EXECUTIVE SUMMARY

Despite the continuation of challenging global economic conditions, International Paper Company posted outstanding results for the 2009 second quarter. While earnings remained well below 2008 second-quarter levels, earnings before special items for the quarter improved from the 2009 first quarter. Compared with the prior quarter, benefits from higher sales volumes were about offset by lower average selling prices. However, lower wood, chemical and energy costs, continued strong manufacturing operating performance and solid progress on cost reduction initiatives contributed to the earnings increase. We also generated solid operating cash flow during the quarter, enabling us to reduce debt balances by $600 million during the quarter, with an additional $600 million reduction in July.

Looking ahead to the third quarter, we expect to continue to face challenging economic conditions. However, it appears that demand for our major products has stabilized. Demand for printing papers in North America and global market pulp should be similar to second-quarter levels, with slight increases in uncoated freesheet shipments expected outside the United States. Demand in North America for containerboard and boxes should increase, and containerboard export shipments should be higher. Seasonal decreases are anticipated for European box shipments. Price realizations for uncoated freesheet should remain at or near second-quarter levels, while global pulp prices should continue to increase. North American containerboard prices should remain stable, but box price realizations are expected to decline, reflecting containerboard price decreases published in the second quarter. Planned maintenance expenses should decrease, although input costs for wood, chemicals and energy are expected to increase. We also expect solid improvement in equity earnings from our Ilim joint venture in Russia. Considering these factors, we expect third-quarter earnings should be similar to second-quarter levels.

RESULTS OF OPERATIONS

For the second quarter of 2009, International Paper reported net sales of $5.8 billion, compared with $5.8 billion in the second quarter of 2008 and $5.7 billion in the first quarter of 2009.

Net earnings attributable to International Paper totaled $136 million, or $0.32 per share, in the 2009 second quarter. This compared with net earnings of $227 million, or $0.54 per share, in the second quarter of 2008 and $257 million, or $0.61 per share, in the first quarter of 2009.

Earnings from continuing operations attributable to International Paper (excluding noncontrolling interests) were $136 million in the second quarter of 2009 compared with $228 million in the second quarter of 2008 and $257 million in the 2009 first quarter. Compared with the second quarter of 2008, earnings in the 2009 second quarter benefited from earnings from the CBPR business acquired in the 2008 third quarter ($56 million), lower operating costs and a more favorable mix of products sold ($57 million), lower mill outage costs ($3 million), and lower raw material and freight costs ($87 million). These benefits were offset by lower average price realizations ($22 million), lower sales volumes and higher lack-of-order downtime ($155 million), lower earnings from land and mineral sales ($26 million), higher net interest expense ($61 million), higher corporate items and other costs ($24 million), and a higher income tax provision ($2 million) reflecting a slightly higher estimated effective tax rate in 2009. Equity earnings, net of taxes, relating to International Paper's investment in Ilim Holding S.A. were $62 million lower in the 2009 second quarter than in the 2008 second quarter. Net special items were a gain of $50 million in the 2009 second quarter, compared with a loss of $7 million in the 2008 second quarter.

Compared with the first quarter of 2009, earnings from continuing operations benefited from higher sales volumes and lower lack-of-order downtime ($84 million), lower manufacturing costs ($31 million), lower raw material and freight costs ($51 million), and slightly higher earnings from land and mineral sales ($1 million). These benefits were offset by lower average price realizations ($80 million) and higher mill outage costs ($26 million). Net interest expense increased ($5 million). Equity earnings, net of taxes for Ilim

Holding, S.A. decreased by $4 million versus the first quarter. Net special items were a gain of $50 million in the 2009 second quarter versus a gain of $223 million in the first quarter of 2009.

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

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

                                                                    Three Months Ended
                                                                June 30,             March 31,
In millions                                                 2009        2008           2009
Net Earnings Attributable to International Paper Company    $ 136       $ 227       $       257
Discontinued operations                                        -            1                -

Earnings From Continuing Operations Attributable to
International Paper Company                                   136         228               257
Add back (deduct):
Income tax provision                                          348          97               230
Equity losses (earnings), net of taxes                         32         (30 )              27
Noncontrolling interests, net of taxes                          4           7                 4

Earnings From Continuing Operations Before Income Taxes
and Equity Earnings                                           520         302               518
Interest expense, net                                         173          81               164
Noncontrolling interests / equity earnings included in
operations                                                     (8 )        (8 )              (6 )
Corporate items                                                44          21                51
Special items:
Restructuring and other charges                                59          -                 52
Sale of forestlands                                            -           (3 )              -

                                                            $ 788       $ 393       $       779

Industry Segment Operating Profit
Industrial Packaging                                        $ 382       $  87       $       360
Printing Papers                                               279         226               312
Consumer Packaging                                            114          13               112
Distribution                                                   10          26                (7 )
Forest Products                                                 3          41                 2

Total Industry Segment Operating Profit (1)                 $ 788       $ 393       $       779

(1) In addition to the operating profits shown above, International Paper recorded equity losses, net of taxes, of $30 million for the three months ended June 30, 2009, and $26 million for the three months ended March 31, 2009, and equity earnings, net of taxes, of $32 million for the three months ended June 30, 2008 related to its equity investment in Ilim Holding S.A., a separate reportable industry segment.

Industry Segment Operating Profit

Industry segment operating profits of $788 million in the 2009 second quarter were higher than both the $393 million in the 2008 second quarter and the $779 million in the 2009 first quarter. Compared with the second quarter of 2008, earnings in the current quarter benefited from earnings from the CBPR business acquired in the 2008 third quarter ($83 million), lower operating costs and a more favorable mix of products sold ($85 million), lower mill outage costs ($4 million), and lower raw material and freight costs ($129 million). These benefits were offset by lower average price realizations ($33 million), lower sales volumes and increased lack-of-order downtime ($230 million), lower gains from land and mineral sales ($39 million), and higher corporate items and other costs ($13 million). Special items consisted of a gain of $396 million in the 2009 second quarter, including a pre-tax gain of $482 million from alternate fuel mixture credits, compared with a loss of $13 million in the 2008 second quarter.

Compared with the 2009 first quarter, operating profits benefited from lower manufacturing costs ($47 million), higher sales volumes and decreased lack-of-order downtime ($126 million), lower raw material and freight costs ($77 million), and slightly higher gains from land and mineral sales ($1 million). These benefits were offset by lower average price realizations ($120 million) and higher mill outage costs ($39 million). Corporate items and other costs increased ($6 million). Special items consisted of gains of $396 million in the 2009 second quarter versus $473 million in the first quarter of 2009.

During the 2009 second quarter, International Paper took approximately 925,000 tons of downtime, including 675,000 tons that were lack-of-order related, compared with approximately 270,000 tons of downtime in the second quarter of 2008, which included essentially no tons of lack-of-order related downtime. During the 2009 first quarter, International Paper took approximately 1,220,000 tons of downtime, including 1,075,000 tons that were lack-of-order related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and lack-of-order related downtime, is taken periodically during the year.

Discontinued Operations

2008:

During the first quarter of 2008, the Company recorded a pre-tax charge of $25 million ($16 million after taxes) related to the final settlement of a post-closing adjustment of the purchase price received by the Company for the sale of its Beverage Packaging business, and a $2 million charge before taxes ($1 million after taxes) for operating losses related to certain wood products facilities.

Income Taxes

The income tax provision was $348 million for the 2009 second quarter. Excluding a $156 million charge to establish a valuation allowance for deferred tax assets in France, a $26 million benefit relating to the completion of the 2004 and 2005 U.S. federal income tax audit and related state income tax effects, and an expense of $157 million relating to the tax effects of special items, the effective income tax rate for continuing operations was 33% for the quarter.

In the 2009 first quarter, the income tax provision totaled $230 million. Excluding a $14 million expense attributable to an adjustment of deferred income taxes relating to incentive compensation payments, a $6 million expense relating to recent state income tax legislative changes and an expense of $178 million relating to the tax effects of special items, the effective income tax rate for continuing operations was 33% for the quarter.

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

Interest Expense and Corporate Items

Net interest expense for the 2009 second quarter was $173 million compared with $164 million for the 2009 first quarter and $81 million for the 2008 second quarter. The higher net expense versus the prior year reflects the issuance of $6 billion of debt, mainly in connection with the acquisition of the CBPR business. The increase compared with the 2009 first quarter reflects slightly lower interest income.

Corporate items, net, were $44 million of net expense in the second quarter of 2009 compared with $51 million in the first quarter of 2009 and $21 million in the second quarter of 2008. The decline compared with the first-quarter principally reflects the finalization of full-year 2009 pension expense based on actual versus estimated year-end census data. The increase from the 2008 second quarter reflects higher pension expense, lower supply chain initiative costs and the effect of an $11 million gain on the sale of the former Natchez mill site in 2008. Overhead charges allocated to industry segments in the second quarter of 2009 were about even with the first quarter of 2009 as higher benefit-related costs were offset by lower inventory-related costs. Overhead charges allocated to industry segments in the second quarter of 2009 were $34 million

higher than in the second quarter of 2008 reflecting higher benefit-related costs and hedging expenses, partially offset by lower inventory-related costs.

Special Items

Restructuring and Other Charges

2009:

During the second quarter of 2009, restructuring and other charges totaling $79 million before taxes ($55 million after taxes) were recorded, including a $34 million charge before taxes ($21 million after taxes) for severance and benefit costs associated with the Company's 2008 overhead reduction program, a $25 million charge before taxes ($16 million after taxes) related to early debt extinguishment costs, a $15 million charge, before and after taxes, for severance and other costs related to the Company's Etienne mill in France, and a $5 million charge before taxes ($3 million after taxes) for other closure costs. Additionally, the second quarter income tax provision included a $156 million charge to establish a valuation allowance for deferred tax assets in France, and a $26 million credit related to the settlement of certain tax issues (see Note 10).

During the first quarter of 2009, restructuring and other charges totaling $83 million before taxes ($65 million after taxes) were recorded, including a $52 million charge before taxes ($32 million after taxes) for severance and benefits associated with the Company's 2008 overhead reduction program, a $23 million charge before taxes ($28 million after taxes) for closure costs related to the Inverurie mill in Scotland, a $6 million charge before taxes ($4 million after taxes) for closure costs for the Franklin, Virginia, lumber mill, sheet converting plant and converting innovations center, and a $2 million pre-tax charge ($1 million after taxes) for costs associated with the reorganization of the Company's Shorewood Packaging operations. Additionally, a $20 million charge was recorded related to certain tax adjustments (see Note 10).

2008:

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

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

Forestlands

During the second quarter of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to adjust the gain previously recognized on the 2006 Transformation Plan sale of forestlands.

Net Losses (Gains) on Sales and Impairments of Businesses

2009:

During the second quarter of 2009, based on a current strategic plan update of projected future operating results of the Company's Etienne, France mill, a determination was made that the current book value of the mill's long-lived assets exceeded their estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $48 million charge, before and after taxes, was recorded to write down the long-lived assets of the mill to their estimated fair value. This charge is included in Net losses (gains) on sales and impairments of businesses in the accompanying consolidated statement of operations.

2008:

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

BUSINESS SEGMENT OPERATING RESULTS

The following presents business segment discussions for the second quarter of 2009.

Industrial Packaging



                                                    2009                                          2008
In millions                       2nd Quarter     1st Quarter    Six Months    2nd Quarter     1st Quarter     Six Months
Sales                            $       2,270   $       2,180        4,450   $       1,470   $       1,445   $      2,915
Operating Profit                           382             360          742              87              97            184

Industrial Packaging net sales for the second quarter of 2009 were 4% higher than in the first quarter of 2009, and 54% higher than in the second quarter of 2008. Operating profits in both the second and first quarters of 2009 included gains of $208 million relating to alternative fuel mixture credits. Operating profits also included $63 million of costs associated with the Etienne mill in France in the 2009 second quarter, and costs of $18 million and $36 million in the 2009 second and first quarters, respectively, for CBPR integration costs. Excluding these items, operating profits in the second quarter of 2009 were 36% higher than in the first quarter of 2009 and significantly higher than the second quarter of 2008. Sales and profits for the 2009 second and first quarters include the operating results of the CBPR business acquired on August 4, 2008.

North American Industrial Packaging net sales were $2.0 billion in the second quarter of 2009 compared with $1.9 billion in the first quarter of 2009 and $1.0 billion in the second quarter of 2008. Operating earnings were $431 million ($241 million excluding alternative fuel mixture credits and CBPR integration costs) in the second quarter of 2009 compared with $347 million ($175 million excluding alternative fuel mixture credits and CBPR integration costs) in the first quarter of 2009 and $65 million in the second quarter of 2008.

Sales volumes increased in the second quarter of 2009 compared with the first quarter of 2009 due to some seasonal improvement in box volumes and higher shipments to export markets. Average price realizations for both containerboard and boxes declined although margins improved with higher acquisition synergies, less downtime and the impact of lower input costs and cost control measures. Planned maintenance downtime costs were about even with the 2009 first quarter. Input costs for wood, recycled fiber, energy, wax and chemicals were lower, and freight costs also decreased reflecting lower fuel costs. Manufacturing costs were favorable reflecting increased efficiencies and benefits from cost control initiatives. In the second quarter of 2009, the business took 580,000 tons of downtime of which 450,000 tons related to lack of orders compared

with total downtime in the first quarter of 2009 of 805,000 tons of which 730,000 tons related to lack of orders.

Compared with the second quarter of 2008, sales volumes for both containerboard and boxes were lower (excluding the impact of the CBPR acquisition) reflecting weaker customer demand. Average sales price realizations for containerboard and boxes were lower due to weak economic conditions. Manufacturing costs were significantly lower, particularly in the box plants, reflecting the benefits from cost control initiatives and acquisition synergies. Costs associated with planned mill maintenance downtime were lower in the 2009 second quarter, and input costs, particularly for wood and energy, were also lower. No lack-of-order downtime was taken in the second quarter of 2008.

Looking ahead to the 2009 third quarter, sales volumes are expected to improve for containerboard due to higher export shipments, while box volumes should remain about even with the second quarter. Total mill downtime is expected to be lower with fewer maintenance outages and less lack-of-order downtime. Average price realizations and margins are expected to reflect continued competitive pressures and a less favorable geographic sales mix. Input costs are expected to be higher for recycled fiber and energy, while costs for chemicals should continue to decline.

European Industrial Packaging net sales were $240 million in both the second and first quarters of 2009 compared with $315 million in the second quarter of 2008. Operating earnings were a loss of $49 million (earnings of $14 million excluding costs associated with the Etienne mill in France) in the second quarter of 2009 compared with earnings of $13 million in the first quarter of 2009 and $20 million in the second quarter of 2008.

Sales volumes in the second quarter of 2009 were slightly lower than in the first quarter of 2009 reflecting seasonally weaker fruit and vegetable box demand largely offset by a strong start to the summer agricultural season. Demand for boxes for industrial segments remained weak. Sales margins improved as reductions in kraft and recycled containerboard costs continued to exceed the declines in box prices. Operating expenses were unfavorable reflecting higher bad debt charges. Input costs decreased due to lower energy prices and reduced consumption.

Compared with the 2008 second quarter, sales volumes in the 2009 second quarter were lower, reflecting the weak demand for industrial packaging containers. Agricultural box sales volumes were slightly higher. Sales margins were higher as box prices did not decline as much as costs for kraft and recycled containerboard. Input costs were favorable, primarily for energy, while operating costs were about flat.

Entering the third quarter, sales volumes are expected to decline due to seasonally slower agricultural business combined with continued weakness in industrial segments. Sales margins at box plants should continue to be favorable despite some erosion in box prices.

Asian Industrial Packaging net sales were $75 million in the second quarter of 2009 compared with $55 million in the first quarter of 2009 and $95 million in the second quarter of 2008. Operating earnings were about breakeven in both the second and first quarters of 2009, but were $2 million in the second quarter of 2008.

Printing Papers



                                                      2009                                           2008
In millions                        2nd Quarter     1st Quarter     Six Months     2nd Quarter     1st Quarter     Six Months
Sales                             $       1,360   $       1,325   $      2,685   $       1,790   $       1,715   $      3,505
Operating Profit                            279             312            591             226             185            411

Printing Papers net sales for the second quarter of 2009 were 3% higher than in the first quarter of 2009, but were 24% lower than in the second quarter of 2008. Operating profits in the second quarter of 2009 included a $197 million gain relating to alternative fuel mixture credits and $4 million of facility closure costs, while operating profits in the first quarter of 2009 included a gain of $240 million relating to alternative fuel mixture credits and $29 million of facility closure costs. Excluding these items, operating profits in the second quarter of 2009 were 15% lower than in the first quarter of 2009 and 62% lower than in the second quarter of 2008.

North American Printing Papers net sales were $685 million in the second quarter of 2009 compared with $705 million in the first quarter of 2009 and $880 million in the second quarter of 2008. Operating earnings were $205 million ($61 million excluding alternative fuel mixture credits and facility closure costs) in the second quarter of 2009 compared with $276 million ($84 million excluding alternative fuel mixture credits and closure costs) in the first quarter of 2009 and $125 million in the second quarter of 2008.

Sales volumes in the second quarter of 2009 were only slightly higher than in the first quarter of 2009 as increased export shipments partially offset lower domestic shipments. Average sales price realizations for uncoated freesheet paper declined slightly in domestic markets, but were significantly lower in export markets. Input costs for wood, energy and chemicals were favorable. Planned maintenance downtime costs were about $21 million higher, reflecting outages at four mills in the second quarter versus one mill in the first quarter. Manufacturing operating costs were favorable reflecting the impact of cost control efforts and excellent machine performance. The business took total downtime of 166,000 tons in the second quarter of which 132,000 tons were lack-of-order downtime compared with total downtime of 161,000 tons, of which 152,000 tons were lack-of-order downtime, in the first quarter.

Compared with the second quarter of 2008, sales volumes were significantly lower reflecting weak customer demand, the reduction in capacity resulting from the conversion of the Louisiana mill to pulp production in June 2008, and the shutdown of a paper machine at the Franklin mill in December 2008. Average sales price realizations for uncoated freesheet paper increased slightly in domestic markets, but were significantly lower in export markets. Lack-of-order downtime in the current quarter was higher than in the second quarter of 2008 when almost none was taken. Input costs were lower with a decrease in energy costs partially offset by higher wood costs. Freight costs were also lower. Manufacturing costs . . .