 65 | – | – | 96 | 4 | 65 |
| Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | – | – | – | (490) | – | – | – | (490) |
| Comprehensive\tincome\t(loss): |  |  |  |  |  |  |  |  |  |
| Net\tearnings | Net\tearnings | – | – | – | 1,100 | – | – | – | 1,100 |
| Minimum\tpension\tliability\tadjustment: |  |  |  |  |  |  |  |  |  |
| U.S.\tplans\t(less\ttax\tof\t$189) | U.S.\tplans\t(less\ttax\tof\t$189) | – | – | – | – | (304) | – | – | (304) |
| Non-U.S.\tplans\t(less\ttax\tof\t$5) | Non-U.S.\tplans\t(less\ttax\tof\t$5) | – | – | – | – | (1) | – | – | (1) |
| Change\tin\tcumulative\tforeign\tcurrency\ttranslation\tadjustment\t(less\ttax\tof\t$22) | Change\tin\tcumulative\tforeign\tcurrency\ttranslation\tadjustment\t(less\ttax\tof\t$22) | – | – | – | – | (251) | – | – | (251) |
| Net\tgains\ton\tcash\tflow\thedging\tderivatives: |  |  |  |  |  |  |  |  |  |
| Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$14) | Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$14) | – | – | – | – | 46 | – | – | 46 |
| Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome\t(less\ttax | Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome\t(less\ttax |  |  |  |  |  |  |  |  |
|  | of\t$30) | – | – | – | – | (68) | – | – | (68) |
| Total\tcomprehensive\tincome | Total\tcomprehensive\tincome |  |  |  |  |  |  |  | 522 |
| BALANCE,\tDECEMBER\t31,\t2005 | BALANCE,\tDECEMBER\t31,\t2005 | 490,501 | 491 | \t 6,627 | 3,172 | (1,935) | 112 | 4 | 8,351 |
| Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | Issuance\tof\tstock\tfor\tvarious\tplans,\tnet | 2,839 | 2 | 108 | – | – | 46 | 1 | 109 |
| Repurchase\tof\tstock | Repurchase\tof\tstock | – | – | – | – | – | 39,686 | 1,433 | (1,433) |
| Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | Cash\tdividends\t-\tCommon\tstock\t($1.00\tper\tshare) | – | – | – | (485) | – | – | – | (485) |
| Comprehensive\tincome\t(loss): |  |  |  |  |  |  |  |  |  |
| Net\tearnings | Net\tearnings | – | – | – | 1,050 | – | – | – | 1,050 |
| Minimum\tpension\tliability\tadjustment: |  |  |  |  |  |  |  |  |  |
| U.S.\tplans\t(less\ttax\tof\t$309) | U.S.\tplans\t(less\ttax\tof\t$309) | – | – | – | – | 496 | – | – | 496 |
| Non-U.S.\tplans\t(less\ttax\tof\t$6) | Non-U.S.\tplans\t(less\ttax\tof\t$6) | – | – | – | – | 15 | – | – | 15 |
| Change\tin\tcumulative\tforeign\tcurrency\ttranslation\tadjustment\t(less\ttax\tof |  |  |  |  |  |  |  |  |  |
| $11) | $11) | – | – | – | – | 220 | – | – | 220 |
| Net\tgains\ton\tcash\tflow\thedging\tderivatives: |  |  |  |  |  |  |  |  |  |
| Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$0) | Net\tgain\tarising\tduring\tthe\tperiod\t(less\ttax\tof\t$0) | – | – | – | – | 2 | – | – | 2 |
| Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome | Less:\tReclassification\tadjustment\tfor\tgains\tincluded\tin\tnet\tincome |  |  |  |  |  |  |  |  |
|  | (less\ttax\tof\t$0) | – | – | – | – | (12) | – | – | (12) |
| Total\tcomprehensive\tincome | Total\tcomprehensive\tincome |  |  |  |  |  |  |  | 1,771 |
|  |  | – | – | – | – | (350) | – | – | (350) |
| BALANCE,\tDECEMBER\t31,\t2006 | BALANCE,\tDECEMBER\t31,\t2006 | 493,340 | $493 | $6,735 | $3,737 | $(1,564) | 39,844 | $ 1,438 | $7,963 |
| (1)\tThe\tcumulative | foreign\tcurrency | translation\tadjustment\t(in\tmillions)\twas\t$(60),\t$(280)\tand\t$(29)\tat\tDecember\t31,\t2006,\t2005\tand\t2004,\trespectively,\tand | translation\tadjustment\t(in\tmillions)\twas\t$(60),\t$(280)\tand\t$(29)\tat\tDecember\t31,\t2006,\t2005\tand\t2004,\trespectively,\tand | translation\tadjustment\t(in\tmillions)\twas\t$(60),\t$(280)\tand\t$(29)\tat\tDecember\t31,\t2006,\t2005\tand\t2004,\trespectively,\tand | translation\tadjustment\t(in\tmillions)\twas\t$(60),\t$(280)\tand\t$(29)\tat\tDecember\t31,\t2006,\t2005\tand\t2004,\trespectively,\tand | translation\tadjustment\t(in\tmillions)\twas\t$(60),\t$(280)\tand\t$(29)\tat\tDecember\t31,\t2006,\t2005\tand\t2004,\trespectively,\tand | is | included\tas\ta\tcomponent\tof | included\tas\ta\tcomponent\tof |

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

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# NOTE	1	SUMMARY	OF	BUSINESS	AND	SIGNIFICANT	ACCOUNTING POLICIES

# NATURE	OF	OUR	BUSINESS

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

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

# CONSOLIDATION

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

Investments	in	affiliated	companies	where	the	Company	has	significant influence	over	their	operations	are	accounted	for	by	the	equity	method. International	Paper's	share	of	affiliates'	earnings	totaled	$38	million,	$15 million	and	$14	million	in	2006,	2005	and	2004,	respectively.

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

# REVENUE	RECOGNITION

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

# SHIPPING	AND	HANDLING	COSTS

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

# ANNUAL	MAINTENANCE	COSTS

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

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

# TEMPORARY	INVESTMENTS

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

# INVENTORIES

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

# PLANTS,	PROPERTIES	AND	EQUIPMENT

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

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

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

# GOODWILL

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

# IMPAIRMENT	OF	LONG-LIVED	ASSETS

Long-lived	assets	are	reviewed	for	impairment	upon	the	occurrence	of events	or	changes	in	circumstances	that	indicate	that	the	carrying	value of	the

assets	 may	 not	 be	 recoverable,	 as	 measured	 by	 comparing	 their	 net book	value	to	the	projected	undiscounted	future	cash	flows	generated	by their	use.	Impaired	assets	are	recorded	at	their	estimated	fair	value	(see Note	6).	Long-lived	assets	classified	as	held	for	sale	are	recorded	at	the lower	of	their	carrying	amount	or	estimated	fair	value	less	costs	to	sell.

International	Paper	uses	the	asset	and	liability	method	of	accounting	for income	taxes	whereby	deferred	income	taxes	are	recorded	for	the	future tax	 consequences	 attributable	 to	 differences	 between	 the	 financial statement	and	tax	bases	of	assets	and	liabilities.	Deferred	tax	assets	and liabilities	 are	 measured	 using	 tax	 rates	 expected	 to	 apply	 to	 taxable income	in	the	years	in	which	those	temporary	differences	are	expected	to be	recovered	or	settled.	Deferred	tax	assets	and	liabilities	are	revalued	to reflect	new	tax	rates	in	the	periods	rate	changes	are	enacted.

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

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

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

# STOCK-BASED	COMPENSATION

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

Prior	 to	 January 1, 2006,	 stock	 options	 and	 other	 stock-based compensation	 awards	 were	 accounted	 for	 using	 the	 intrinsic	 value method	prescribed	by	Accounting	Principles	Board	(APB)	Opinion	No.	25, "Accounting	for	Stock	Issued	to	Employees,"	and	related	interpretations. Had	compensation	cost	in	2005	and	2004	for	International	Paper's	stock- based	 compensation	 programs	 been	 determined	 consistent	 with	 the provisions	of	SFAS	No.	123(R),	net	earnings,	basic	earnings	per	common share	and	diluted	earnings	per	common	share	would	have	been	reduced to	the	pro	forma	amounts	shown	below:

| In	millions,	except	per	share	amounts | 2005 | 2004 |
| :--- | :--- | :--- |
| Net\tEarnings\t(Loss) |  |  |
| As\treported | $1,100 | $(35) |
| Pro\tforma | \t 1,043 | (73) |
| Basic\tEarnings\t(Loss)\tPer\tCommon\tShare |  |  |
| As\treported | $2.26 | $(0.07) |
| Pro\tforma\nDiluted\tEarnings\t(Loss)\tPer\tCommon\tShare | 2.15 | (0.15) |
| As\treported | $2.21 | $(0.07) |
| Pro\tforma | 2.10 | (0.15) |

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

# ENVIRONMENTAL	REMEDIATION	COSTS

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

# ASSET	RETIREMENT	OBLIGATIONS

In	 accordance	 with	 the	 provisions	 of	 SFAS	 No.	 143,	 "Accounting	 for Asset	Retirement	Obligations,"	a	liability	and	an	asset	are	recorded	equal to	the	present	value	of	the	estimated	costs	associated	with	the	retirement of	long-lived	assets	where	a	legal	or	contractual	obligation	exists	and	the liability	can	be	reasonably	estimated.	The	liability	is	accreted	over	time and	 the	asset	 is	depreciated	over	 the	 life	of	 the	related	equipment	or facility.	 International	 Paper's	 asset	 retirement	 obligations	 under	 this standard	principally	relate	to	closure	costs	for	landfills.	Revisions	to	the liability	could	occur	due	to	changes	in	the	estimated	costs	or	timing	of closures,	 or	 possible	 new	 federal	 or	 state	 regulations	 affecting	 these closures	(see	Note	11).

# TRANSLATION	OF	FINANCIAL	STATEMENTS

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

# NOTE	2	EARNINGS	PER	COMMON	SHARE

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

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

| In	millions,	except	per	share	amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Earnings\tfrom\tcontinuing\toperations | $1,282 | $684 | $238 |
| Effect\tof\tdilutive\tsecurities | 13 | 27 | – |
| Earnings\tfrom\tcontinuing\toperations\t-\tassuming\ndilution | $1,295 | $711 | $238 |
| Average\tcommon\tshares\toutstanding\nEffect\tof\tdilutive\tsecurities | \t 476.1 | \t 486.0 | \t 485.8 |
| Restricted\tperformance\tshare\tplan | 3.0 | 0.8 | – |
| Stock\toptions | 0.2 | 2.9 | 2.6 |
| Contingently\tconvertible\tdebt | 9.4 | 20.0 | – |
| Average\tcommon\tshares\toutstanding\t-\tassuming\ndilution | \t 488.7 | \t 509.7 | \t 488.4 |
| Earnings\tper\tcommon\tshare\tfrom\tcontinuing\noperations | $2.69 | $1.41 | $0.49 |
| Diluted\tearnings\tper\tcommon\tshare\tfrom\tcontinuing\noperations | $2.65 | $1.40 | $0.49 |

# NOTE	3	INDUSTRY	SEGMENT	INFORMATION

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

# NOTE	4	RECENT	ACCOUNTING	DEVELOPMENTS

# EMPLOYERS'	ACCOUNTING	FOR	DEFINED	BENEFIT	PENSION	AND	OTHER POSTRETIREMENT	PLANS

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

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

# FAIR	VALUE	MEASUREMENTS

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

# ACCOUNTING	FOR	PLANNED	MAJOR	MAINTENANCE	ACTIVITIES

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

# ACCOUNTING	FOR	UNCERTAINTY	IN	INCOME	TAXES

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

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

# ACCOUNTING	FOR	CERTAIN	HYBRID	FINANCIAL	INSTRUMENTS

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

# ACCOUNTING	CHANGES	AND	ERROR	CORRECTIONS

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

# ACCOUNTING	FOR	CONDITIONAL	ASSET	RETIREMENT	OBLIGATIONS

In	March	2005,	the	FASB	issued	Interpretation	No.	47,	"Accounting	for Conditional	 Asset	 Retirement	 Obligations."	 This	 interpretation	 clarifies that	the	term	"conditional	asset	retirement	obligation"	as	used	in	FASB Statement	No.	143	refers	to	the	fact	that	a	legal	obligation	to	perform	an asset	retirement	activity	is	unconditional	even	though	uncertainty	exists about	 the	 timing	and	(or)	method	of	settlement.	Uncertainty	about	 the timing	and	(or)	method	of	settlement	of	a	conditional	asset	retirement

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

The	Company's	principal	conditional	asset	retirement	obligations	relate	to the potential future closure or redesign of certain of its production facilities. In	 connection	 with	 any	 such	 activity, it is	 possible that the Company	may	be	required	to	take	steps	to	remove	certain	materials	from the	facilities,	or	to	remediate	in	accordance	with	federal	and	state	laws that	govern	the	handling	of	certain	hazardous	or	potentially	hazardous materials.	Applicable	regulations	and	standards	provide	that	the	removal of	 certain	 materials	 would	 only	 be required if the facility	 were to	 be demolished	 or	 underwent	 major renovations.	 At this time,	 any such obligations	 have	 an indeterminate	 settlement	 date,	 and the	 Company believes	that	adequate	information	does	not	exist	to	apply	an	expected- present-value technique to estimate any such potential obligations. Accordingly,	the	Company	does	not	record	a	liability	for	such	remediation until	a	decision	is	made	that	allows	reasonable	estimation	of	the	timing	of such	remediation.

# IMPLICIT	VARIABLE	INTERESTS

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

# ACCOUNTING	FOR	INCOME	TAXES

In December 2004, the FASB issued FSP Financial Accounting Standards	(FAS)	109-1	and	109-2	relating	to	the	American	Jobs	Creation Act	of	2004	(the	Act).	The	Act	provides	for	a	special	one-time	deduction of

85%	of	certain	foreign	earnings	that	are	repatriated.	In	2005,	International Paper	 repatriated $2.1 billion	 in	 cash	 from	 certain	 of	 its	 foreign subsidiaries,	 including	 amounts	 eligible	 for	 this	 special	 deduction. International	Paper	recorded	income	tax	expenses	associated	with	these cash	repatriations	totaling	approximately	$142	million	for	the	year	ended December	31,	2005.

# SHARE-BASED	PAYMENT	TRANSACTIONS

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

# EXCHANGES	OF	NONMONETARY	ASSETS

In	 December	 2004,	 the	 FASB	 issued	 SFAS	 No.	 153,	 "Exchanges	 of Nonmonetary	 Assets,	 an	 Amendment	 of	 APB	 Opinion	 No.	 29,"	 that replaces	 the	 exception	 from	 fair	 value	 measurement	 in	 APB	 Opinion No.	 29,	 "Accounting	 for	 Nonmonetary	 Transactions,"	 for	 nonmonetary exchanges	of	similar	productive	assets	with	a	general	exception	from	fair value	measurement	 for	exchanges	of	nonmonetary	assets	 that	do	not have	commercial	substance.	A	nonmonetary	exchange	has	commercial substance	if	the	future	cash	flows	of	the	entity	are	expected	to	change significantly	as	a	result	of	the	exchange.	International	Paper	applied	the provisions	of	SFAS	No.	153	prospectively	in	the	first	quarter	of	2006,	with no	material	effect	on	its	consolidated	financial	statements.

# INVENTORY	COSTS

In	November	2004,	the	FASB	issued	SFAS	No.	151,	"Inventory	Costs,	an Amendment	 of	ARB	 No.	 43,	 Chapter	 4."	 This	 statement	 requires	 that abnormal	 amounts	 of	 idle	 facility	 expense,	 freight,	 handling	 costs	 and wasted	material	be	recognized	as	current-

period	charges.	This	statement	also	introduces	the	concept	of	"normal capacity"	 and	 requires	 the	 allocation	 of	 fixed	 production	 overhead	 to inventory	 based	 on	 the	 normal	 capacity	 of	 the	 production	 facilities. Unallocated	overhead	must	be	recognized	as	an	expense	in	the	period	in which	it	is	incurred.	International	Paper	adopted	SFAS	No.	151	in	the	first quarter	 of	 2006,	 with	 no	 material	 impact	 on	 its	 consolidated	 financial statements.

# ACCOUNTING	FOR	MEDICARE	BENEFITS

In	 May	 2004,	 the	 FASB	 issued	 FSP	 FAS 106-2, "Accounting	 and Disclosure	 Requirements	 Related	 to	 the	 Medicare	 Prescription	 Drug, Improvement	and	Modernization	Act	of	2003,"	that	provides	guidance	on the	accounting	and	required	disclosures	for	the	effects	of	the	Medicare Prescription	 Drug,	 Improvement	 and	 Modernization	 Act	 of	 2003. International	 Paper	 adopted	 FSP	 FAS	 106-2	 prospectively	 in	 the	 third quarter	of	2004.	See	Note	16	for	a	further	discussion.

# NOTE	5	ACQUISITIONS

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

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

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

The	financial	position	and	results	of	operations	of	these	acquisitions	have been	included	in	International	Paper's	consolidated	financial	statements from	the	dates	of	acquisition	in	2005.

# NOTE	6	RESTRUCTURING,	BUSINESS	IMPROVEMENT	AND	OTHER CHARGES

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

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

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

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

|  | First | Second | Third | Fourth |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| In\tmillions | Quarter | Quarter | Quarter | Quarter | Total |
| Printing\tPapers | $4 | $26(a,b) | $12(b) | $12(b) | $54 |
| Industrial\tPackaging | 1 | 2 | – | 4 | 7 |
| Consumer\tPackaging | 2 | 3 | 1 | 3 | 9 |
| Forest\tProducts | 1 | 1 | 9 | 4 | 15 |
| Distribution | 3 | 2 | 1 | 4 | 10 |
| Corporate | 7 | 14 | 34(c) | 7 | 62 |
|  | $18 | $48 | $57 | $34 | $157 |

(a)Includes	 $15	 million	 of	 pension	 and	 postretirement	 curtailment	 charges	 and termination benefits.

(b)Includes	$7	million,	$9	million	and	$11	million	in	the	2006	second,	third	and	fourth	quarters,

respectively,	of	accelerated	depreciation	charges	related	to	equipment	to	be	taken	out	of service	as	a	result	of	the	Transformation	Plan.

(c)Includes	$29	million	of	lease	termination	and	relocation	costs	relating	to	the	relocation	of	the Company's	corporate	headquarters	from	Stamford,	Connecticut	to	Memphis,	Tennessee.

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

|  | Asset |  |  |
| :--- | :--- | :--- | :--- |
|  | Write- | Severance |  |
| In\tmillions | downs | and\tOther | Total |
| Printing\tPapers | $27 | $27 | $54 |
| Industrial\tPackaging | – | 7 | 7 |
| Consumer\tPackaging | – | 9 | 9 |
| Forest\tProducts | – | 15 | 15 |
| Distribution | – | 10 | 10 |
| Corporate | 5 | 57 | 62 |
|  | $32 | $125 | $157 |

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

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

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

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

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

the	income	tax	provision	was	recorded,	including	a	credit	of	$627	million from	 an	 agreement	 reached	 with	 the	 U.S.	 Internal	 Revenue	 Service concerning	the	1997	through	2000	U.S.	federal	income	tax	audits,	a	$142 million	charge	related	to	cash	repatriations	from	non-U.S.	subsidiaries, and	$31	million	of	other	tax	charges.	Interest	expense,	net,	also	includes a	$43	million	pre-tax	credit	($26	million	after	 taxes)	relating	 to	 the	 tax audit	agreement.

|  | Second | Third | Fourth |  |
| :--- | :--- | :--- | :--- | :--- |
| In\tmillions | Quarter | Quarter | Quarter | Total |
| Printing\tPapers | $17(a) | $17(c) | $150(e) | $184 |
| Industrial\tPackaging | – | 4 | 10 | 14 |
| Consumer\tPackaging | – | 1 | 1 | 2 |
| Forest\tProducts | 10(b) | – | 2(f) | 12 |
| Distribution | – | – | 4 | 4 |
| Specialty\tBusinesses\tand |  |  |  |  |
| Other | – | 13(d) | – | 13 |
| Corporate | – | 7 | 20(g) | 27 |
|  | $27 | $42 | $187 | $256 |

(a)Includes	charges	for	severance	and	other	charges	for	the	indefinite	shutdown	of	three	U.S. paper	machines.

(b)Includes	charges	associated	with	the	relocation	of	the	Forest	Products	headquarters	from Savannah,	Georgia	to	Memphis,	Tennessee.

(c)Includes	$6	million	of	additional	severance	charges	related	to	the	indefinite	shutdown	of	the three	U.S.	paper	machines.

(d)Represents	charges	related	to	the	shutdown	of	a	plant	in	Norway.

(e)Includes	charges	of	$50	million	related	to	the	shutdown	of	paper	machines	at	Jay,	Maine, Bastrop,	Louisiana,	and	Pensacola,	Florida,	and	a	charge	of	$95	million	to	write	down	the assets	of	the	Bastrop,	Louisiana	mill	to	their	estimated	net	realizable	value	of	$105	million. (f)Includes	$2	million	of	charges	related	to	the	relocation	of	the	Forest	Products	headquarters from	Savannah,	Georgia	to	Memphis,	Tennessee.

(g)Includes	$2	million	of	charges	related	to	the	relocation	of	International	Paper's	headquarters from	Stamford,	Connecticut	to	Memphis,	Tennessee,	and	$12	million	of	transformation	costs.

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

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

In	addition,	credits	of	$123	million	before	taxes	($76	million	after	taxes) for	net	insurance	recoveries	related	to	the	hardboard	siding	and	roofing litigation	and	$35	million	before	taxes	($21	million	after	taxes)	for	the	net reversal	of	restructuring	reserves	no	longer	needed	were	recorded.	Also, a	 $32	 million	 charge	 was	 recorded	 for	 an	 adjustment	 of	 deferred	 tax balances.

The	 following	 table	presents	a	detail	of	 the	$62	million	corporate-wide organizational	restructuring	program	charge	in	2004,	by	business:

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

# NOTE	7	BUSINESSES	HELD	FOR	SALE,	DIVESTITURES	AND IMPAIRMENTS

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

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

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

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

| In	millions,	except	per	share	amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Revenues | $816 | $ 820 | $ 763 |
| Earnings\tfrom\tdiscontinued\toperation |  |  |  |
| Earnings\tfrom\toperation | $52 | $40 | $51 |
| Income\ttax\texpense | (16) | (18) | (17) |
| Earnings\tfrom\toperation,\tnet\tof\ttaxes | 36 | 22 | 34 |
| Loss\ton\tsales\tand\timpairments | (121) | – | – |
| Income\ttax\tbenefit | 31 | – | – |
| Loss\ton\tsales\tand\timpairments,\tnet\tof\ttaxes | (90) | – | – |
| Earnings\t(loss)\tfrom\tdiscontinued\toperation,\tnet\tof\ntaxes | $(54) | $22 | $34 |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued |  |  |  |
| operation\t-\tassuming\tdilution |  |  |  |
| Earnings\tfrom\toperation | $0.07 | $0.04 | $0.07 |
| Loss\ton\tsales\tand\timpairments | (0.18) | – | – |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom |  |  |  |
| discontinued\toperation,\tnet\tof\ttaxes\tand |  |  |  |
| minority\tinterest\t-\tassuming\tdilution | $(0.11) | $0.04 | $0.07 |

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

| In	millions,	except	per	share	amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Revenues | $1,017 | $1,135 | $1,522 |
| Earnings\tfrom\tdiscontinued\toperation |  |  |  |
| Earnings\t(loss)\tfrom\toperation | $(15) | $197 | $258 |
| Income\ttax\tbenefit\t(expense) | 5 | (77) | (100) |
| Earnings\t(loss)\tfrom\toperation,\tnet\tof\ttaxes | (10) | 120 | 158 |
| Loss\ton\tsales\tand\timpairments | (269) | – | – |
| Income\ttax\tbenefit | 35 | – | – |
| Loss\ton\tsales\tand\timpairments,\tnet\tof\ttaxes | (234) | – | – |
| Earnings\t(loss)\tfrom\tdiscontinued\toperation,\tnet\nof\ttaxes | $(244) | $120 | $158 |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom |  |  |  |
| discontinued\toperation\t-\tassuming\tdilution |  |  |  |
| Earnings\t(loss)\tfrom\toperation | $ (0.02) | $0.24 | $0.32 |
| Loss\ton\tsales\tand\timpairments | (0.47) | – | – |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom |  |  |  |
| discontinued\toperation,\tnet\tof\ttaxes\tand |  |  |  |
| minority\tinterest\t-\tassuming\tdilution | $ (0.49) | $0.24 | $0.32 |

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

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

Also	during	the	2006	third	quarter,	International	Paper	completed	the	sale of	its	interests	in	a	Beverage	Packaging	operation	in	Japan	for	a	pre-tax gain	of	$12	million	($3	million	after	taxes),	and	the	sale	of	its	Brazilian Coated	 Papers	 business	 to	 Stora	 Enso	 Oyj	 for	 approximately	 $420 million,	 subject	 to	 certain	 post-closing	 adjustments.	 This	 business included	a	coated	paper	mill	and	lumber	mill	in	Aropoti,	Parana	State, Brazil,	 as	 well	 as	 50,000	 hectares	 (approximately	 124,000	 acres)	 of forestlands	in	Parana.	As	the	Company	determined	that	the	accounting requirements	 under	 SFAS	 No.	 144	 for	 reporting	 this	 business	 as	 a discontinued	operation	were	met,	the	resulting	$100	million	pre-tax	gain ($79	million	after	taxes)	was	recorded	as	a	gain	on	sale	of	a	discontinued operation.

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

| In	millions,	except	per	share	amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Revenues | $ 127 | $ 218 | $ 165 |
| Earnings\tfrom\tdiscontinued\toperation |  |  |  |
| Earnings\tfrom\toperation | $20 | $49 | $38 |
| Income\ttax\texpense | (9) | (23) | (11) |
| Earnings\tfrom\toperation,\tnet\tof\ttaxes | 11 | 26 | 27 |
| Gain\ton\tsale | 100 | – | – |
| Income\ttax\texpense | (21) | – | – |
| Gain\ton\tsale,\tnet\tof\ttaxes | 79 | – | – |
| Earnings\tfrom\tdiscontinued\toperation,\tnet\tof\ttaxes | $90 | $26 | $27 |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued |  |  |  |
| operation\t-\tassuming\tdilution |  |  |  |
| Earnings\tfrom\toperation | $0.02 | $0.05 | $0.05 |
| Gain\ton\tsale | \t 0.16 | – | – |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued |  |  |  |
| operation,\tnet\tof\ttaxes\tand\tminority\tinterest\t- |  |  |  |
| assuming\tdilution | $0.18 | $0.05 | $0.05 |

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

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

| In	millions,	except	per	share	amounts | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Revenues | $231 | $ 224 | $188 |
| Earnings\tfrom\tdiscontinued\toperation |  |  |  |
| Earnings\tfrom\toperation | $41 | $11 | $(1) |
| Income\ttax\texpense | (15) | (4) | – |
| Earnings\tfrom\toperation,\tnet\tof\ttaxes | 26 | 7 | (1) |
| Loss\ton\tsales\tand\timpairments | (116) | – | – |
| Income\ttax\tbenefit | 44 | – | – |
| Loss\ton\tsales\tand\timpairments,\tnet\tof\ttaxes | (72) | – | – |
| Earnings\t(loss)\tfrom\tdiscontinued\toperation,\tnet\tof\ntaxes | $(46) | $7 | $(1) |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom |  |  |  |
| discontinued\toperation\t-\tassuming\tdilution |  |  |  |
| Earnings\tfrom\toperation | $0.05 | $0.01 | $– |
| Loss\ton\tsales\tand\timpairments | (0.14) | – | – |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom |  |  |  |
| discontinued\toperation,\tnet\tof\ttaxes\tand |  |  |  |
| minority\tinterest\t-\tassuming\tdilution | $(0.09) | $0.01 | $– |

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

2005:	In	the	third	quarter	of	2005,	International	Paper	completed	the	sale of	 its 50.5% interest	 in	 CHH	 to	 Rank	 Group	 Investments	 Ltd.	 for approximately	U.S.	$1.14	billion	 to	be	used	principally	 to	reduce	debt. The	pre-tax	gain	on	the	sale	of	$29	million	($361	million	after	taxes	and minority	interest),	including	a	$186	million	pre-tax	credit	from	cumulative translation	 adjustments,	 was	 included	 in	 Discontinued	 operations, together	with	CHH's	operating	results	prior	 to	 the	sale.	Additionally,	 in May	 2004,	 CHH	 sold	 its	 Tissue	 business.	 In	 accordance	 with	 SFAS No.	144,	International	Paper	has	retroactively	reclassified	the	operating results	 of	 CHH	 for	 all	 periods	 to	 present	 CHH	 as	 a	 discontinued operation.

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

| In	millions,	except	per	share	amounts | 2005 | 2004 |
| :--- | :--- | :--- |
| Revenues | $1,700 | $2,300 |
| Earnings\t(loss)\tfrom\tdiscontinued\toperation |  |  |
| Earnings\t(loss)\tfrom\toperation | $(32) | $35 |
| Income\ttax\t(expense)\tbenefit | (96) | 33 |
| Minority\tinterest\tbenefit\t(expense),\tnet\tof\ttaxes\tand\tminority |  |  |
| interest | 8 | (41) |
| Earnings\t(loss)\tfrom\tdiscontinued\toperation,\tnet\tof\ttaxes |  |  |
| and\tminority\tinterest | (120) | 27 |
| Gain\ton\tsale\tof\tCHH | 29 | – |
| Gain\ton\tsale\tof\tCHH\tTissue\tbusiness | – | 268 |
| Income\ttax\tbenefit\t(expense) | 332 | (69) |
| Minority\tinterest\texpense,\tnet\tof\ttaxes | – | (109) |
| Gain\ton\tsale,\tnet\tof\ttaxes\tand\tminority\tinterest | 361 | 90 |
| Earnings\tfrom\tdiscontinued\toperation,\tnet\tof\ttaxes\tand |  |  |
| minority\tinterest | $241 | $117 |
| Earnings\t(loss)\tper\tcommon\tshare\tfrom\tdiscontinued\noperation\t-\tassuming\tdilution |  |  |
| Earnings\t(loss)\tfrom\toperation,\tnet\tof\ttaxes\tand\tminority |  |  |
| interest | $ (0.24) | $0.06 |
| Gain\ton\tsale,\tnet\tof\ttaxes\tand\tminority\tinterest | 0.71 | 0.19 |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued\toperation, |  |  |
| net\tof\ttaxes\tand\tminority\tinterest\t-\tassuming\tdilution | $0.47 | $0.25 |

2004: In	 the	 third	 quarter	 of	 2004,	 International	 Paper	 entered	 into	 an agreement	to	sell	its	Weldwood	of	Canada	Limited	(Weldwood)	business to	West	Fraser	Timber	Co.,	Ltd.	of	Vancouver,	Canada	(West	Fraser),	for approximately	C$1.26	billion	 in	cash,	subject	 to	certain	adjustments	at closing.	Accordingly,	 a	 $323	 million	 pre-tax	 loss	 on	 impairment ($711 million	 after	 taxes),	 including $182	 million of	 pre-tax	 credits	 from cumulative	 translation	 adjustments,	 was	 recorded	 in	 Discontinued operations	to	write	down	the	assets	of	Weldwood	to	their	estimated	net realizable	value	upon	sale,	including	the	related	tax	effect.	The	Company completed	the	sale	of	Weldwood	in	the	fourth	quarter	for	C$1.23	billion. International	 Paper's	 net	 cash	 proceeds	 received	 from	 the	 sale	 were approximately	 U.S.	 $1.1	 billion.	The	 operating	 results	 of	 Weldwood	 in 2004	are	presented	in	discontinued	operations.

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

| In	millions,	except	per	share	amounts | 2004 |
| :--- | :--- |
| Revenues | $1,000 |
| Earnings\tfrom\tdiscontinued\toperation |  |
| Earnings\tfrom\toperation | $153 |
| Income\ttax\texpense | (50) |
| Earnings\tfrom\toperation,\tnet\tof\ttaxes | 103 |
| Asset\timpairment | (323) |
| Income\ttax\texpense\t(a) | (388) |
| Asset\timpairment,\tnet\tof\ttaxes | (711) |
| Loss\tfrom\tdiscontinued\toperation,\tnet\tof\ttaxes | $(608) |
| Earnings\tper\tcommon\tshare\tfrom\tdiscontinued\toperation |  |
| Earnings\tfrom\toperation,\tnet\tof\ttaxes | $0.22 |
| Asset\timpairment,\tnet\tof\ttaxes | (1.47) |
| Loss\tper\tcommon\tshare\tfrom\tdiscontinued\toperation,\tnet\tof\ttaxes | $ (1.25) |

(a)Reflects	the	low	historic	tax	basis	in	Weldwood	that	was	carried	over	in	connection	with	the acquisition	of	Champion	in	June	2000.

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

# OTHER	DIVESTITURES	AND	IMPAIRMENTS:

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

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

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

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

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

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

In	the	second	quarter	of	2005,	a	net	pre-tax	credit	of	$19	million	($12 million	after	 taxes)	was	recorded,	 including	a	$25	million	credit	before taxes	($15	million	after	 taxes)	 from	 the	collection	of	a	note	receivable from	the	2001	sale	of	the	Flexible	Packaging	business	and	final	charges related	 to	 the	sales	of	Fine	Papers	and	 Industrial	Papers.	 In	addition, interest	income	of	$11	million	before	taxes	($7	million	after	taxes)	was collected	on	the	Flexible	Packaging	business	note,	which	is	included	in Interest	 expense,	 net	 in	 the	 accompanying	 consolidated	 statement	 of operations.	 During	 the	 first	 quarter	 of	 2005,	 International	 Paper	 had announced	an	agreement	 to	sell	 its	Fine	Papers	business	 to	Mohawk Paper	Mills,	Inc.	of	Cohoes,	New	York.	A	$24	million	pre-tax	loss	($13 million	after	taxes)	was	recorded	in	the	first	quarter	to	write	down	the	net assets	 of	 the	 Fine	 Papers	 business	 to	 their	 estimated	 net	 realizable value.	The	sale	of	Fine	Papers	was	completed	in	the	second	quarter	of 2005.

Also	during	the	first	quarter	of	2005,	International	Paper	announced	that it	had	signed	an	agreement	to	sell	its	Industrial	Papers	business	to	an affiliate	of

Kohlberg	and	Company,	LLC.	A	$49	million	pre-tax	loss	($35	million	after taxes)	was	recorded	in	the	first	quarter	to	write	down	the	net	assets	of the	 Industrial	 Papers	 business	 and	 related	 corporate	 assets	 to	 their estimated	 net	 realizable	 value.	 The	 sale	 of	 Industrial	 Papers	 was completed	in	the	second	quarter	of	2005.

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

In	the	second	quarter	of	2004,	a	$27	million	loss	before	and	after	taxes was	recorded	to	write	down	the	assets	of	Papeteries	de	Souche	L.C.	in France	to	their	estimated	realizable	value.	In	addition,	a	$4	million	loss before	 taxes	 ($2	 million	 after	 taxes)	 was	 recorded	 to	 write	 down	 the assets	of	Food	Pack	S.A.	in	Chile	to	their	estimated	realizable	value.

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

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

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

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

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Accounts\treceivable,\tnet | $298 | $511 |
| Inventories | 401 | 515 |
| Plants,\tproperties\tand\tequipment,\tnet | 995 | \t 2,728 |
| Forestlands | – | 63 |
| Goodwill | 10 | \t 1,422 |
| Other\tassets | 74 | 143 |
| Assets\tof\tbusinesses\theld\tfor\tsale | $1,778 | $5,382 |
| Accounts\tpayable | $184 | $336 |
| Accrued\tpayroll\tand\tbenefits | 50 | 83 |
| Other\taccrued\tliabilities | 32 | 89 |
| Other\tliabilities | 67 | 113 |
| Liabilities\tof\tbusinesses\theld\tfor\tsale | $333 | $621 |

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

| In	millions | 2006 |  | 2005 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Assets | Liabilities | Assets | Liabilities |
| Kraft\tPapers | $148 | $16 | $266 | $17 |
| Beverage\tPackaging | 572 | 107 | 787 | 179 |
| Wood\tProducts | 562 | 51 | 864 | 69 |
| Arizona\tChemical | 496 | 159 | 396 | 135 |
| Coated\tand\tSupercalendered\tPapers | – | – | \t 2,736 | 142 |
| Brazilian\tCoated\tPapers | – | – | 319 | 43 |
| Other\tbusinesses | – | – | 14 | 36 |
| Totals | $ 1,778 | $333 | $5,382 | $621 |

# NOTE	8	VARIABLE	INTEREST	ENTITIES	AND	PREFERRED SECURITIES	OF	SUBSIDIARIES

# VARIABLE	INTEREST	ENTITIES:

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

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

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

International	Paper	also	holds	variable	interests	in	two	financing	entities that	were	used	 to	monetize	 long-term	notes	received	 from	 the	sale	of forestlands	in	2002	and	2001.	International	Paper	transferred	notes	and cash	 having	 a	 value	 of	 approximately	 $1.0	 billion	 to	 these	 entities	 in exchange	 for	preferred	 interests,	and	accounted	 for	 the	 transfers	as	a sale	of	the	notes	with	no	associated	gain	or	loss.	In	the	same	period,	the entities	 acquired	 approximately	 $1.0	 billion	 of	 International	 Paper	 debt obligations	for

cash.	International	Paper	has	not	consolidated	the	entities	because	it	is not	 the	 primary	 beneficiary	 of	 the	 entities.	 At	 December 31, 2006, International	Paper's	$545	million	preferred	interest	in	one	of	the	entities has	been	offset	against	related	debt	obligations	since	International	Paper has,	and	intends	to	affect,	a	legal	right	of	offset	to	net-settle	these	two amounts.	The	remaining	$455	million	of	debt	obligations	are	included	in floating	rate	notes	due	2007	–	2016	in	the	summary	of	long-term	debt	in Note	12.

# PREFERRED	SECURITIES	OF	SUBSIDIARIES:

In	 March	 2003,	 Southeast	 Timber,	 Inc.	 (Southeast	 Timber),	 a consolidated	 subsidiary	 of	 International	 Paper,	 issued	 $150	 million	 of preferred	securities	to	a	private	investor	with	future	dividend	payments based	on	LIBOR.	Southeast	Timber,	which	through	a	subsidiary	initially held	approximately	1.5	million	acres	of	forestlands	in	the	southern	United States,	was	International	Paper's	primary	vehicle	for	sales	of	southern forestlands.	 As	 of	 December 31, 2006,	 substantially	 all	 of	 these forestlands	have	been	sold.	These	preferred	securities	may	be	put	back to	 International	 Paper	 by	 the	 private	 investor	 upon	 the	 occurrence	 of certain	events,	and	have	a	liquidation	preference	that	approximates	their face	amount.	The	$150	million	preferred	third-party	interest	is	included	in Minority	 interest	 in	 the	 accompanying	 consolidated	 balance	 sheet. Distributions	paid	to	the	third-party	investor	were	$13	million,	$10	million and	$7	million	in	2006,	2005	and	2004,	respectively.	The	expense	related to	these	preferred	securities	is	shown	in	Minority	interest	expense	in	the accompanying	consolidated	statement	of	operations.

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

# NOTE	9	INCOME	TAXES

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Earnings\t(loss) |  |  |  |
| U.S. | $3,166 | $53 | $ (19) |
| Non-U.S. | 22 | \t 233 | \t 395 |
| Earnings\tfrom\tcontinuing\toperations\tbefore\tincome |  |  |  |
| taxes\tand\tminority\tinterest | $3,188 | $286 | $376 |

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Current\ttax\tprovision\t(benefit) |  |  |  |
| U.S.\tfederal | $125 | $(391) | $49 |
| U.S.\tstate\tand\tlocal | 38 | (52) | 24 |
| Non-U.S. | 107 | 65 | \t 123 |
|  | $270 | $(378) | $196 |
| Deferred\ttax\tprovision\t(benefit) |  |  |  |
| U.S.\tfederal | $1,583 | $(5) | $ (34) |
| U.S.\tstate\tand\tlocal | 172 | (10) | 5 |
| Non-U.S. | (136) | (14) | (53) |
|  | $1,619 | $(29) | $ (82) |
| Income\ttax\tprovision\t(benefit) | $1,889 | $(407) | $114 |

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Earnings\tfrom\tcontinuing\toperations\tbefore\nincome\ttaxes\tand\tminority\tinterest | $3,188 | $ 286 | $376 |
| Statutory\tU.S.\tincome\ttax\trate | 35% | 35% | 35% |
| Tax\texpense\tusing\tstatutory |  |  |  |
| U.S.\tincome\ttax\trate | \t 1,116 | 100 | \t 132 |
| State\tand\tlocal\tincome\ttaxes | 136 | (41) | 19 |
| Tax\trate\tand\tpermanent\tdifferences\ton\tnon- |  |  |  |
| U.S.\tearnings | (19) | (30) | (36) |
| Net\tU.S.\ttax\ton\tnon-U.S.\tdividends | 33 | 169 | 44 |
| Tax\tbenefit\ton\texport\tsales | (6) | (9) | (7) |
| Non-deductible\tbusiness\texpenses | 15 | 13 | 12 |
| Sales\tand\timpairments\tof\tnon-strategic\tassets | 646 | (8) | (11) |
| Minority\tinterest | – | – | (9) |
| Retirement\tplan\tdividends | (7) | (6) | (7) |
| Tax\tcredits | (14) | (19) | (37) |
| Tax\taudit\tsettlements | – | (560) | – |
| Other,\tnet | (11) | (16) | 14 |
| Income\ttax\texpense\t(benefit) | $1,889 | $(407) | $114 |
| Effective\tincome\ttax\trate | 59% | (142)% | 30% |

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

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Postretirement\tbenefit\taccruals | $381 | $339 |
| Prepaid\tpension\tcosts | 258 | 588 |
| Alternative\tminimum\tand\tother\ttax\tcredits | 400 | 300 |
| Net\toperating\tloss\tcarryforwards | 1,156 | 1,786 |
| Compensation\treserves | 285 | 211 |
| Legal\treserves | 59 | 40 |
| Other | 446 | 343 |
| Gross\tdeferred\ttax\tassets | 2,985 | 3,607 |
| Less:\tvaluation\tallowance | (111) | (118) |
| Net\tdeferred\ttax\tassets | $ 2,874 | $ 3,489 |
| Deferred\ttax\tliabilities: |  |  |
| Plants,\tproperties\tand\tequipment | $(1,965) | $(2,580) |
| Forestlands\tand\trelated\tinstallment\tsales | (2,095) | (753) |
| Other | (192) | (281) |
| Total\tdeferred\ttax\tliabilities | $(4,252) | $(3,614) |
| Net\tdeferred\ttax\tliabilities | $(1,378) | $(125) |

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

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

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

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

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

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

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

Deferred	 income	 taxes	 are	 not	 provided	 for	 temporary	 differences	 of approximately $2.7 billion, $2.4 billion	 and $2.7 billion	 as	 of December	31,	2006,	2005	and	2004,	respectively,	representing	earnings of	 non-U.S.	 subsidiaries	 intended	 to	 be	 permanently	 reinvested. Computation	of	the	potential	deferred	tax	liability	associated	with	these undistributed	earnings	and	other	basis	differences	is	not	practicable.

International	Paper	is	currently	being	audited	by	various	federal,	state	and non-U.S.	taxing	authorities	for	tax	periods	from	1996	through	2005.	While the	 Company	 believes	 that	 it	 is	 adequately	 accrued	 for	 possible	 audit adjustments,	 the	 final	 resolution	 of	 these	 examinations	 cannot	 be determined	at	 this	 time	and	could	result	 in	 final	settlements	 that	differ from	current	estimates.

# NOTE	10	COMMITMENTS	AND	CONTINGENT	LIABILITIES

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

Unconditional	 purchase	 obligations	 have	 been	 entered	 into	 in	 the ordinary	 course	 of	 business,	 principally	 for	 capital	 projects	 and	 the purchase	of	certain	pulpwood,	logs,	wood	chips,	raw	materials,	energy and	services,	including	fiber	supply	agreements	to	purchase	pulpwood that	were	entered	 into	concurrently	with	 the	2006	Transformation	Plan forestland	sales	(see	Note	7).

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

| In	millions | 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Lease\tobligations\t(a) | $144 | $117 | $94 | $74 | $60 | $110 |
| Purchase\tobligations\t(b,c) | \t 2,329 | \t 462 | \t 362 | \t 352 | \t 323 | 1,794 |
| Total | $2,473 | $579 | $456 | $426 | $383 | $1,904 |

(a)Included	 in	 these	 amounts	 are	 $76	 million	 of	 lease	 obligations	 related	 to	 discontinued operations	and	businesses	held	for	sale	that	are	due	as	follows:	2007	–	$23	million;	2008	–

(b)Included	in	these	amounts	are	$1.3	billion	of	purchase	obligations	related	to	discontinued

operations	and	businesses	held	for	sale	that	are	due	as	follows:	2007	–	$335	million;	2008	–

(c)Includes	 $2.2	 billion	 relating	 to fiber	 supply	 agreements	 entered into	 at the time	 of the Transformation	Plan	forestland	sales.

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

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

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

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

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

# EXTERIOR	SIDING	AND	ROOFING	SETTLEMENTS

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

The	first	suit,	entitled	Judy	Naef	v.	Masonite	and	International	Paper,	was filed	in	December	1994	and	settled	on	January	15,	1998	(the	Hardboard Settlement).	The	plaintiffs	alleged	that	hardboard	siding	manufactured	by Masonite	 failed	 prematurely,	 allowing	 moisture	 intrusion	 that	 in	 turn caused	 damage	 to	 the	 structure	 underneath	 the	 siding.	 The	 class consisted	of	all	U.S.	property	owners	having	Masonite	hardboard	siding installed	on	and	 incorporated	 into	buildings	between	January	1,	1980, and	January	15,	1998.	For	siding	that	was	installed	between	January	1, 1980,	 and	 December	 31,	 1989,	 the	 deadline	 for	 filing	 claims	 expired January	 18,	 2005,	 and	 for	 siding	 installed	 between	 January	 1,	 1990, through	January	15,	1998,	claims	must	be	made	by	January	15,	2008.

The	second	suit,	entitled	Cosby,	et	al.	v.	Masonite	Corporation,	et	al. ,	was filed	in	1997	and	settled	on	January	6,	1999	(the	Omniwood	Settlement). The	plaintiffs	made	allegations	with	regard	to	Omniwood

siding	manufactured	by	Masonite	that	were	similar	to	those	alleged	with respect	 to	 hardboard	 siding.	 The	 class	 consisted	 of	 all	 U.S.	 property owners	 having	 Omniwood	 siding	 installed	 on	 and	 incorporated	 into buildings	from	January	1,	1992,	to	January	6,	1999.	Claims	relating	to Omniwood	siding	must	be	made	by	January	6,	2009.

The	third	suit,	entitled	Smith,	et	al.	v.	Masonite	Corporation,	et	al. ,	was filed	in	1995	and	settled	on	January	6,	1999	(the	Woodruf	Settlement). The	plaintiffs	alleged	that	Woodruf	roofing	manufactured	by	Masonite	was defective	and	caused	damage	 to	 the	structure	underneath	 the	roofing. The	class	consisted	of	all	U.S.	property	owners	who	had	incorporated	and installed	Woodruf	roofing	from	January	1,	1980,	to	January	6,	1999.	For roofing	that	was	installed	between	January	1,	1980,	and	December	31, 1989,	 the	 deadline	 for	 filing	 claims	 expired	 January	 6,	 2006,	 and	 for roofing	installed	between	January	1,	1990,	and	January	6,	1999,	claims must	be	made	by	January	6,	2009.

All	 of	 the	 settlements	 provide	 for	 monetary	 compensation	 to	 class members	meeting	the	settlement	requirements	on	a	claims-made	basis, which	requires	a	class	member	to	individually	submit	proof	of	damage	to, or	caused	by,	Masonite	product,	proof	of	square	 footage	 involved	and proofs	of	various	other	matters.	All	of	 the	settlements	also	provide	 for payment	of	attorneys'	fees	equaling	15%	(in	the	case	of	the	Hardboard Settlement)	 and 13% (in	 the	 case	 of	 the	 Omniwood	 and	 Woodruf Settlements)	of	the	settlement	amounts	paid	to	class	members.

# CLAIMS	FILING	AND	EVALUATION

For	all	of	 the	settlements,	once	a	claim	 is	determined	 to	be	valid,	 the amount	 of	 the	 claim	 is	 determined	 by	 reference	 to	 a	 negotiated compensation	 formula	 designed	 to	 compensate	 the	 homeowner	 for product	damage	to	the	structure.	The	compensation	formula	is	based	on (1)	the	average	cost	per	square	foot	for	product	replacement,	including material	 and	 labor	 as	 calculated	 by	 industry	 standards,	 in	 the	 area	 in which	 the	structure	 is	 located,	adjusted	 for	 inflation,	or	(2)	 the	cost	of appropriate	refinishing	as	determined	by	industry	standards	in	such	area. Pursuant	to	the	settlement	agreements,	these	costs	are	determined	by reference	to	"Mean's	Price	Data,"	as	published	by	R.S.	Means	Company and	 updated	 annually	 for	 inflation.	 Persons	 receiving	 compensation pursuant	to	this	formula	also	agree	to	release	the	Company	and	Masonite from	all	other	property	damage	claims	relating	to	the	product	in	question.

In	 connection	 with	 the	 products	 involved	 in	 the	 settlements	 described above,	where	there	is	damage,	the	process	of	degradation,	once	begun, continues	 until	 repairs	 are	 made.	 The	 Company	 estimates	 that approximately	four	million	structures	have	installed	products	that	are	the subject	of	the	Hardboard	Settlement,	300,000	structures	have	installed products	that	are	the	subject	of	the	Omniwood	Settlement	and	86,000 structures	 have	 installed	 products	 that	 are	 the	 subject	 of	 the	 Woodruf Settlement.	 Masonite	 stopped	 selling	 the	 products	 involved	 in	 the Hardboard	Settlement	in	May	2001,	the	products	involved	in	the	Woodruf Settlement	 in	 May	 1996	 and	 the	 products	 involved	 in	 the	 Omniwood Settlement	in	September	1996.

Persons	 who	 are	 class	 members	 under	 the	 settlements	 who	 do	 not pursue	remedies	may	have	recourse	to	warranties,	if	any,	in	existence	at the	expiration	of	the	respective	terms	established	under	the	settlement agreements	for	making	claims.	The	warranty	period	generally	extends	for 25	years	following	the	installation	of	the	product	in	question	and,	although the	warranties	vary	from	product	to	product,	they	generally	provide	for	a payment	of	up	to	two	times	the	purchase	price.

# CLAIMS	PAYMENT	DATA

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

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

# AVERAGE	SETTLEMENT	COST	PER	CLAIM

|  | Hardboard | Hardboard | Omniwood | Omniwood | Woodruf | Woodruf |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Single | Multi- | Single | Multi- | Single | Multi- |
| In\tthousands | Family | Family | Family | Family | Family | Family |
| December\t31,\t2006 | $2.2 | $3.4 | $4.6 | $3.0 | $4.4 | $3.7 |
| December\t31,\t2005 | 2.5 | 2.2 | 4.6 | 6.1 | 4.3 | 0.5 |
| December\t31,\t2004 | 2.3 | 3.1 | 4.3 | 4.2 | 4.2 | 4.0 |

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

The following table	shows	an	analysis	of	claims	activity	related Hardboard,	Omniwood	and	Woodruf

to the

# CLAIMS	ACTIVITY

|  | Hardboard |  | Omniwood |  | Woodruf |  | Total |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Single | Multi- | Single | Multi- | Single | Multi- | Single | Multi- |  |
| In\tthousands | Family | Family | Family | Family | Family | Family | Family | Family | Total |
| December\t31,\t2003 | 26.4 | 2.8 | 1.8 | 0.5 | 0.8 | 0.3 | 29.0 | 3.6 | 32.6 |
| No.\tof\tClaims\tFiled | 56.0 | 8.0 | 5.2 | – | 0.6 | – | 61.8 | 8.0 | 69.8 |
| No.\tof\tClaims\tPaid | (28.6) | (3.7) | (4.0) | (0.1) | (0.4) | – | (33.0) | (3.8) | (36.8) |
| No.\tof\tClaims\tDismissed | (14.9) | (2.1) | (0.6) | – | (0.1) | – | (15.6) | (2.1) | (17.7) |
| December\t31,\t2004 | 38.9 | 5.0 | 2.4 | 0.4 | 0.9 | 0.3 | 42.2 | 5.7 | 47.9 |
| No.\tof\tClaims\tFiled | 27.3 | 5.6 | 4.6 | 0.4 | 0.6 | – | 32.5 | 6.0 | 38.5 |
| No.\tof\tClaims\tPaid | (30.7) | (5.3) | (4.1) | (0.3) | (0.5) | – | (35.3) | (5.6) | (40.9) |
| No.\tof\tClaims\tDismissed | (15.3) | (2.1) | (0.5) | – | (0.2) | – | (16.0) | (2.1) | (18.1) |
| December\t31,\t2005 | 20.2 | 3.2 | 2.4 | 0.5 | 0.8 | 0.3 | 23.4 | 4.0 | 27.4 |
| No.\tof\tClaims\tFiled | 18.3 | 0.6 | 5.4 | 0.3 | 0.6 | – | 24.3 | 0.9 | 25.2 |
| No.\tof\tClaims\tPaid | (12.7) | (1.6) | (4.3) | (0.2) | (0.4) | – | (17.4) | (1.8) | (19.2) |
| No.\tof\tClaims\tDismissed | (4.0) | (0.1) | (0.8) | – | (0.2) | – | (5.0) | (0.1) | (5.1) |
| December\t31,\t2006 | 21.8 | 2.1 | 2.7 | 0.6 | 0.8 | 0.3 | 25.3 | 3.0 | 28.3 |

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

# RESERVE	FOR	SIDING	AND	ROOFING	SETTLEMENTS

At	December	31,	2006,	net	reserves	for	the	settlements	discussed	above totaled	$124	million,	of	which	$72	million	is	attributable	to	the	Hardboard Settlement,	$49	million	to	the	Omniwood	Settlement	and	$3	million	to	the Woodruf	Settlement.

The	following	table	presents	an	analysis	of	the	net	reserve	activity	related to	the	Hardboard,	Omniwood	and	Woodruf	Settlements	for	the	years ended	December	31,	2006,	2005	and	2004:

|  | Hard- | Omni- |  |  |
| :--- | :--- | :--- | :--- | :--- |
| In\tmillions | board | wood | Woodruf | Total |
| Balance,\tDecember\t31,\t2003 | $ 261 | $117 | $9 | $ 387 |
| Payments | (111) | (20) | (5) | (136) |
| Insurance\tcollections | 8 | – | – | 8 |
| Balance,\tDecember\t31,\t2004 | 158 | 97 | 4 | 259 |
| Payments | (119) | (23) | (4) | (146) |
| Insurance\tcollections | (5) | – | 5 | – |
| Balance,\tDecember\t31,\t2005 | 34 | 74 | 5 | 113 |
| Additional\tprovision | 90 | – | – | 90 |
| Payments | (52) | (25) | (2) | (79) |
| Balance,\tDecember\t31,\t2006 | $72 | $49 | $3 | $ 124 |

While, for tracking purposes, the	 Company	 maintains three reserve accounts for each of the Hardboard, Omniwood and Woodruf Settlements,	we	evaluate	the	adequacy	of	the	aggregate	reserve	due	to their	 similar	 and related	 nature. In	 making	 a	 determination	 as to the adequacy	of	the	aggregate	reserve,

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

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

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

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

# HARDBOARD	INSURANCE	MATTERS

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

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Insurance\tsettlements | $22 | $334 | $174 |
| Income\trecognized | 19 | \t 258 | \t 123 |
| Cash\tsettlements\treceived,\tnet | 80 | \t 114 | 96 |

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

In	2004,	the	Company	settled	a	dispute	with	a	third	party	relating	to	an alternative	risk-transfer	agreement.	Under	that	agreement,	the	Company received $100	 million for	 certain	 costs	 relating	 to	 the	 Hardboard Settlement	and	other	hardboard	siding	cases.	As	part	of	the	settlement, the	Company	agreed	to	pay	the	third	party	a	portion	of	certain	insurance recoveries	 received	 by	 the	 Company	 after	 January	 1,	 2004,	 up	 to	 a maximum	of	$95	million.	As	of	December	31,	2006,	approximately	$66 million	had	been	paid	to	the	third	party	under	this	settlement.

# SUMMARY

The	Company	is	also	involved	in	various	other	inquiries,	administrative proceedings	 and	 litigation	 relating	 to	 contracts,	 sales	 of	 property, environmental	protection,	tax,	antitrust,	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	(other	than	those	that	cannot	be	assessed	due	to their	preliminary	nature),	or	all	of	them	combined,	including	the	preceding antitrust	 matters,	 will	 not	 have	 a	 material	 adverse	 effect	 on	 its consolidated	financial	statements.

# NOTE	11	SUPPLEMENTARY	FINANCIAL	STATEMENT INFORMATION

Inventories	by	major	category	were:

| In	millions	at	December	31 | 2006 | 2005 |
| :--- | :--- | :--- |
| Raw\tmaterials | $265 | $249 |
| Finished\tpulp,\tpaper\tand\tpackaging\tproducts | 1,341 | 1,383 |
| Operating\tsupplies | 271 | 259 |
| Other | 32 | 41 |
| Inventories | $1,909 | $1,932 |

The	 last-in,	 first-out	 inventory	 method	 is	 used	 to	 value	 most	 of International	 Paper's	 U.S.	 inventories.	Approximately	 70%	 of	 total	 raw materials	 and	 finished	 products	 inventories	 were	 valued	 using	 this method.	 If	 the	 first-in,	 first-out	 method	 had	 been	 used,	 it	 would	 have increased	 total	 inventory	 balances	 by	 approximately	 $252	 million	 and $239	million	at	December	31,	2006	and	2005,	respectively.

# Plants,	properties	and	equipment	by	major	classification	were:

| In	millions	at	December	31 | 2006 | 2005 |
| :--- | :--- | :--- |
| Pulp,\tpaper\tand\tpackaging\tfacilities |  |  |
| Mills | $16,665 | $15,968 |
| Packaging\tplants | 5,093 | 5,068 |
| Other\tplants,\tproperties\tand\tequipment | 1,285 | 1,450 |
| Gross\tcost | 23,043 | 22,486 |
| Less:\tAccumulated\tdepreciation | 14,050 | 13,413 |
| Plants,\tproperties\tand\tequipment,\tnet | $8,993 | $9,073 |

Interest	costs	related	to	the	development	of	certain	long-term	assets	are capitalized	and	amortized	over	the	related	assets'	estimated	useful	lives. Capitalized	net	interest	costs	were	$21	million	in	2006,	$14	million	in 2005	and	$10	million	in	2004.	Interest	payments	made	during	2006,	2005 and	2004	were	$734	million,	$819	million	and	$773	million,	respectively. The	2005	interest	payments	include	a	$52	million	payment	to	the	U.S. Internal	Revenue	Service	related	to	the	settlement	of	the	1997	–	2000 U.S.	federal	income	tax	audits.	Total	interest	expense	was	$651	million	in 2006,	$681	million	in	2005,	net	of	a	$46	million	credit	related	to	the settlement	of	the	tax	audits	discussed	above	and	$782	million	in	2004. Interest	income	was	$130	million,	$86	million	and	$70	million	in	2006, 2005	and	2004,	respectively.

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

|  |  | Reclassifi- |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Balance | cations |  | Balance |
|  | January\t1, | and | Additions/ | December\t31, |
| In\tmillions | 2006\t(a) | Other\t(b) | Reductions | 2006 |
| Printing\tPapers | $1,674 | $(174) | $– | $1,500 |
| Industrial\tPackaging | 677 | 4 | (11)^(c) | 670 |
| Consumer\nPackaging | 960 | 179 | (688)^(d) | 451 |
| Distribution | 299 | 9 | – | 308 |
| Corporate | 11 | (11) | – | – |
| Total | $3,621 | $7 | $(699) | $2,929 |

(a)Restated	to	show	the	Kraft	Papers,	Beverage	Packaging,	Wood	Products	and	Brazil	Coated Papers	 businesses	 as	 discontinued	 operations	 and	 Arizona	 Chemical	 and	 Coated	 and Supercalendered	Papers	as	businesses	held	for	sale.

(b)Represents	the	effects	of	foreign	currency	translations	and	reclassifications,	principally	$179 million	 relating	 to	 the	 movement	 of	 the	 coated	 bristols	 business	 from	 Printing	 Papers	 to Consumer	Packaging.

(c)Reflects	a	$3	million	decrease	from	the	sale	of	International	Paper	Containers	(UK)	Limited and	International	Paper	Ireland,	a	$1	million	increase	from	the	completion	of	the	accounting for	 the	 50%	 interest	 in	 IPPM	 acquired	 August	 1,	 2005,	 a	 $5	 million	 increase	 from	 the purchase	 of	 an	 additional	 25%	 interest	 in	 IPPM	 on	 May	 1,	 2006,	 a	 $9	 million	 decrease representing	 the	completion	of	 the	purchase	accounting	 for	a	66.5%	 interest	acquired	 in Compagnie	 Marocaine	 des	 Cartons	 et	 des	 Papiers	 in	 October	 2005,	 and	 a	 $5	 million decrease	from	the	completion	of	the	purchase	accounting	for	the	Box	USA	acquisition. (d)Represents	charges	of	$630	million	and	$129	million	related	to	the	annual	impairment	testing of	the	coated	paperboard	business	and	Shorewood	packaging	business,	respectively,	and	a $71	million	increase	related	to	the	accounting	for	certain	joint	ventures	in	China.

|  |  |  | Reclassifi- |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | Balance | cations |  | Balance |
|  |  | January\t1, | and | Additions/ | December\t31, |
| In\tmillions | In\tmillions | 2005\t(a) | Other\t(b) | Reductions | 2005 |
| Printing\tPapers | Printing\tPapers | $1,672 | $3 | $– | $1,675 |
| Industrial\tPackaging | Industrial\tPackaging | 591 | 18 | 67^(c^) | 676 |
| Consumer | Packaging | 987 | (28) | 1^(d^) | 960 |
| Distribution | Distribution | 299 | – | – | 299 |
| Corporate | Corporate | 24 | – | (13)^(e) | 11 |
| Total |  | $3,573 | $(7) | $55 | $3,621 |

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

(c)Reflects	the	completion	of	the	accounting	for	the	acquisition	of	Box	USA	of	$23	million,	the acquisition	 of	 Compagnie	 Marocaine	 des	 Cartons	 et	 des	 Papiers	 of	 $12	 million	 and	 the acquisition	of	a	50%	interest	in	IPPM	of	$38	million,	offset	by	the	effects	of	the	sale	of	the Industrial	Papers	business	of	$6	million.

(d)Reflects	 a	 $5	 million	 adjustment	 resulting	 from	 the	 acquisition	 of	 a	 minority	 interest	 in Shorewood	EPC	Europe	Limited	and	$1	million	related	to	the	acquisition	of	a	20%	interest	in IP	Korea	Ltd.,	offset	by	$5	million	related	to	the	reclassification	of	IP	Pty	Australia	Ltd.	to equity	method	investments.

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

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

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

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

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Asset\tretirement\tobligation\tat\tJanuary\t1 | $33 | $30 |
| New\tliabilities | 1 | 9 |
| Liabilities\tsettled | (4) | (5) |
| Net\tadjustments\tto\texisting\tliabilities | (1) | (2) |
| Accretion\texpense | 1 | 1 |
| Asset\tretirement\tobligation\tat\tDecember\t31 | $30 | $33 |

This	 liability	 is	 included in Other liabilities in the accompanying consolidated	balance	sheet.

The	following	table	presents	changes	in	minority	interest	balances	for	the years	ended	December	31,	2006	and	2005:

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Balance,\tbeginning\tof\tyear | $185 | $152 |
| Interest\tof\tCHH\tin\tan\tIP\tconsolidated\tsubsidiary | – | 17 |
| Purchase\tof\tCHH's\tinterest\tin\tan\tIP\tconsolidated\tsubsidiary | (15) | – |
| Minority\tinterest\tof\tacquired\tentities | 33 | 15 |
| Dividends\tpaid | (12) | (11) |
| Minority\tinterest\texpense | 17 | 9 |
| Other,\tnet | 5 | 3 |
| Balance,\tend\tof\tyear | $213 | $185 |

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

calendered	business	(see	Note	7).

# NOTE	12	DEBT	AND	LINES	OF	CREDIT

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

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

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

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

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

In	 November	 and	 December	 of	 2005,	 International	 Paper	 Investments (Luxembourg)	S.ar.l,	a	wholly-owned	subsidiary	of	 International	Paper, issued	$700	million	of	long-term	debt	with	an	initial	interest	rate	of	LIBOR plus	40	basis	points	that	can	vary	depend	-

ing	 upon	 the	 credit	 rating	 of	 the	 Company	 and	 a	 maturity	 date	 in November	2010.	Additionally,	the	subsidiary	borrowed	$70	million	under a	bank	credit	agreement	with	an	 initial	 interest	rate	of	LIBOR	plus	40 basis	points	that	can	vary	depending	on	the	credit	rating	of	the	Company, and	with	a	maturity	date	in	November	2006.

In	December	2005,	International	Paper	used	a	portion	of	the	proceeds from	the	above	borrowings,	and	from	the	sale	of	CHH	in	the	third	quarter of	2005,	to	repay	approximately	$190	million	of	notes	with	coupon	rates ranging	from	3.8%	to	10%	and	original	maturities	from	2008	to	2029.

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

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

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

# A	summary	of	long-term	debt	follows:

| In	millions	at	December	31 | 2006 | 2005 |
| :--- | :--- | :--- |
| 8^\t7\n/8%\tto\t10%\tnotes\t-\tdue\t2011\t-\t2012 | $19 | $136 |
| 9.25%\tdebentures\t-\tdue\t2011 | 44 | 125 |
| 7%\tto\t7\t7/8%\tnotes\t-\tdue\t2007 | 198 | 437 |
| 6^\t7\n/8%\tnotes\t-\tdue\t2023\t-\t2029 | 130 | 351 |
| 6.75%\tnotes\t-\tdue\t2011 | 195 | 819 |
| 6.65%\tnotes\t-\tdue\t2037 | 99 | 98 |
| 6.4%\tnotes\tto\t6.5%\tnotes\t-\tdue\t2007 | 147 | 344 |
| 6.4%\tto\t7.75%\tdebentures\t-\tdue\t2025\t-\t2027 | 254 | 571 |
| 5.85%\tnotes\t-\tdue\t2012 | 284 | 969 |
| 5.25%\tto\t5.5%\tnotes\t-\tdue\t2014\t-\t2016 | 839 | 1,296 |
| 5^\t3\n/8%\teuro\tnotes\t-\tdue\t2006 | – | 296 |
| 5^\t1\n/8%\tdebentures\t-\tdue\t2012 | 110 | 106 |
| 3.8%\tto\t4.25%\tnotes\t-\tdue\t2008\t-\t2010 | 913 | 1,152 |
| Zero-coupon\tconvertible\tdebentures\t-\tdue\t2021 | 2 | 1,185 |
| Medium-term\tnotes\t-\tdue\t2009\t(a) | 30 | 43 |
| Floating\trate\tnotes\t-\tdue\t2007\t-\t2016\t(b) | \t 1,690 | 1,764 |
| Environmental\tand\tindustrial\tdevelopment\tbonds\t-\tdue\t2007\t-\t2033 |  |  |
| (c) | \t 1,934 | 2,005 |
| Commercial\tpaper\tand\tbank\tnotes\t(d) | 246 | 415 |
| Other\t(e) | 89 | 85 |
| Total\t(f) | \t 7,223 | \t 12,197 |
| Less:\tCurrent\tmaturities | 692 | 1,178 |
| Long-term\tdebt | $6,531 | $11,019 |

(e)Includes	$3	million	at	December	31,	2006,	and	$6	million	at	December	31,	2005,	related	to interest	rate	swaps	treated	as	fair	value	hedges	(see	Note	13).

At	 December	 31,	 2006	 and	 2005,	 International	 Paper	 classified	 $100 million	and	$1.25	billion,	respectively,	of	tenderable	bonds,	contingently convertible	 securities,	 commercial	 paper	 and	 bank	 notes,	 and	 Current maturities	of	long-term	debt	as	Long-term	debt.	International	Paper	has the	intent	and	ability	to	renew	or	convert	these	obligations,	as	evidenced by	the	available	bank	credit	agreements	described	below.

At	 December 31, 2006,	 International	 Paper's	 unused	 contractually committed	bank	credit	agreements	totaled	$3.0	billion.	The	agreements generally	provide	 for	 interest	rates	at	a	 floating	rate	 index	plus	a	pre- determined	margin	dependent	upon	International	Paper's	credit	rating.	In March	 2006,	 International	 Paper	 replaced	 its	 maturing $750	 million revolving	 bank	 credit	 agreement	 with	 a 364-day $500	 million fully committed	revolving	bank	credit	agreement	that	expires	in	March	2007 and	has	a	facility	fee	of	0.08%	payable	quarterly,	and	replaced	its	$1.25 billion	revolving	bank	credit	agreement	with	a	$1.5	billion	fully	committed revolving	bank	credit	agreement	that	expires	in	March	2011	and	has	a facility	fee	of	0.10%	payable	quarterly.	In	addition,	in	October	2006,	the Company	 amended	 its	 existing	 receivables	 securitization	 program	 that provides	for	up	to	$1.2	billion	of	commercial	paper-based	financings	with a	 facility	 fee	 of	 0.20%	 and	 an	 expiration	 date	 in	 November	 2007,	 to provide	up	to	$1.0	billion	of	available	commercial	paper-based	financings with	a	 facility	 fee	of	0.1%	and	an	expiration	date	of	October	2009.	At December	 31,	 2006,	 there	 were	 no	 borrowings	 under	 either	 the	 bank credit	agreements	or	receivables	securitization	program.

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

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

# NOTE	13	DERIVATIVES	AND	HEDGING	ACTIVITIES

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

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

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

The	 remainder	 of	 International	 Paper's	 interest	 rate	 swap	 agreements qualify	 as	 fully	 effective	 fair	 value	 hedges	 under	 SFAS	 No.	 133.	 At December	 31,	 2006	 and	 2005,	 outstanding	 notional	 amounts	 for	 its interest	 rate	 swap	 fair	 value	 hedges	 amounted	 to	 approximately	 $1.9 billion	and	$1.7	billion,	respectively.	The	fair	values	of	these	swaps	were net	assets	of	approximately	$2	million	and	$7	million	at	December	31, 2006	and	2005,	respectively.

respectively,	were	terminated,	or	undesignated	as	an	effective	fair	value hedge,	in	connection	with	various	early	retirements	of	debt.	The	resulting gains	 of	 approximately	 $17	 million	 and	 $6	 million,	 respectively,	 are included	 in	 Restructuring	 and	 other	 charges	 in	 the	 accompanying consolidated	statement	of	operations	(see	Note	6).

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

# COMMODITY	RISK

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

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

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

Foreign	 exchange	 contracts	 (including	 forward,	 swap	 and	 purchase option	contracts)	are	also	used	to	hedge	certain	transactions,	primarily trade	 receipts	 and	 payments	 denominated	 in	 foreign	 currencies,	 to manage	 volatility	 associated	 with	 these	 transactions	 and	 to	 protect International	Paper	from	currency	fluctuations	between	the	contract	date and	 ultimate	 settlement.	 These	 contracts,	 most	 of	 which	 have	 been designated	as	cash	flow	hedges,	had	maturities	of	three	years	or	less	as of	December	31,	2006.	For	the	years	ended	December	31,	2006,	2005 and	2004,	net	unrealized	gains	after	taxes	and	minority	interest	totaling $18	million,	$48	million	and	$72	million,	respectively,	were	recorded	to OCI.	Net	after-tax	gains	of	$20	million,	$14	million	and	$4	million	were reclassified	to	earnings.	Gains	relating	to	CHH,	after	taxes	and	minority interest,	totaling	$14	million	and	$22	million	are	included	in	Discontinued operations	 for	 the	 years	 ended	 December 31, 2005	 and	 2004, respectively.	Cumulative	OCI	after-tax	and	minority	interest	gains	of	$40 million	 are	 included	 in	 the	 gain	 on	 sale	 of	 CHH	 in	 Discontinued operations	in	2005.	As	of	December	31,	2006,	gains	of	$24	million	after taxes	are	expected	to	be	reclassified	to	earnings	in	2007.	Other	contracts are	 used	 to	 offset	 the	 earnings	 impact	 relating	 to	 the	 variability	 in exchange	 rates	 on	 certain	 short-term	 monetary	 assets	 and	 liabilities denominated	 in	 non-functional	 currencies	 and	 are	 not	 designated	 as hedges.	 Changes	 in	 the	 fair	 value	 of	 these	 instruments,	 recognized currently	in	earnings	to	offset	the	remeasurement	of	the	related	assets and	liabilities,	were	not	significant.

International	 Paper	 does	 not	 hold	 or	 issue	 financial	 instruments	 for trading	 purposes.	The	 counterparties	 to	 swap	 agreements	 and	 foreign exchange	contracts	consist	of	a	number	of	major	international	financial

institutions.	International	Paper	continually	monitors	its	positions	with	and the	 credit	 quality	 of	 these	 financial	 institutions	 and	 does	 not	 expect nonperformance	by	the	counterparties.

# NOTE	14	CAPITAL	STOCK

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

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

# NOTE	15	RETIREMENT	PLANS

# U.S.	DEFINED	BENEFIT	PLANS

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

The	plans	provide	defined	benefits	based	on	years	of	credited	service and	either	final	average	earnings	(salaried	employees),	hourly	job	rates or	specified	benefit	rates	(hourly	and	union	employees).

For	its	qualified	defined	benefit	pension	plan,	International	Paper	makes contributions	that	are	sufficient

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

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

# Net	Periodic	Pension	Expense

Service	cost	is	the	actuarial	present	value	of	benefits	attributed	by	the plans'	benefit	formula	to	services	rendered	by	employees	during	the	year. Interest	cost	represents	the	increase	in	the	projected	benefit	obligation, which	is	a	discounted	amount,	due	to	the	passage	of	time.	The	expected return	 on	 plan	 assets	 reflects	 the	 computed	 amount	 of	 current	 year earnings	from	the	investment	of	plan	assets	using	an	estimated	long-term rate	of	return.

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Service\tcost | $ 141 | $ 129 | $ 115 |
| Interest\tcost | 506 | 474 | 467 |
| Expected\treturn\ton\tplan\tassets | (540) | (556) | (592) |
| Actuarial\tloss | 243 | 167 | 94 |
| Amortization\tof\tprior\tservice\tcost | 27 | 29 | 27 |
| Net\tperiodic\tpension\texpense\t(a) | $ 377 | $ 243 | $ 111 |

(a)Excludes	$9.1	million,	$6.5	million	and	$3.4	million	in	2006,	2005	and	2004,	respectively,	in curtailment	losses,	and	$8.7	million,	$3.6	million	and	$1.4	million	in	2006,	2005	and	2004, respectively,	of	termination	benefits,	in	connection	with	cost	reduction	programs	and	facility rationalizations	that	were	recorded	in	Restructuring	and	other	charges	in	the	consolidated statement	of	operations.	Also	excludes	$77.2	million	and	$14.3	million	in	2006	and	2005, respectively,	in	curtailment	losses,	and	$18.6	million	and	$7.6	million	of	termination	benefits in	2006	and	2005,	respectively,	related	to	certain	divestitures	recorded	in	Net	losses	on	sales and	impairments	of	businesses	held	for	sale	in	the	consolidated	statement	of	operations.

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

International	 Paper	 evaluates its	 actuarial	 assumptions	 annually	 as	 of December	31	(the	measurement	date)	and	considers	changes	in	these long-term	factors	based	upon	market	conditions	and	the	requirements	of SFAS	No.	87,	"Employers'	Accounting	for	Pensions."	These	assumptions are	used	to	calculate	benefit	obligations	as	of	December	31	of	the	current year,	and	pension	expense	to	be	recorded	in	the	following	year.

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

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Discount\trate | 5.50% | 5.75% | 6.00% |
| Expected\tlong-term\treturn\ton\tplan\tassets | 8.50% | 8.50% | 8.75% |
| Rate\tof\tcompensation\tincrease | 3.25% | 3.25% | 3.25% |

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

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

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

The	following	illustrates	the	effect	on	pension	expense	for	2007	of	a	25 basis	point	decrease	in	the	above	assumptions:

| In	millions | 2007 |
| :--- | :--- |
| Expense/(Income): |  |
| Discount\trate | $27 |
| Expected\tlong-term\treturn\ton\tplan\tassets | 19 |
| Rate\tof\tcompensation\tincrease | (6) |

# Investment	Policy	/	Strategy

Plan	assets	are	invested	to	maximize	returns	within	prudent	levels	of	risk. The	 target	 allocations	 by	 asset	 class	 are	 summarized	 in	 the	 following table.	Investments	are	diversified	across	classes	and	within	each	class	to minimize	risk.	In	2006,	International	Paper	modified	its	investment	policy to	use	interest	rate	swap	agreements	to	extend	the	duration	of	the	Plan's bond	portfolio	to	better	match	the	duration	of	the	pension	obligation,	thus helping	 to	 stabilize	 the	 ratio	 of	 assets	 to	 liabilities	 when	 interest	 rates change.	Thus,	when	interest	rates	fall,	the	value	of	the	swap	agreements increases	 directionally	 with	 increases	 in	 the	 pension	 obligation.	 The current	portfolio	 is	hedged	at	approximately	35%	of	 the	plan's	 liability, with	plans	to	increase	this	ratio	to	50%	by	no	later	than	the	end	of	2008. This	new	strategy	is	not	expected	to	alter	the	long-term	rate	of	return	on plan	assets.	Periodic	reviews	are	made	of	investment	policy	objectives and	investment	manager	performance.

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

|  | Target |  |  |
| :--- | :--- | :--- | :--- |
| Asset\tCategory | Allocations | 2006 | 2005 |
| Equity\tsecurities | 52%\t-\t63% | 57% | 61% |
| Debt\tsecurities | 26%\t-\t34% | 34% | 28% |
| Real\testate | 5%\t-\t10% | 7% | 9% |
| Other | 2%\t-\t8% | 2% | 2% |
| Total |  | 100% | 100% |

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

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

# Minimum	Pension	Liability	Adjustment

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

Strong	 actual	 returns	 on	 plan	 assets	 in	 the	 fourth	 quarter	 of	 2004 increased	the	market	value	of	plan	assets	by	more	than	the	increase	in the	 ABO,	 resulting	 in	 a	 reduction	 in	 the	 required	 additional	 minimum pension	liability.	As	a	result,	a	credit	to	after-tax	OCI	was	recognized	in the	amount	of	$41	million	at	December	31,	2004.	At	December	31,	2005, the	change	in	the	mortality	assumption	increased	the	ABO	by	more	than plan	 assets	 requiring	 an	 after-tax	 charge	 to	 OCI	 of	 $290	 million.	 At December	 31,	 2006,	 an	 after-tax	 credit	 to	 OCI	 of	 $484	 million	 was recorded.	 International	 Paper	 also	 incurred	 adjustments	 to	 the nonqualified	plan	additional	minimum	liabilities	and	recorded	an	after-tax credit	to	OCI	of	$12	million	in	2006	and	an	after-tax	charge	of	$14	million in	2005.

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

|  | Before |  | After |
| :--- | :--- | :--- | :--- |
| In\tmillions | Adoption | Adjustments | Adoption |
| Intangible\tasset | $176 | $(176) | $– |
| Liability | (435) | (436) | (871) |
| Deferred\ttax | 749 | 235 | 984 |
| Accumulated\tOCI | 1,204 | 377 | 1,581 |

The	following	table	summarizes	the	projected	and	accumulated	benefit obligations	 and	 fair	 values	 of	 plan	 assets	 for	 the	 qualified	 and nonqualified	defined	benefit	plans	at	December	31,	2006	and	2005:

(a)Reflects	a	$1.0	billion	voluntary	contribution	in	the	fourth	quarter	of	2006.

# Unrecognized	Actuarial	Losses

SFAS	 No.	 87	 provides	 for	 delayed	 recognition	 of	 actuarial	 gains	 and losses,	 including	 amounts	 arising	 from	 changes	 in	 the	 estimated projected	plan	benefit	obligation	due	to	changes	in	the	assumed	discount rate,	differences	between	the	actual	and	expected	return	on	plan	assets and	 other	 assumption	 changes.	 These	 net	 gains	 and	 losses	 are recognized	 prospectively	 over	 a	 period	 that	 approximates	 the	 average remaining	 service	 period	 of	 active	 employees	 expected	 to	 receive benefits	under	 the	plans	(approximately	11	years	as	of	December	31, 2006)	to	the	extent	that	they	are	not	offset	by	gains	in	subsequent	years. The	estimated	net	loss	and	prior	service	cost	that	will	be	amortized	from OCI	into	net	periodic	pension	cost	during	the	next	fiscal	year	are	$186 million	and	$20	million,	respectively.

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

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

# Non-U.S.	Defined	Benefit	Plans

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

(a)Excludes	$10	million	of	curtailment	losses	in	2006	related	to	multiple	divestitures	to	include the	sale	of	Beverage	Packaging,	Coated	Papers,	Polyrey	and	U.K.	Container	recorded	in	Net losses	on	sales	and	impairments	of	businesses	held	for	sale	in	the	consolidated	statement	of operations.	Also	excludes	$1.7	million	of	curtailment	gains	in	2005	related	to	the	divestiture of	Maresquel	recorded	in	Net	losses	on	sales	and	impairments	of	businesses	held	for	sale	in the	consolidated	statement	of	operations.

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Discount\trate | 4.86% | 5.11% | 5.43% |
| Expected\tlong-term\treturn\ton\tplan\tassets | 6.80% | 6.68% | 6.66% |
| Rate\tof\tcompensation\tincrease | 3.39% | 3.32% | 3.50% |

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Change\tin\tprojected\tbenefit\tobligation: |  |  |
| Benefit\tobligation,\tJanuary\t1 | $276 | $ 365 |
| Obligations\tfor\tadditional\tplans | 5 | 1 |
| Service\tcost | 13 | 11 |
| Interest\tcost | 14 | 12 |
| Participants'\tcontributions | 3 | 3 |
| Divestitures | (61) | (121) |
| Curtailment\tgains | – | (2) |
| Actuarial\t(gain)\tloss | (23) | 40 |
| Benefits\tpaid | (9) | (12) |
| Effect\tof\tforeign\tcurrency\texchange\trate\tmovements | 30 | (21) |
| Benefit\tobligation,\tDecember\t31 | $248 | $ 276 |
| Change\tin\tplan\tassets: |  |  |
| Fair\tvalue\tof\tplan\tassets,\tJanuary\t1 | $173 | $ 255 |
| Actual\treturn\ton\tplan\tassets | 18 | 30 |
| Company\tcontributions | 36 | 16 |
| Benefits\tpaid | (9) | (12) |
| Participants'\tcontributions | 3 | 3 |
| Divestitures | (62) | (108) |
| Effect\tof\tforeign\tcurrency\texchange\trate\tmovements | 20 | (11) |
| Fair\tvalue\tof\tplan\tassets,\tDecember\t31 | $179 | $ 173 |
| Funded\tstatus | $ (69) | $(103) |
| Amounts\trecognized\tin\tthe\tconsolidated\tbalance\tsheet: |  |  |
| Non-current\tassets | $10 |  |
| (Liabilities) | (79) |  |
| Total\tasset/(liability)\trecognized | $ (69) |  |

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

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

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

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

|  | Before |  | After |
| :--- | :--- | :--- | :--- |
| In\tmillions | Adoption | Adjustments | Adoption |
| Prepaid\tbenefit\tcost | $2 | $8 | $10 |
| Liability | (70) | (9) | (79) |
| Deferred\ttax | 7 | — | 7 |
| Accumulated\tOCI | 22 | 1 | 23 |

# OTHER	PLANS

International	Paper	sponsors	defined	contribution	plans	(primarily	401(k) plans)	 to	 provide	 substantially	 all	 U.S.	 salaried	 and	 certain	 hourly employees	of	International	Paper	an	opportunity	to	accumulate	personal funds	and	to	provide	additional	benefits	to	employees	hired	after	June	30, 2004,	 for	 their	retirement.	Contributions	may	be	made	on	a	before-tax basis	to	substantially	all	of	these	plans.

As	 determined	 by	 the	 provisions	 of	 each	 plan,	 International	 Paper matches	the	employees'	basic	voluntary	contributions	and,	for	employees hired	after	June	30,	2004,	contributes	an	additional	percentage	of	pay. Such	contributions	 to	 the	plans	 totaled	approximately	$96	million,	$88 million	and	$87	million	for	the	plan	years	ending	in	2006,	2005	and	2004, respectively.

# NOTE	16	POSTRETIREMENT	BENEFITS

# U.S.	POSTRETIREMENT	BENEFITS

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

On	December	8,	2003,	the	Medicare	Prescription	Drug,	Improvement	and Modernization	Act	of	2003	(the	Medicare	Act)	was	signed	into	law.	This Act	introduces	a	prescription	drug	benefit	under	Medicare	(Medicare	Part D)	as	well	as	a	federal	subsidy	to	sponsors	of	retiree	health	care	benefit plans	 that	 provide	 a	 benefit	 that	 is	 at	 least	 actuarially	 equivalent	 to Medicare	Part	D.

In	accordance	with	FSP	FAS	106-2,	the	effects	of	the	Medicare	Act	on International	Paper's	plans	have	been	recorded	prospectively	beginning July	1,	2004.	This	resulted	in	a	reduction	of	net	postretirement	benefit cost	 of	 approximately	 $8	 million	 and	 a	 reduction	 of	 the	 accumulated postretirement	benefit	obligation	(APBO)	of	approximately	$110	million	in 2004,	which	is	treated	as	a	reduction	of	unrecognized	actuarial	losses that	are	amortized	to	expense	over	the	average	remaining	service	period of	employees	eligible	for	postretirement	benefits.	The	final	regulations	for the	implementation	of	the	Medicare	Act	were	released	on	January	21, 2005.	 This	 resulted	 in	 a	 remeasurement	 of	 the	 plan	 that	 reduced	 net postretirement	benefit	costs	by	$14	million	and	reduced	the	APBO	by	$59 million	in	2005.

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

| In	millions | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Service\tcost | $2 | $2 | $6 |
| Interest\tcost | 33 | 38 | 52 |
| Actuarial\tloss | 22 | 20 | 35 |
| Amortization\tof\tprior\tservice\tcost | (50) | (40) | (40) |
| Net\tpostretirement\tbenefit\texpense\t(a) | $7 | $20 | $53 |

termination	benefits,	related	to	cost	reduction	programs	and	facility	rationalizations	that	were

recorded	in	Restructuring	and	other	charges	in	the	consolidated	statement	of	operations.

respectively,	related	to	certain	divestitures	recorded	in	Net	losses	on	sales	and	impairments of	businesses	held	for	sale	in	the	consolidated	financial	statements.

International	 Paper	 evaluates its	 actuarial	 assumptions	 annually	 as	 of December	31	(the	measurement	date)	and	considers	changes	in	these long-term	factors	based	upon	market	conditions	and	the	requirements	of SFAS	No.	106,	"Employers'	Accounting	for	Postretirement	Benefits	Other Than	Pensions."

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

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

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

The	plan	is	only	funded	in	an	amount	equal	to	benefits	paid.	The	following table	presents	the	changes	in	benefit	obligation	and	plan	assets	for	2006 and	2005:

| In	millions | 2006 | 2005 |
| :--- | :--- | :--- |
| Change\tin\tbenefit\tobligation: |  |  |
| Benefit\tobligation,\tJanuary\t1 | $ 703 | $ 838 |
| Service\tcost | 2 | 2 |
| Interest\tcost | 33 | 38 |
| Participants'\tcontributions | 46 | 42 |
| Actuarial\t(loss)/gain | 12 | (100) |
| Benefits\tpaid | (133) | (136) |
| Less\tFederal\tsubsidy | 11 | – |
| Plan\tamendments | (88) | 13 |
| Divestitures | 16 | 1 |
| Restructuring | 6 | 3 |
| Special\ttermination\tbenefits | 16 | 2 |
| Benefit\tobligation,\tDecember\t31 | $ 624 | $ 703 |
| Change\tin\tplan\tassets: |  |  |
| Fair\tvalue\tof\tplan\tassets,\tJanuary\t1 | $– | $– |
| Company\tcontributions | 87 | 94 |
| Participants'\tcontributions | 46 | 42 |
| Benefits\tpaid | (133) | (136) |
| Fair\tvalue\tof\tplan\tassets,\tDecember\t31 | $– | $– |
| Funded\tstatus | $(624) | $(703) |
| Amount\trecognized\tin\tthe\tconsolidated\tbalance\tsheet\tunder\tSFAS |  |  |
| 158: |  |  |
| Current\tliability | (59) |  |
| Non-current\tliability | (565) |  |

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

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

|  | Before |  | After |
| :--- | :--- | :--- | :--- |
| In\tmillions | Adoption | Adjustments | Adoption |
| Current\tliability | $(59) | $– | $(59) |
| Noncurrent\tliability | (520) | (45) | (565) |
| Deferred\ttax | – | 74 | 74 |
| Accumulated\tOCI | – | (29) | (29) |

At	 December	 31,	 2006,	 estimated	 total	 future	 postretirement	 benefit payments,	net	of	participant	contributions	and	estimated	future	Medicare Part	D	subsidy	receipts	are	as	follows:

|  | Benefit | Subsidy |
| :--- | :--- | :--- |
| In\tmillions | Payments | Receipts |
| 2007 | $73 | $13 |
| 2008 | 73 | 14 |
| 2009 | 71 | 15 |
| 2010 | 68 | 15 |
| 2011 | 65 | 15 |
| 2012\t-\t2016 | 281 | 75 |

# NON-U.S.	POSTRETIREMENT	BENEFITS

In	addition	to	the	U.S.	plan,	certain	Canadian	and	Brazilian	employees are	eligible	for	retiree	health	care	and	life	insurance.	Net	postretirement benefit	cost	for	our	non-U.S.	plans	was	$3	million	for	2006,	$3	million	for 2005	and	$2	million	for	2004.	The	benefit	obligation	for	these	plans	was $17	 million in	 2006	 and $21	 million in	 2005.	 The	 adoption	 of	 the provisions	of	SFAS	No.	158	on	the	balance	sheet	at	December	31,	2006 for	 the	 Company's	 Non-U.S.	 postretirement	 benefit	 plans	 was	 an increase	in	the	non-current	benefit	liability	of	$2	million	and	a	charge	to Accumulated	other	comprehensive	income	of	approximately	$1	million.

# NOTE	17	INCENTIVE	PLANS

International	Paper	currently	has	a	Long-Term	Incentive	Compensation Plan	(LTICP)	that	includes	a	stock	option	program,	a	performance	share program,	 a	 service-based	 restricted	 stock	 award	 program,	 and	 an executive	continuity	award	program	that	provides	for	tandem	grants	of restricted	 stock	 and	 stock	 options.	 The	 LTICP	 is	 administered	 by	 the Management	Development	and	Compensation	Committee	the	Board	of Directors	 (Committee)	 who	 are	 not	 eligible	 for	 awards.	 Also,	 stock appreciation	rights	(SAR's)	have	been	awarded	to	employees	of	a	non- U.S.	subsidiary,	with	4,225	and	5,135	rights

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

Effective	January	1,	2006,	International	Paper	adopted	the	provisions	of SFAS	 No.	 123(R),	 "Share-Based	 Payment"	 using	 the	 modified prospective	method.	As	no	unvested	stock	options	were	outstanding	at this	date,	the	adoption	did	not	have	a	material	impact	on	the	consolidated financial	statements.

# STOCK	OPTION	PROGRAM

International	Paper	accounts	for	stock	options	under	SFAS	No.	123(R), "Share-Based	 Payment."	 Compensation	 expense	 is	 recorded	 over	 the related	service	period	based	on	the	grant-date	fair	market	value.	Since all	outstanding	options	were	vested	as	of	July	14,	2005,	only	replacement option	grants	were	expensed	in	2006.

Under	 the	program,	upon	exercise	of	an	option,	a	replacement	option may	be	granted	under	certain	circumstances	with	an	exercise	price	equal to	the	market	price	at	the	time	of	exercise	and	with	a	term	extending	to the	expiration	date	of	the	original	option.

The	 Company	 discontinued	 its	 stock	 option	 program	 in	 2004	 for members	of	executive	management,	and	in	2005	for	all	other	eligible	U.S. and	non-U.S.	employees.	In	the	United	States,	the	stock	option	program was	 replaced	 with	 a	 performance-based	 restricted	 share	 program	 for approximately	1,250	employees	to	more	closely	tie	long-term	incentive compensation	to	Company	performance	on	two	key	performance	drivers: return	on	investment	(ROI)	and	total	shareholder	return	(TSR).	As	part	of this	 shift	 in	 focus	 away	 from	 stock	 options	 to	 performance-based restricted	stock,	the	Company	accelerated	the

vesting	 of	 all	 14	 million	 unvested	 stock	 options	 to	 July	 12,	 2005.	The Company	 also	 considered	 the	 benefit	 to	 employees	 and	 the	 income statement	impact	in	making	its	decision	to	accelerate	the	vesting	of	these options.	Based	on	the	market	value	of	the	Company's	common	stock	on July	12,	2005,	the	exercise	prices	of	all	such	stock	options	were	above the	market	value	and,	accordingly,	the	Company	recorded	no	expense	as a	result	of	this	action.

For	pro	forma	disclosure	purposes	(see	Note	1),	the	fair	market	value	of each	option	grant	has	been	estimated	on	the	date	of	the	grant	using	the Black-Scholes	option	pricing	model	with	the	following	weighted	average assumptions	used	for	grants	in	2006,	2005	and	2004,	respectively:

|  | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- |
| Initial\toptions\t(a) |  |  |  |
| Risk-free\tinterest\trate | N/A | 3.82% | 3.23% |
| Price\tvolatility | N/A | 22.65% | 24.41% |
| Dividend\tyield | N/A | 2.53% | 2.53% |
| Expected\tterm\tin\tyears | N/A | 3.50 | 3.50 |
| Replacement\toptions\t(b) |  |  |  |
| Risk-free\tinterest\trate | 4.97% | 2.99% | 2.14% |
| Price\tvolatility | 19.70% | 21.78% | 22.83% |
| Dividend\tyield | 2.70% | 2.42% | 2.30% |
| Expected\tterm\tin\tyears | 2.00 | 0.32 | 1.60 |

(a)The	average	fair	market	values	of	initial	option	grants	during	2005	and	2004	were	$6.78	and $6.90,	respectively.

The	following	summarizes	the	status	of	the	Stock	Option	Program	and the	changes	during	the	three	years	ending	December	31,	2006:

|  | Options<br>(a,b) | Weighted<br>Average<br>Exercise<br>Price | Weighted<br>Average<br>Remaining<br>Life<br>(years) | Aggregate<br>Intrinsic<br>Value<br>(thousands) |
| :--- | :--- | :--- | :--- | :--- |
| Outstanding\tat\tDecember\t31, |  |  |  |  |
| 2003 | 42,805,828 | $39.51 |  |  |
| Granted | 9,663,303 | 39.70 |  |  |
| Exercised | (4,726,957) | 34.60 |  |  |
| Forfeited | (1,059,215) | 40.86 |  |  |
| Expired | (1,248,052) | 51.40 |  |  |
| Outstanding\tat\tDecember\t31, |  |  |  |  |
| 2004 | 45,434,907 | 39.70 | 6.80 | $1,804 |
| Granted | 861,827 | 39.64 |  |  |
| Exercised | (602,746) | 33.74 |  |  |
| Forfeited | (1,607,979) | 41.44 |  |  |
| Expired | (2,504,411) | 43.52 |  |  |
| Outstanding\tat\tDecember\t31, |  |  |  |  |
| 2005 | 41,581,598 | $39.49 | 6.00 | $1,642 |
| Granted | 997 | 37.06 |  |  |
| Exercised | (964,744) | 32.67 |  |  |
| Forfeited | (850,949) | 44.21 |  |  |
| Expired | (3,784,204) | 39.90 |  |  |
| Outstanding\tat\nDecember\t31,\t2006 | 35,982,698 | $39.52 | 5.08 | $1,422 |

(a)The	table	does	not	include	Continuity	Award	tandem	stock	options	described	below.	No	fair market	 value	 is	 assigned	 to	 these	 options	 under	 SFAS	 No.	 123.	 The	 tandem	 restricted shares	accompanying	these	options	are	expensed	over	their	vesting	period. (b)The	table	includes	options	outstanding	under	an	acquired	company	plan	under	which	options may	no	longer	be	granted.

# PERFORMANCE-BASED	RESTRICTED	SHARES

Under	 the	 Performance	 Share	 Program	 (PSP),	 contingent	 awards	 of International	Paper	common	stock	are	granted	by	the	Committee.	Under the	PSP	approved	during	2001	and	amended	in	2004,	awards	vesting over	a	three-year	period	were	granted	in	2004.	In	2005,	the	plan	was amended	to	provide	for	segmentation	in	which	one-fourth	of	the	award vested	 during	 each	 twelve-month	 period,	 with	 the	 final	 one-fourth segment	vesting	over	the	full	three-year	period.	PSP	awards	are	earned based	on	the	achievement	of	defined	performance	rankings	of	return	on investment	(ROI)	and	total	shareholder	return	(TSR)	compared	to	ROI and	TSR	peer	groups	of	companies.	Awards	are	weighted	75%	for	ROI and	25%	for	TSR	for	all	participants	except	for	certain	members	of	senior management	for	whom	the	awards	are	weighted	50%	for	ROI	and	50% for	TSR.	The	ROI	component	of	the	PSP	awards	is	valued	at	the	closing stock	price	on	the	day	prior	to	the	grant

date.	 As	 the	 ROI	 component	 contains	 a	 performance	 condition, compensation	expense,	net	of	estimated	forfeitures,	is	recorded	over	the requisite	service	period	based	on	the	most	probable	number	of	awards expected	 to	 vest.	 The	 TSR	 component	 of	 the	 PSP	 awards	 is	 valued using	a	Monte	Carlo	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,	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	the	senior	management	group	are	liability	awards, which	 are	 remeasured	 at	 fair	 value	 at	 each	 balance	 sheet	 date.	 The valuation	of	these	PSP	liability	awards	is	computed	based	on	the	same methodology	as	the	PSP	equity	awards.

The	 following	 table	 sets	 forth	 the	 assumptions	 used	 to	 determine compensation	cost	for	the	market	condition	component	of	the	PSP	plan:

The	following	summarizes	PSP	activity	for	the	three	years	ending December	31,	2006:

|  |  | Weighted |
| :--- | :--- | :--- |
|  |  | Average |
|  |  | Grant\tDate |
|  | Shares | Fair\tValue |
| Outstanding\tat\tDecember\t31,\t2003 | 1,184,455 | $38.16 |
| Granted | 1,581,442 | 42.95 |
| Shares\tissued | (391,691) | 40.88 |
| Forfeited | (128,957) | 41.01 |
| Outstanding\tat\tDecember\t31,\t2004 | 2,245,249 | 40.90 |
| Granted | 2,831,566 | 41.56 |
| Shares\tissued | (519,533) | 40.68 |
| Forfeited | (361,965) | 41.81 |
| Outstanding\tat\tDecember\t31,\t2005 | 4,195,317 | 41.29 |
| \t\t\t\tGranted | 2,320,858 | 33.58 |
| \t\t\t\tShares\tissued\t(a) | (638,541) | 37.78 |
| \t\t\t\tForfeited | (373,176) | 38.97 |
| Outstanding\tat\tDecember\t31,\t2006 | 5,504,458 | $38.61 |

(a)Includes	267,467	shares	held	for	payout	at	the	end	of	the	performance	period.

# EXECUTIVE	CONTINUITY	AND	RESTRICTED	STOCK	AWARD	PROGRAMS

The	 Executive	 Continuity	Award	 program	 provides	 for	 the	 granting	 of tandem	awards	of	restricted	stock	and/or	nonqualified	stock	options	to key	 executives.	 Grants	 are	 restricted	 and	 awards	 conditioned	 on attainment	of	a	specified	age.	The	awarding	of	a	tandem	stock	option results	in	the	cancellation	of	the	related	restricted	shares.

The	service-based	Restricted	Stock	Award	program	(RSA),	designed	for recruitment,	retention	and	special	recognition	purposes,	also	provides	for awards	of	restricted	stock	to	key	employees.

The	following	summarizes	the	activity	of	the	Executive	Continuity	Award program	 and	 RSA	 program	 for	 the	 three	 years	 ending	 December	 31, 2006:

|  |  | Weighted |
| :--- | :--- | :--- |
|  |  | Average |
|  |  | Grant\tDate |
|  | Shares | Fair\tValue |
| Outstanding\tat\tDecember\t31,\t2003 | 304,160 | $37.63 |
| Granted | 31,500 | 43.20 |
| Shares\tissued | (22,700) | 39.46 |
| Forfeited\t(a) | (26,461) | 30.60 |
| Outstanding\tat\tDecember\t31,\t2004 | 286,499 | 38.75 |
| Granted | 8,000 | 43.10 |
| Shares\tissued | (13,000) | 43.05 |
| Forfeited\t(a) | (31,124) | 40.19 |
| Outstanding\tat\tDecember\t31,\t2005 | 250,375 | 38.49 |
| \t\t\t\tGranted | 78,000 | 34.43 |
| Shares\tissued | (89,458) | 38.80 |
| Forfeited\t(a) | (61,667) | 36.59 |
| Outstanding\tat\tDecember\t31,\t2006 | 177,250 | $37.21 |

(a)Also includes restricted	 shares	 canceled	 when tandem	 stock	 options	 were	 awarded.	 No participant	elected	to	receive	tandem	options	in	2006,	2005	or	2004.

Total	 stock-based	 compensation	 cost	 recognized	 in	 Selling	 and administrative	expense	in	the	accompanying	consolidated	statement	of operations	for	the	years	ended	December	31,	2006,	2005	and	2004	was $106	 million,	 $53	 million	 and	 $29	 million,	 respectively.	The	 actual	 tax benefit	realized	for	stock-based	compensation	costs	was	$3	million	for both	of	the	years	ended	December	31,	2006	and	2005,	and	$40	million for	 the	 year	 ended	 December	 31,	 2004.	At	 December	 31,	 2006,	 $84 million,	 net	 of	 estimated	 forfeitures,	 of	 compensation	 cost	 related	 to unvested	 restricted	 performance	 shares	 and	 continuity	 awards attributable	 to	 future	 performance	 had	 not	 yet	 been	 recognized.	 This amount	will	be	recognized	in	expense	over	a	weighted-average	period	of 1.5	years.

# NOTE	18	SUBSEQUENT	EVENTS

On	February	1,	2007,	the	Company	completed	the	exchange	of	pulp	and paper	assets	in	Brazil	with	Votorantim	Celulose	e	Papel	S.A.	(VCP)	that had	 been	 announced	 in	 the	 fourth	 quarter	 of	 2006.	 The	 Company exchanged	 its	 in-progress	pulp	mill	project	and	approximately	100,000 hectares	 of	 surrounding	 forestlands	 in	 Tres	 Lagoas,	 Brazil,	 for	 VCP's Luiz	Antonio	 uncoated	 paper	 and	 pulp	 mill	 and	 approximately	 55,000 hectares	of	forestlands	in	the	state	of	Sao	Paulo,	Brazil.	The	net	assets exchanged,	 consisting	 principally	 of	 approximately	 $1.1	 billion	 of	 pre- funded	project	development	costs	and	$134	million	of	 forestlands,	are included	as	Assets	held	for	exchange	in	the	accompanying	consolidated balance	sheet	at	December	31,	2006.

# INTERIM	FINANCIAL	RESULTS	(UNAUDITED)	(a)

Note:	Since	basic	and	diluted	earnings	per	share	are	computed	independently	for	each	period	and	category,	full	year	per	share	amounts	may	not	equal	the	sum	of	the	four	quarters.

Footnotes	to	Interim	Financial	Results

(a)All	periods	presented	have	been	restated	to	reflect	the	Kraft	Papers business,	 Beverage	 Packaging	 business,	 Wood	 Products	 business, Brazilian	 Coated	 Papers	 business,	 Carter	 Holt	 Harvey	 Limited business,	and	Weldwood	of	Canada	Limited	business	as	Discontinued operations.

(b)Gross	margin	represents	net	sales	less	cost	of	products	sold.

(c)Includes	a	charge	of	$1.3	billion	before	taxes	($1.2	billion	after	taxes) to	 reduce	 the	 carrying	 value	 of	 the	 net	 assets	 of	 the	 Coated	 and Supercalendered	Papers	business	to	their	estimated	fair	value,	an	$18 million	charge	before	taxes	($11	million	after	taxes)	for	organizational restructuring	 charges	 associated	 with	 the	 Company's	 previously announced	Transformation	Plan,	an	$8	million	charge	before	taxes	($5 million	after	taxes)	for	losses	on	early	debt	extinguishment,	and	an	$18 million	charge	before	taxes	($11	million	after	taxes)	for	legal	reserves.

(d)Includes	a	charge	of	$100	million	before	taxes	($61	million	after	taxes) to	 reduce	 the	 carrying	 value	 of	 the	 net	 assets	 of	 the	 Kraft	 Papers business	to	their	estimated	fair	value,	and	the	operating	results	of	the Kraft	Paper,	Brazilian	Coated	Papers,	Wood	Products	and	Beverage Packaging	businesses.

(e)Includes	 a	 pre-tax	 credit	 of	 $62	 million	 ($39	 million	 after	 taxes)	 for gains	on	sales	of	U.S.	forestlands	included	in	the	Transformation	Plan, a	pre-tax	charge	of	$85	million	($53	million	after	taxes)	to	adjust	the carrying	 value	 of	 the	 assets	 of	 the	 Company's	 Coated	 and Supercalendered	Papers	business	to	their	estimated	fair	value,	a	pre- tax	charge	of	$52	million	($37	million	after	taxes)	to	write	down	the carrying	value	of	certain	assets	in	Brazil	to	their	estimated	fair	value,	a pre-tax	charge	of	$48	million	($29	million	after	taxes)	for	severance and	 other	 charges	 associated	 with	 the	 Company's	 Transformation Plan,	 and	 a	 $4	 million	 charge	 ($3	 million	 after	 taxes)	 for	 a	 legal settlement.

(f)Includes	 a	 pre-tax	 charge	 of	 $16	 million	 ($11	 million	 after	 taxes)	 to reduce	 the	 carrying	 value	 of	 the	 net	 assets	 of	 the	 Kraft	 Papers business	to	their	estimated	fair	value,	and	the

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

(g)Includes	a	pre-tax	gain	of	$304	million	($185	million	after	taxes)	from sales	 of	 U.S.	 forestlands	 included	 in	 the	 Transformation	 Plan,	 the recognition	 of	 a	 previously	 deferred	 $110	 million	 pre-tax	 gain ($68 million	after	taxes)	related	to	a	2004	sale	of	forestlands	in	Maine,	a pre-tax	 charge	 of	 $38	 million	 ($23	 million	 after	 taxes)	 to	 reflect	 the completion	 of	 the	 sales	 of	 the	 Company's	 U.S.	 Coated	 and Supercalendered	 Papers	 business,	 a	 pre-tax	 charge	 of	 $57	 million ($35	million	after	taxes)	for	charges	associated	with	the	Company's Transformation	Plan,	a	pre-tax	charge	of	$35	million	($21	million	after taxes)	for	legal	reserves,	and	a	net	pre-tax	gain	of	$2	million	(a	loss	of $5	million	after	taxes)	related	to	other	smaller	items.

(h)Includes	a	pre-tax	credit	of	$101	million	($80	million	after	taxes)	for	the gain	on	the	sale	of	the	Company's	Brazilian	Coated	Papers	business, pre-tax	losses	of	$115	million	and	$165	million	($82	million	and	$165 million	 after	 taxes)	 to	 adjust	 the	 carrying	 values	 of	 the	 Company's Beverage	 Packaging	 and	 Wood	 Products	 businesses	 to	 their estimated	fair	values,	a	net	pre-tax	gain	of	$12	million	($3	million	after taxes)	related	to	smaller	items,	and	the	operating	results	of	the	Kraft Papers,	 Brazilian	 Coated	 Papers,	 Wood	 Products	 and	 Beverage Packaging	businesses.

(i)Includes	 a	 pre-tax	 gain	 of	 $4.4	 billion	 ($2.7	 billion	 after	 taxes)	 from sales	 of	 U.S.	 forestlands	 included	 in	 the	 Company's	Transformation Plan,	a	$759	million	charge	(before	and	after	taxes)	for	the	impairment of	 goodwill	 in	 the	 Company's	 coated	 paperboard	 and	 Shorewood businesses,	a	$128	million	pre-tax	charge	($84	million	after	taxes)	to reduce	the	carrying	value	of	the	fixed	assets	of	the	Company's	Saillat mill	 in	France	 to	 their	estimated	 fair	value,	a	net	$21	million	pre-tax charge	(zero	after	taxes)	relating	to	smaller	asset	sales,	a	$34	million pre-tax	 charge ($21	 million after	 taxes)	 for	 severance	 and	 other charges	associated	with	the	Company's	Transformation	Plan,	a	pre-tax gain	 of	 $115	 million	 ($70	 million	 after	 taxes)	 for	 payments	 received relating	 to	 the	 Company's	 participation	 in	 the	 U.S.	 Coalition	 for	 Fair Lumber	Imports,	a	pre-tax	charge	of	$157	million

($97	million	after	taxes)	for	losses	on	early	debt	extinguishment,	a	$40 million	pre-tax	charge	($25	million	after	 taxes)	 for	 increases	 to	 legal reserves,	a	$6	million	pre-tax	credit	($4	million	after	taxes)	for	interest received	 from	 the	 Canadian	 government	 on	 refunds	 of	 prior-year softwood	lumber	duties,	and	a	$5	million	pre-tax	credit	($4	million	after taxes)	for	other	items.

(j)Includes	pre-tax	charges	of	$104	million	($69	million	after	taxes)	for	the Wood	Products	business	and	$18	million	($11	million	after	taxes)	for the	Beverage	Packaging	business	to	adjust	the	carrying	value	of	these businesses	 based	 on	 the	 terms	 of	 the	 definitive	 agreements	 to	 sell these	businesses,	a	$38	million	pre-tax	credit	($23	million	after	taxes) for	refunds	received	from	the	Canadian	government	of	duties	paid	by the	 Company's	 Weldwood	 of	 Canada	 Limited	 business,	 a	 pre-tax charge	 of	 $1	 million	 ($2	 million	 after	 taxes)	 for	 adjustments	 of	 prior discontinued	operations	estimates,	and	the	quarterly	operating	results of	 the	 Company's	 Kraft	 Papers,	 Wood	 Products	 and	 Beverage Packaging	businesses.

(k)Includes	a	$24	million	charge	before	taxes	($15	million	after	taxes)	for losses	on	early	extinguishment	of	debt	and	a	$79	million	charge	before taxes	($52	million	after	taxes)	for	estimated	losses	of	businesses	held for	sale.

(l)Includes	 net	 income	 of	 the	 Kraft	 Papers,	 Brazilian	 Coated	 Papers, Wood	Products,	Beverage	Packaging	businesses,	and	of	CHH	prior	to its	sale	in	the	third	quarter	of	2005.

(m)Includes	a	$27	million	charge	before	taxes	($17	million	after	taxes)	for organizational	 restructuring	 charges,	 a	 pre-tax	 credit	 of	 $35	 million ($21	 million after	 taxes)	 for	 insurance	 recoveries	 related	 to	 the hardboard	 siding	 and	 roofing	 litigation,	 a	 $19	 million	 pre-tax	 credit ($12	million	after	taxes)	for	net	adjustments	of	losses	on	businesses previously	sold,	and	interest	income	of	$11	million	before	taxes	($7 million	after	taxes)	related	to	the	collection	of	a	note	receivable	from	a 2001	sale.

(n)Includes	an	$82	million	increase	in	the	income	tax	provision,	including approximately $79	 million for	 deferred	 taxes	 related	 to	 earnings repatriated	during	the	quarter	under	the	American	Jobs	Creation	Act	of 2004.

(o)Includes	a	$42	million	charge	before	taxes	($30	million	after	taxes)	for organizational	restructuring	charges,	a	pre-tax	charge	of	$26	million ($16	million	after	taxes)	for	losses	on	early	extinguishment	of	debt,	a pre-tax	credit	of	$188	million	($109	million	after	taxes)	for	insurance recoveries	related	to	the	hardboard	siding	and	roofing	litigation,	a	net charge	 of $5	 million before	 taxes ($3	 million after	 taxes)	 for adjustments	of	losses	on	businesses	previously	sold,	a	$3	million	pre- tax	credit	($2	million	after	taxes)	for	the	net	adjustment	of	previously provided	 reserves,	 and	 interest	 income	 of	 $43	 million	 before	 taxes ($26	million	after	taxes)	relating	to	a	tax	audit	agreement.

(p)Includes	a	gain	of	$29	million	before	taxes	($361	million	after	taxes) from	the	sale	of	CHH.

(q)Includes	 a	 $517	 million	 net	 reduction	 of	 the	 income	 tax	 provision, including	a	credit	of	$553	million	from	an	agreement	reached	with	the U.S.	Internal	Revenue	Service	concerning	the	1997	through	2000	U.S. federal	 income	 tax	 audits,	 a	 charge	 of	 $21	 million	 related	 to	 cash repatriations	from	non-U.S.	subsidiaries,	and	a	charge	of	$15	million relating	to	a	change	in	Ohio	state	tax	laws.

(r)Includes	a	$187	million	charge	before	taxes	($115	million	after	taxes) for	organizational	restructuring	charges	associated	with	the	Company's previously	announced	Transformation	Plan,	a	$27	million	charge	before taxes	($16	million	after	taxes)	for	legal	reserves,	a	$7	million	charge before	 taxes ($4	 million after	 taxes)	 for	 losses	 on	 early	 debt extinguishment,	a	$35	million	pre-tax	credit	($21	million	after	taxes)	for insurance	 recoveries	 related	 to	 the	 hardboard	 siding	 and	 roofing litigation,	a	pre-tax	charge	of	$46	million	($30	million	after	taxes)	for adjustments	of	estimated	losses	on	businesses	sold	or	held	for	sale, and	a	$1	million	credit	for	adjustments	of	previously	provided	reserves.

(s)Includes	a	$19	million	 tax	benefit,	reflecting	a	$74	million	 favorable adjustment	from	the	finalization	of	the	Company's	1997	through	2000 U.S.	 federal	 income	 tax	 audit,	 a	 $43	 million	 provision	 for	 deferred taxes	related	to	earnings	being	repatriated	under	the	American	Jobs Creation	Act	of	2004,	and	$12	million	of	other	tax	charges.

# ITEM	9.	CHANGES	IN	AND	DISAGREEMENTS	WITH	ACCOUNTANTS ON	ACCOUNTING	AND	FINANCIAL	DISCLOSURE

# ITEM	9A.	CONTROLS	AND	PROCEDURES

# EVALUATION	OF	CONTROLS	AND	PROCEDURES:

As	 of	 December	 31,	 2006,	 an	 evaluation	 was	 carried	 out	 under	 the supervision	 and	 with	 the	 participation	 of	 the	 Company's	 management, including	our	Chief	Executive	Officer	and	Chief	Financial	Officer,	of	the effectiveness	of	the	design	and	operation	of	our	disclosure	controls	and procedures,	pursuant	to	Rule	13a-15	under	the	Securities	Exchange	Act of	 1934	 (the	 Exchange	 Act).	 Based	 upon	 this	 evaluation,	 the	 Chief Executive	 Officer	 and	 Chief	 Financial	 Officer	 have	 concluded	 that	 the Company's	disclosure	controls	and	procedures	are	effective	 to	ensure that	information	required	to	be	disclosed	by	us	in	reports	we	file	under	the Exchange	Act	is	recorded,	processed,	summarized,	and	reported	by	the management	of	the	Company	on	a	timely	basis	in	order	to	comply	with the	Company's	disclosure	obligations	under	the	Exchange	Act	and	the SEC	rules	thereunder.

# MANAGEMENT'S	REPORT	ON	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

Our	 management	 is	 responsible	 for	 establishing	 and	 maintaining adequate	 internal	 controls	 over	 our	 financial	 reporting,	 including	 the safeguarding	 of	 assets	 against	 unauthorized	 acquisition,	 use	 or disposition.	 These	 controls	 are	 designed	 to	 provide	 reasonable assurance	 to	 management	 and	 the	 Board	 of	 Directors	 regarding preparation	 of	 reliable	 published	 financial	 statements	 and	 such	 asset safeguarding,	 and	 the	 preparation	 of	 our	 consolidated	 financial statements	in	accordance	with	accounting	principles	generally	accepted in	the	United	States	(GAAP).	Our	internal	control	over	financial	reporting includes	those	policies	and	procedures	that:

•	pertain	 to	 the	 maintenance	 of	 records	 that,	 in	 reasonable	 detail, accurately	 and	 fairly	 reflect	 the	 transactions	 and	 dispositions	 of	 our assets;

•	provide	reasonable	assurance	that	transactions	are	recorded	properly to	allow	for	the	preparation	of	financial	statements	in	accordance	with GAAP,	and	that	our	receipts	and	expenditures	are	being	made	only	in accordance	with	authorizations	of	our	management	and	directors;

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

•	provide	reasonable	assurance	as	to	the	detection	of	fraud.

All	 internal	 control	 systems	 have	 inherent	 limitations,	 including	 the possibility	of	circumvention	and	overriding	of	controls,	and	therefore	can provide	 only	 reasonable	 assurance	 as	 to	 such	 financial	 statement preparation	and	asset	safeguarding.	The	system	is	supported	by	written policies	 and	 procedures,	 contains	 self-monitoring	 mechanisms,	 and	 is audited	by	the	internal	audit	function.	Appropriate	actions	are	taken	by management	to	correct	deficiencies	as	they	are	identified.

As	of	December	31,	2006,	management	has	assessed	the	effectiveness of	 the	 Company's	 internal	 control	 over	 financial	 reporting.	 In	 a	 report included	on	pages	45	and	46,	management	concluded	that,	based	on	its assessment,	 the	 Company's	 internal	 control	 over	 financial	 reporting	 is effective	as	of	December	31,	2006.

In	making	 this	assessment,	we	used	 the	criteria	described	 in	"Internal Control	–	Integrated	Framework"	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission.

Our	 independent	 registered	 public	 accounting	 firm,	 Deloitte	 &	 Touche LLP,	 with	 direct	 access	 to	 our	 Board	 of	 Directors	 through	 our	 Audit Committee,	have	audited	the	consolidated	financial	statements	prepared by	us.	Their	report	on	the	consolidated	financial	statements	is	included	in Part	 II,	 Item	 8.	 Financial	 Statements	 and	 Supplementary	 Data.	 Our management's	assessment	of	our	internal	control	over	financial	reporting has	 been	 audited	 by	 Deloitte	 &	Touche	 LLP,	 as	 stated	 in	 their	 report included	herein.

# MANAGEMENT'S	PROCESS	TO	ASSESS	THE	EFFECTIVENESS	OF	INTERNAL CONTROL	OVER	FINANCIAL	REPORTING

To	comply	with	the	requirements	of	Section	404	of	the	Sarbanes-Oxley Act	of	2002,	we	followed	a	comprehensive	compliance	process	across the	 enterprise	 to	 evaluate	 our	 internal	 control	 over	 financial	 reporting, engaging	employees	at	all	levels	of	the	organization.	Our	internal	control environment	includes	an	enterprise-wide	attitude	of	integrity	and

control	consciousness	that	establishes	a	positive	"tone	at	the	top."	This	is exemplified	by	our	ethics	program	that	includes	long-standing	principles and	 policies	 on	 ethical	 business	 conduct	 that	 require	 employees	 to maintain	 the	highest	ethical	and	 legal	standards	 in	 the	conduct	of	our business,	 which	 have	 been	 distributed	 to	 all	 employees;	 a	 toll-free telephone	 helpline	 whereby	 any	 employee	 may	 report	 suspected violations	 of	 law	 or	 our	 policy;	 and	 an	 office	 of	 ethics	 and	 business practice.	 The	 internal	 control	 system	 further	 includes	 careful	 selection and	 training	 of	 supervisory	 and	 management	 personnel,	 appropriate delegation	 of	 authority	 and	 division	 of	 responsibility,	 dissemination	 of accounting	 and	 business	 policies	 throughout	 the	 Company,	 and	 an extensive	 program	 of	 internal	 audits	 with	 management	 follow-up.	 Our Board	 of	 Directors,	 assisted	 by	 the	 Audit	 and	 Finance	 Committee, monitors	the	integrity	of	our	financial	statements	and	financial	reporting procedures,	 the	 performance	 of	 our	 internal	 audit	 function	 and independent	 auditors,	 and	 other	 matters	 set	 forth	 in	 its	 charter.	 The Committee,	which	currently	consists	of	five	independent	directors,	meets regularly	with	representatives	of	management,	and	with	the	independent auditors	 and	 the	 Internal	 Auditor,	 with	 and	 without	 management representatives	in	attendance,	to	review	their	activities.

# CHANGES	IN	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

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

There	 have	 been	 no	 changes	 in	 our	 internal	 control	 over	 financial reporting	 during	 the	 quarter	 ended	 December 31, 2006	 that	 have materially	 affected,	 or	 are	 reasonably	 likely	 to	 materially	 affect,	 our internal	control	over	financial	reporting.

# ITEM	9B.	OTHER	INFORMATION

# PART	III.

# ITEM	10.	DIRECTORS,	EXECUTIVE	OFFICERS	AND	CORPORATE GOVERNANCE

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

Executive	officers	of	International	Paper	are	elected	to	hold	office	until	the next	 annual	 meeting	 of	 the	 Board	 of	 Directors	 following	 the	 annual meeting	of	shareholders	and	until	the	election	of	successors,	subject	to removal	by	the	Board.

The	 Company's	 Code	 of	 Business	 Ethics	 (Code)	 is	 applicable	 to	 all employees	 of	 the	 Company,	 including	 the	 chief	 executive	 officer	 and senior	 financial	 officers,	 as	 well	 as	 the	 Board	 of	 Directors.	 No amendments	 or	 waivers	 of	 the	 Code	 have	 occurred.	 We	 intend	 to disclose	any	amendments	to	our	Code	and	any	waivers	from	a	provision of	our	Code	granted	to	our	directors,	chief	executive	officer	and	senior financial	 officers	 on	 our	 Internet	 Web	 site	 within	 five	 business	 days following	such	amendment	or	waiver.

We	 make available free of charge	 on	 our	 Internet	 Web	 site	 at www.internationalpaper.com, and	 in	 print	 to	 any	 shareholder	 who requests	 them,	 our	 Corporate	 Governance	 Principles,	 our	 Code	 of Business	Ethics	and	the	Charters	of	our	Audit	and	Finance	Committee, Management	Development	and	Compensation	Committee,	Governance Committee	and	Public	Policy	and	Environment	Committee.	Requests	for copies	 may	 be	 directed	 to	 the	 corporate	 secretary	 at	 our	 corporate headquarters.

Information	 with	 respect	 to	 compliance	 with	 Section	 16(a)	 of	 the Securities	Exchange	Act	of	1934	and	our	corporate	governance	is	hereby incorporated	by	reference	to	our	definitive	proxy	statement	that	will	be filed	with	the	SEC	within	120	days	of	the	close	of	our	fiscal	year.

# ITEM	11.	EXECUTIVE	COMPENSATION

Information	with	respect	to	the	compensation	of	executives	and	directors of	 the	 Company	 is	 hereby	 incorporated	 by	 reference	 to	 our	 definitive proxy	statement	that	will	be	filed	with	the	SEC	within	120	days	of	the close	of	our	fiscal	year.

# ITEM	12.	SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER MATTERS

A	description	of	the	security	ownership	of	certain	beneficial	owners	and management	 and	 equity	 compensation	 plan	 information	 is	 hereby incorporated	by	reference	to	our	definitive	proxy	statement	that	will	be filed	with	the	SEC	within	120	days	of	the	close	of	our	fiscal	year.

# ITEM	13.	CERTAIN	RELATIONSHIPS	AND	RELATED

# TRANSACTIONS,	AND	DIRECTOR	INDEPENDENCE

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

# ITEM	14.	PRINCIPAL	ACCOUNTING	FEES	AND	SERVICES

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

# PART	IV.

# ITEM	15.	EXHIBITS,	FINANCIAL	STATEMENT	SCHEDULES

(a) (1) Financial	 Statements	 –	 See	 Item 8. Financial Statements	and	Supplementary	Data.

(2) Financial	 Statement Schedules – The following additional	financial	data

should	 be	 read	 in	 conjunction	 with	 the	 financial statements	in	Item	8.	Schedules	not	included	with	this additional	 financial	 data	 have	 been	 omitted	 because they	are	not	applicable,	or	the	required	information	is shown	in	the	financial	statements	or	the	notes	thereto.

# Additional	Financial	Data

(3.2) By-laws	of	International	Paper	Company,	as	amended through	October	10,	2006	(incorporated	by	reference to	Exhibit	3.1	to	Company's	Current	Report	on	Form 8-K	dated	October	16,	2006,	File	No.	1-3157).

(4.1) Specimen	Common	Stock	Certificate	(incorporated	by reference	to	Exhibit	2-A	to	the	Company's	registration statement	on	Form	S-7,	No.	2-56588,	dated	June	10, 1976).

(4.3) In	 accordance	 with	 Item 601 (b) (4) (iii)	 (A)	 of Regulation	 S-K,	 certain	 instruments	 respecting	 long- term	debt	of	the	Company	have	been	omitted	but	will be	furnished	to	the	Commission	upon	request.

(10.1) Amended	 and	 Restated	 Purchase	Agreement	 dated as	 of	 May 26, 2006,	 Among	 Red	 Mountain Timberlands	LLC,	Forest	Investment	Associates	L.P, Red	 Mountain	 Investments	 LLC,	 FIA	 Investments LLC,	 RMS	 Texas	 Timberlands	 I	 LP,	 Red	 Mountain Operations	 LLC,	 International	 Paper	 Company,	 and The	 Other	 Selling	 Parties	 Listed	 on	 Schedule	 A (incorporated	herein	by	reference	to	Exhibit	10.1	of	the Company's	 Quarterly	 Report	 on	 Form	 10-Q	 for	 the quarter	ended	June	30,	2006,	File	No.	1-3157.

(10.2) Amendment,	 dated	 November	 3,	 2006,	 to	Amended and	 Restated	 Purchase	 Agreement,	 dated	 as	 of May 26, 2006,	 among	 Red	 Mountain	 Timberlands LLC,	Forest	Investment	Associates	L.P.,	Red	Mountain Investments	 LLC,	 FIA	 Investments	 LLC,	 RMS Timberlands	LLC,	RMS	Texas	Timberlands	I	LP,	Red Mountain	 Operations	 LLC, International	 Paper Company	 and	 the	 other	 selling	 parties	 listed	 on Schedule	 A	 thereto	 (incorporated	 by	 reference	 to Exhibit	10.4	to	Company's	Quarterly	Report	on	Form 10-Q	for	the	quarter	ended	September	30,	2006,	File No.	1-3157).

(10.3) Purchase	Agreement	dated	as	of	April	4,	2006,	among TimberStar	 Southwest	 Parent	 LLC,	 TimberStar Southwest	 LLC,	 International	 Paper	 Company	 and other	 selling	 parties	 named	 therein	 (incorporated	 by reference	to	Exhibit	10.3	to	the	Company's	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	March	31, 2006,	File	No.	1-3157).

(10.4) First	 Amendment,	 dated	 October 30, 2006,	 to Purchase	 Agreement,	 dated	 as	 of	 April 4, 2006, among	TimberStar	Southwest	Parent	LLC,	TimberStar Southwest	LLC,	International	Paper	Company	and	the other	 selling	 parties	 listed	 on	 Schedule	 A	 thereto (incorporated	 by	 reference	 to	 Exhibit 10.3 to Company's	 Quarterly	 Report	 on	 Form	 10-Q	 for	 the quarter	ended	September	30,	2006,	File	No.	1-3157).

(10.6) Amendment	No.1	to	Agreement	of	Purchase	and	Sale by	 and	 among	 International	 Paper	 Company,	 CMP Investments	L.P.	and	CMP	Holdings	LLC,	dated	and effective	as	of	August	1,	2006	(incorporated	herein	by reference	to	Exhibit	10.2	of	the	Company's	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	June	30, 2006,	File	No.	1-3157).

(10.7) Exchange	Agreement	dated	September	19,	2006,	by and	 between	 Votorantim	 Celulose	 E	 Papel	 S.A.	 and International	 Paper	 Investments (Holland) B.V. (incorporated	by	reference	to	Exhibit	2.1	to	Company's Current	 Report	 on	 Form	 8-K	 dated	 September	 25, 2006,	File	No.	1-3157).

(10.8) Closing	 Memorandum,	 dated	 February 1, 2007, entered	into	between	International	Paper	Investments (Holland)	B.V.	and	Votorantim	Celulose	E	Papel	S.A.*

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

(10.15) Form of individual non-qualified stock option agreement	under	the	Company's	Long-Term	Incentive Compensation	 Plan	 (incorporated	 by	 reference	 to Exhibit	10.6	to	the	Company's	Annual	Report	on	Form 10-K for	 the	 fiscal	 year	 ended	 December	 31,	 2001, File	No.	1-3157).†

(10.16) Form	of	individual	executive	continuity	award	under	the Company	 Long-Term	 Incentive	 Compensation	 Plan (incorporated	 by	 reference	 to	 Exhibit 10.9 to	 the Company's	Annual	Report	on	Form	10-K	for	the	fiscal year	ended	December	31,	1999,	File	No.	1-3157).†

(10.18) International	Paper	Company	Deferred	Compensation Savings	Plan	(unfunded	savings	plan)	(incorporated	by reference	 to	 Exhibit	 10.11	 to	 the	 Company's	Annual Report	on	Form	10-K	 for	 the	year	 fiscal	year	ended December	31,	2000,	File	No.	1-3157).†

(10.20) Unfunded	 Supplemental	 Retirement	 Plan	 for	 Senior Managers,	as	amended	and	restated	(incorporated	by reference	to	Exhibit	10.2	to	the	Company's	Quarterly Report	on	Form	10-Q	for	the	quarter	ended	June	30, 2005,	File	No.	1-3157).†

(10.21) Amendment	 to	 Unfunded	 Supplemental	 Retirement Plan	for	Senior	Managers,	as	amended	and	restated (incorporated	 by	 reference	 to	 Exhibit 10.1 to	 the Company's	 Current	 Report	 on	 Form 8-K filed	 on February	17,	2006,	File	No.	1-3157).†

Amendment	 No. 2, effective January 1, 2007, to Unfunded	 Supplemental	 Retirement	 Plan for	 Senior Managers,	as	amended	and	restated.*†

(10.23) International	 Paper	 Company	 Restricted	 Stock and Deferred Compensation Plan for Non-Employee Directors,	effective	January	1,	2007.*†

(10.24) Form	of	Non-Competition	Agreement	entered into	by certain Company employees (including named executive officers) who	 may receive performance share	awards	or	restricted	 stock	 awards	 pursuant to the	 Long-Term Incentive	 Compensation	 Plan	 of the Company	(incorporated	by	reference	to	Exhibit	10.4	to the	Company's	Quarterly	Report	on	Form	10-Q	for	the quarter	ended	March	31,	2006,	File	No.	1-3157).†

(10.25) Form	 of	 Non-Solicitation	 Agreement	 entered into	 by certain Company employees (including named executive officers) who	 may receive performance share	awards	or	restricted	 stock	 awards	 pursuant to the	 Long-Term Incentive	 Compensation	 Plan	 of the Company	(incorporated	by	reference	to	Exhibit	10.5	to the	Company's	Quarterly	Report	on	Form	10-Q	for	the quarter	ended	March	31,	2006,	File	No.	1-3157).† (10.26) Form of Change of Control Agreement—Tier I (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated October	17,	2005,	File	No.	1-3157).†

(10.27) Form of Change of Control Agreement—Tier II (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated October	17,	2005,	File	No.	1-3157).†

(10.28) Form of Indemnification Agreement for Directors (incorporated by reference to	 Exhibit 10.13 to the Company's	Annual	Report	on	Form	10-K	for	the	fiscal year	ended	December	31,	2003,	File	No.	1-3157).†

(10.29) Retirement Agreement dated March 21, 2006, between	 Robert	 M.	 Amen and International	 Paper Company	(incorporated	by	reference	to

(10.30) Board	 Policy	 on	 Severance	Agreements	 with	 Senior Executives	(incorporated	by	reference	to	Exhibit	10.1 to	the	Company's	Current	Report	on	Form	8-K	dated October	17,	2005,	File	No.	1-3157).†

2006,	among	the	Company,	the	lenders,	party	thereto,

Citibank,	N.A.,	as	Syndication	Agent,	Banc	of	America Securities	 LLC,	 BNP	 Paribas	 and	 Deutsche	 Bank Securities	Inc.,	as	Documentation	Agents,	J.P.	Morgan Securities	 Inc.	 and	 Citicorp	 Global	 Markets,	 Inc.	 as Lead	 Arrangers	 and	 Joint	 Bookrunners,	 and	 JP Morgan	 Chase	 Bank,	 N.A.,	 as	 Administrative	 Agent (incorporated	 by	 reference	 to	 Exhibit 10.1 to	 the Company's	Current	Report	on	Form	8-K	dated	April	3, 2006,	File	No.	1-3157).

(10.35) Consent	dated	as	of	December	7,	2006,	to	the	5-year Credit	Agreement,	among	 the	Company,	 the	 lenders party	 thereto,	and	JP	Morgan	Chase	Bank,	N.A.,	as Administrative	Agent.*

(10.36) Amended and Restated Credit and Security Agreement	 dated	 as	 of	 November	 17,	 2004,	 among Red	Bird	Receivables,	Inc.,	as	Borrower,	International Paper Financial Services, Inc., as Servicer, International	 Paper	 Company,	 as	 Performance Guarantor,	 The	 Conduits	 from	 Time	 to	 Time	 Party thereto,	The	Bank	of	Tokyo-Mitsubishi,	Ltd.,	New	York Branch,	 as	 Gotham	Agent,	 JP	 Morgan	 Chase	 Bank, N.A.,	as	Prefco	Agent,	BNP	Paribas,	Acting	through	its New	York	 Branch,	 as	 StarBird	Agent,	 Citicorp	 North America,	Inc.,	as	CAFCO	Agent	and	Wachovia	Bank, National	 Association	 as	 Blue	 Ridge	 Agent	 and	 as Administrative	 Agent	 (incorporated	 by	 reference	 to Exhibit	 10.01	 to	 the	 Company's	 Current	 Report	 on Form	 8-K/A	 dated	 December	 9,	 2004,	 File	 No.	 1- 3157).

(10.37) First	Amendment,	dated	as	of	December	30,	2005,	to the	 Amended	 and	 Restated	 Credit	 and	 Security Agreement,	by	and	among	Red	Bird	Receivables,	Inc., as	 Borrower,	 International	 Paper	 Financial	 Services, Inc.,	 as	 Servicer,	 International	 Paper	 Company,	 as Performance	 Guarantor,	 The	 Bank	 of	 Tokyo- Mitsubishi,	Ltd.,	New	York	Branch,	as	a	Co-Agent,	JP Morgan	 Chase	 Bank,	 N.A.,	 as	 a	 Co-Agent,	 BNP Paribas,	Acting	through	its	New	York	Branch,	as	a	Co- Agent,	 StarBird	 Funding	 Corporation,	 Citicorp	 North America,	 Inc.,	 as	 a	 Co-Agent,	 and	 Wachovia	 Bank, National Association as Co-Agent and as Administrative	Agent.*

(10.38) Second	Amendment,	dated	as	of	October	25,	2006,	to the	 Amended	 and	 Restated	 Credit	 and	 Security Agreement,	by	and	among	Red	Bird	Receivables,	Inc., as	 Borrower,	 International	 Paper	 Financial	 Services, Inc.,	 as	 Servicer,	 International	 Paper	 Company,	 as Performance	 Guarantor,	 The	 Bank	 of	 Tokyo— Mitsubishi	UFJ	Ltd.,	New	York	Branch	(formerly	known as	 The	 Bank	 of	 Tokyo—Mitsubishi	 Ltd.,	 New	 York Branch),	 as	 a	 Co-Agent,	 JP	 Morgan	 Chase	 Bank, N.A.,	as	a	Co-Agent,	BNP	Paribas,	New	York	Branch, as	a	Co-Agent,

# StarBird	Funding	Corporation,	Citicorp	North	America,

Inc.,	 as	 a	 Co-Agent	 and	 Wachovia	 Bank,	 National

# Association,	 as	 a	 Co-Agent	 and	 as	 Administrative

(10.39) Third	Amendment,	dated	as	of	December	15,	2006,	to the	 Amended	 and	 Restated	 Credit	 and	 Security Agreement,	by	and	among	Red	Bird	Receivables,	Inc., as	 Borrower,	 International	 Paper	 Financial	 Services, Inc.,	 as	 Servicer,	 International	 Paper	 Company,	 as Performance	 Guarantor,	 The	 Bank	 of	 Tokyo— Mitsubishi	UFJ	Ltd.,	New	York	Branch	(formerly	known as	 The	 Bank	 of	 Tokyo—Mitsubishi	 Ltd.,	 New	 York Branch),	 as	 a	 Co-Agent,	 JP	 Morgan	 Chase	 Bank, N.A.,	as	a	Co-Agent,	BNP	Paribas,	New	York	Branch, as	a	Co-Agent,	Starbird	Funding	Corporation,	Citicorp North	 America,	 Inc.,	 as	 a	 Co-Agent	 and	 Wachovia Bank,	 National	 Association,	 as	 a	 Co-Agent	 and	 as Administrative	Agent.*

(10.40) Receivables Sale Agreement dated as of December 26, 2001,	 between	 International	 Paper Company,	 as	 originator,	 and	 International	 Paper Financial	 Services,	 Inc.,	 as	 buyer	 (incorporated	 by reference	to	Exhibit	(b)(2)	of	the	Company's	Schedule TO	filed	with	the	Securities	and	Exchange	Commission on	August	16,	2006).

(10.42) Second	Amendment	 to	 Receivables	 Sale	Agreement dated	November	17,	2004.*

(10.43) Receivables	 Sale	 and	 Contribution	Agreement	 dated as	of	December	26,	2001,	between	International	Paper Financial	 Services,	 Inc.,	 and	 Red	 Bird	 Receivables, Inc.,	as	Buyer	(incorporated	by	reference	to	Exhibit	(b)

Securities	and	Exchange	Commission	on	August	16,

(10.44) First	Amendment	to	Receivables	Sale	and	Contribution Agreement	dated	February	28,	2002.*

(10.45) Second	 Amendment	 to	 Receivables	 Sale	 and Contribution	Agreement	dated	December	23,	2002.*

(10.46) Third	 Amendment to Receivables Sale and Contribution	Agreement	dated	December	3,	2003.*

(10.47) Fourth	 Amendment	 to	 Receivables	 Sale	 and Contribution	Agreement	dated	November	17,	2004.*

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

(11) Statement	of	Computation	of	Per	Share	Earnings.*

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

(21) List	of	Subsidiaries	of	Registrant.*

(23) Consent	of	Independent	Registered	Public	Accounting Firm.*

(31.1) Certification	 by	 John	 V.	 Faraci,	 Chairman	 and	 Chief Executive	 Officer,	 pursuant	 to	 Section 302 of	 the Sarbanes-Oxley	Act	of	2002.*

(31.2) Certification	 by	 Marianne	 M.	 Parrs,	 Chief	 Financial Officer,	pursuant	to	Section	302	of	the	Sarbanes-Oxley Act	of	2002.*

†	Management	contract	or	compensatory	plan	or	arrangement

*	filed	herewith

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM	ON	FINANCIAL	STATEMENT	SCHEDULE

We	have	audited	the	consolidated	financial	statements	of	International	Paper	Company	and	subsidiaries	(the	"Company")	as	of	December	31,	2006	and 2005,	and	for	each	of	the	three	years	in	the	period	ended	December	31,	2006,	management's	assessment	of	the	effectiveness	of	the	Company's	internal control	 over	 financial	 reporting	 as	 of	 December	 31,	 2006,	 and	 the	 effectiveness	 of	 the	 Company's	 internal	 control	 over	 financial	 reporting	 as	 of December	31,	2006,	and	have	issued	our	reports	thereon	dated	February	26,	2007	(which	report	on	the	consolidated	financial	statements	expresses	an unqualified	opinion	and	includes	an	explanatory	paragraph	regarding	the	Company's	adoption	of	new	accounting	standards);	such	reports	are	included elsewhere	in	this	Form	10-K.	Our	audits	also	included	the	consolidated	financial	statement	schedule	of	the	Company	listed	in	Item	15.	This	consolidated financial	statement	schedule	is	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	based	on	our	audits.	In	our opinion,	such	consolidated	financial	statement	schedule,	when	considered	in	relation	to	the	basic	consolidated	financial	statements	taken	as	a	whole, presents	fairly,	in	all	material	respects,	the	information	set	forth	therein.

# SCHEDULE	II	–	VALUATION	AND	QUALIFYING	ACCOUNTS

# SCHEDULE	II

# INTERNATIONAL	PAPER	COMPANY	AND	CONSOLIDATED	SUBSIDIARIES

# (In	millions)

|  | Balance<br>at<br>Beginning<br>of	Period | Additions<br>Charged<br>to<br>Earnings | Charged<br>to<br>Other<br>Accounts | Deductions<br>from<br>Reserves | Balance<br>at	End<br>of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Description |  |  |  |  |  |
| Reserves\tApplied\tAgainst\tSpecific\tAssets |  |  |  |  |  |
| Shown\ton\tBalance\tSheet: |  |  |  |  |  |
| Doubtful\taccounts\t–\tcurrent | $94 | $19 | $– | $(28)(a) | $85 |
| Restructuring\treserves | 33 | 125 | – | (102)(b) | 56 |
|  |  |  |  | For\tthe\tYear\tEnded\tDecember\t31,\t2005 | For\tthe\tYear\tEnded\tDecember\t31,\t2005 |
|  |  |  | Additions |  |  |
|  | Balance | Additions | Charged |  | Balance |

|  | at<br>Beginning<br>of	Period | Charged<br>to<br>Earnings | to<br>Other<br>Accounts | Deductions<br>from<br>Reserves | at	End<br>of<br>Period |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Description |  |  |  |  |  |
| Reserves\tApplied\tAgainst\tSpecific\tAssets |  |  |  |  |  |
| Shown\ton\tBalance\tSheet: |  |  |  |  |  |
| Doubtful\taccounts\t–\tcurrent | $110 | $18 | $– | $(20)(a) | $108 |
| Restructuring\treserves | 75 | 62 | – | (137)(b) | – |

(a)	Includes	write-offs,	less	recoveries,	of	accounts	determined	to	be	uncollectible	and	other	adjustments.

(b)	Includes	payments	and	deductions	for	reversals	of	previously	established	reserves	that	were	no	longer	required.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Act	of	1934,	the	Registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by the	undersigned,	thereunto	duly	authorized.

# /S/				MAURA	ABELN	SMITH

# Maura	Abeln	Smith

# Senior	Vice	President,	General	Counsel

# and	Corporate	Secretary

# POWER	OF	ATTORNEY

KNOW	ALL	MEN	BY	THESE	PRESENTS,	that	each	person	whose	signature	appears	below	constitutes	and	appoints	Maura	Abeln	Smith	as	his	or	her true	and	lawful	attorney-in-fact	and	agent,	acting	alone,	with	full	power	of	substitution	and	resubstitution	for	him	or	her	and	in	his	or	her	name,	place	and stead,	in	any	and	all	capacities,	to	sign	any	or	all	amendments	to	this	annual	report	on	Form	10-K,	and	to	file	the	same,	with	all	exhibits	thereto	and	other documents	in	connection	therewith,	with	the	Securities	and	Exchange	Commission,	granting	unto	said	attorney-in-fact	full	power	and	authority	to	do	and perform	each	and	every	act	and	thing	requisite	or	necessary	to	be	done,	hereby	ratifying	and	confirming	all	that	said	attorney-in-fact	and	agent,	or	his	or her	substitute	or	substitutes,	may	lawfully	do	or	cause	to	be	done	by	virtue	hereof.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the registrant	and	in	the	capacities	and	on	the	dates	indicated:

| /S/				JOHN	V.	FARACI | Chairman	of	the	Board,	Chief	Executive	Officer	and | February	28,	2007 |
| :--- | :--- | :--- |
| John\tV.\tFaraci | Director |  |
| /S/\t\t\t\tDAVID\tJ.\tBRONCZEK | Director | February\t28,\t2007 |
| David\tJ.\tBronczek |  |  |
| /S/\t\t\t\tMARTHA\tFINN\tBROOKS | Director | February\t28,\t2007 |
| Martha\tFinn\tBrooks |  |  |
| /S/\t\t\t\tSAMIR\tG.\tGIBARA | Director | February\t28,\t2007 |
| Samir\tG.\tGibara |  |  |
| /S/\t\t\t\tDONALD\tF.\tMCHENRY | Director | February\t28,\t2007 |
| Donald\tF.\tMcHenry |  |  |
| /S/\t\t\t\tJOHN\tL.\tTOWNSEND\tIII | Director | February\t28,\t2007 |
| John\tL.\tTownsend\tIII |  |  |
| /S/\t\t\t\tJOHN\tF.\tTURNER | Director | February\t28,\t2007 |
| John\tF.\tTurner |  |  |
| /S/\t\t\t\tWILLIAM\tG.\tWALTER | Director | February\t28,\t2007 |
| William\tG.\tWalter |  |  |
| /S/\t\t\t\tALBERTO\tWEISSER | Director | February\t28,\t2007 |
| Alberto\tWeisser |  |  |
| /S/\t\t\t\tMARIANNE\tM.\tPARRS | Executive\tVice\tPresident\tand\tChief\tFinancial\tOfficer | February\t28,\t2007 |

Appendix	I

# 2006	Listing	of	Facilities

# (all	facilities	are	owned	except	noted	otherwise)

PRINTING	PAPERS Corrugated	Container Laurens,	South	Carolina U.S.: Spartanburg,	South	Carolina Uncoated	Papers	and	Pulp Bay	Minette,	Alabama Lavergne,	Tennessee	leased     U.S.: Decatur,	Alabama Morristown,	Tennessee        Courtland,	Alabama Dothan,	Alabama	leased Murfreesboro,	Tennessee       Selma,	Alabama Conway,	Arkansas Dallas,	Texas (Riverdale	Mill) Jonesboro,	Arkansas Edinburg,	Texas	(2	locations)        Ontario,	California	leased Russellville,	Arkansas El	Paso,	Texas

       Cantonment,	Florida

(Pensacola	Mill)

(Louisiana	Mill)

    Springhill,	Louisiana

    Sturgis,	Michigan

   Ticonderoga,	New	York

   Riegelwood,	North	Carolina    Hazleton,	Pennsylvania

       (C	&	D	Center)    Eastover,	South	Carolina    Georgetown,	South	Carolina    Sumter,	South	Carolina

   McKinney,	Texas

    Franklin,	Virginia	(2	locations)

# International:

   Mogi	Guacu,	São	Paulo,	Brazil

    Saillat,	France    Kwidzyn,	Poland    Svetogorsk,	Russia     Inverurie,	Scotland

INDUSTRIAL	AND	CONSUMER

PACKAGING

Containerboard

       Vicksburg,	Mississippi

    International: Yanzhou	City,	China Arles,	France Kenitra,	Morocco

Carson,	California

Hanford,	California

Modesto,	California

San	Leandro,	California	leased

Stockton,	California

Vernon,	California

Putnam,	Connecticut

Ft.	Worth,	Texas San	Antonio,	Texas Chesapeake,	Virginia Richmond,	Virginia Cedarburg,	Wisconsin

Fond	du	Lac,	Wisconsin

Auburndale,	Florida Las	Palmas,	Canary	Islands Jacksonville,	Florida	leased Tenerife,	Canary	Islands Lake	Wales,	Florida Rancagua,	Chile Forest	Park,	Georgia Beijing,	China Savannah,	Georgia Chengdu,	China Stockbridge,	Georgia	leased Dalian,	China Bedford	Park,	Illinois	leased Dongguan,	China Chicago,	Illinois Guangzhou,	China Des	Plaines,	Illinois Shenyang,	China Litchfield,	Illinois	leased Tianjin,	China Northlake,	Illinois Wuxi,	China Fort	Wayne,	Indiana Arles,	France Hartford	City,	Indiana Chalon-sur-Saone,	France Portland,	Indiana	leased Creil,	France Lexington,	Kentucky LePuy,	France Lafayette,	Louisiana Mortagne,	France Shreveport,	Louisiana Guadeloupe,	French	West	Indies Springhill,	Louisiana Bellusco,	Italy Auburn,	Maine Catania,	Italy Brownstown,	Michigan	(3	locations) Pomezia,	Italy Howell,	Michigan San	Felice,	Italy Kalamazoo,	Michigan Agadir,	Morocco Arden	Hills,	Minnesota (2	locations) Minneapolis,	Minnesota 1	leased Houston,	Mississippi	leased Casablanca,	Morocco Kansas	City,	Missouri Kenitra,	Morocco North	Kansas	City,	Missouri	leased Alcala,	Spain	leased Geneva,	New	York Almeria,	Spain Statesville,	North	Carolina Barcelona,	Spain Byesville,	Ohio Bilbao,	Spain Cincinnati,	Ohio Gandia,	Spain Newark,	Ohio Valladolid,	Spain Solon,	Ohio Chonburi,	Thailand

Wooster,	Ohio Eighty-four,	Pennsylvania Lancaster,	Pennsylvania Mount	Carmel,	Pennsylvania Georgetown,	South	Carolina

Kraft	Paper Courtland,	Alabama Bastrop,	Louisiana Franklin,	Virginia

# Coated	Paperboard

# Beverage	Packaging

Pine	Bluff,	Arkansas Turlock,	California Plant	City,	Florida Cedar	Rapids,	Iowa Framingham,	Massachusetts Kalamazoo,	Michigan Raleigh,	North	Carolina

London,	Ontario,	Canada Longueuil,	Quebec,	Canada	leased Shanghai,	China Santiago,	Dominican	Republic San	Salvador,	El	Salvador	leased Ashrat,	Israel Jeddah,	Saudi	Arabia Seoul,	South	Korea Taipei,	Taiwan Guacara,	Venezuela

# Foodservice

Visalia,	California Shelbyville,	Illinois Kenton,	Ohio

Brisbane,	Australia Shanghai,	China Bogota,	Columbia Chesire,	England	leased D.N.	Ashrat,	Israel

Mexico	City,	Mexico	leased

# Shorewood	Packaging

Waterbury,	Connecticut Indianapolis,	Indiana Louisville,	Kentucky Edison,	New	Jersey

Harrison,	New	Jersey	leased West	Deptford,	New	Jersey Hendersonville,	North	Carolina Weaverville,	North	Carolina Springfield,	Oregon Danville,	Virginia Newport	News,	Virginia Roanoke,	Virginia

Brockville,	Ontario,	Canada Smiths	Falls,	Ontario,	Canada Toronto,	Ontario,	Canada Guangzhou,	China Sacheon,	South	Korea Ebbw	Vale,	Wales,	United	Kingdom

xpedx

Stores	Group Chicago,	Illinois 135	locations	nationwide 127	leased South	Central	Region Greensboro,	North	Carolina 42	branches	in	the	Southeast	States	and	Mid- western	States

29	leased

West	Region Denver,	Colorado 35	branches	in	the	Rocky	Mountain,	Northwest, and	Pacific	States 22	leased

North	Central	Region Hartford,	Connecticut 30	branches	in	New	England,	Upper	Mid-west and	Middle	Atlantic	States 22	leased

National	Group Loveland,	Ohio

6	locations	in	Georgia,	Kansas,	Ohio,	New	York, and	Missouri

all	leased

Mexico	(20	locations) all	leased

# Forest	Resources

Approximately	0.5	million	acres in	the	South	and	North

Approximately	0.37	million acres	in	Brazil

# Wood	Products

Chapman,	Alabama Citronelle,	Alabama Maplesville,	Alabama Opelika,	Alabama Thorsby,	Alabama Gurdon,	Arkansas Leola,	Arkansas McDavid,	Florida Whitehouse,	Florida Augusta,	Georgia Folkston,	Georgia Meldrim,	Georgia Springhill,	Louisiana Wiggins,	Mississippi Joplin,	Missouri

Armour,	North	Carolina Seaboard,	North	Carolina Johnston,	South	Carolina Newberry,	South	Carolina Sampit,	South	Carolina Camden,	Texas Corrigan,	Texas Henderson,	Texas New	Boston,	Texas Franklin,	Virginia

# Chemicals

Panama	City,	Florida Pensacola,	Florida Port	St.	Joe,	Florida Savannah,	Georgia Valdosta,	Georgia Dover,	Ohio

Oulu,	Finland Niort,	France Sandarne,	Sweden Bedlington,	United	Kingdom Chester-le-Street,	United	Kingdom

# IP	Mineral	Resources

Houston,	Texas	leased

# Appendix	II

# 2006	CAPACITY	INFORMATION

# CONTINUING	OPERATIONS

| (in	thousands	of	short	tons) | U.S. | Europe | Americas,<br>other<br>than	U.S. | Asia | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Printing\tPapers |  |  |  |  |  |
| Uncoated\tFreesheet | 3,600 | 1,351 | 435 | – | 5,386 |
| Bristols | 360 | – | – | – | 360 |
| Uncoated\tPapers\tand\tBristols | 3,960 | 1,351 | 435 | – | 5,746 |
| Dried\tPulp | 1,075 | 167 | – | – | 1,242 |
| Newsprint | – | 125 | – | – | 125 |
| Total\tPrinting\tPapers | 5,035 | 1,643 | 435 | – | 7,113 |
| Industrial\tPackaging |  |  |  |  |  |
| Containerboard | 4,748 | 180 | – | – | 4,928 |
| Bleached\tKraft\tPaper | 95 | – | – | – | 95 |
|  | 4,843 | 180 | – | – | 5,023 |
| Consumer\tPackaging |  |  |  |  |  |
| Coated\tPaperboard | 1,859 | 331 | – | 430 | 2,190 |
| Total\tPackaging | 6,702 | 511 | – | 430 | 7,213 |

|  | (M	Acres) |
| :--- | :--- |
| South | 520 |
| North | 6 |
| Total\tU.S. | 526 |
| Brazil | 370 |
| Total | 896 |
| We\thave\tharvesting\trights\tin: |  |
| Russia | 516 |
| Total | 1,412 |



Question: what percentage of 2005 industrial packaging sales are containerboard sales?
Answer: 19%