When we refer to "we," "us," "our," "the Company," or "Rayonier," we mean Rayonier Inc. and its consolidated subsidiaries. References herein to "Notes to Financial Statements" refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.

The Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the 2008 Annual Report on Form 10-K.

Forward - Looking Statements

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier's future financial and operational performance, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as "may," "will," "should," "expect," "estimate," "believe," "anticipate" and other similar language.

Forward looking statements are subject to future events, risks and uncertainties (many of which are beyond our control or are currently unknown to us) as well as potentially inaccurate estimates, assumptions and judgments by us that could cause actual results to differ materially from results contemplated by our forward-looking statements. Some of these events, risks and uncertainties are set forth in Item 1A - Risk Factors in our 2008 Annual Report on Form 10-K and our 2009 reports on Form 10-Q. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements.

Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates under different conditions. For a full description of our critical accounting policies, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2008 Annual Report on Form 10-K.

Segments

We are a leading international forest products company primarily engaged in activities associated with timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by the Company's real estate subsidiary, TerraPointe LLC, and parcels under contract previously in the Timber segment. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of the Company's lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in "Other Operations." Sales between operating segments are made based on fair market value and intercompany profit or loss is eliminated in consolidation.

In the second quarter of 2009, as a result of distressed capital markets and the weak global economic conditions, Rayonier and its joint venture partners decided to discontinue the sale process of their New Zealand holdings and continue with on-going operations. As such, the operating results are included in continuing operations. See Note 3 - Investment in Joint Venture for additional information.

We evaluate financial performance based on the operating income of the segments. Operating income, as presented in the Condensed Consolidated Statements of Income and Comprehensive Income, is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by Company management to be part of segment operations.

Results of Operations, Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008.

Financial Information (in millions)                  Three Months Ended             Nine Months Ended
                                                        September 30,                 September 30,
                                                     2009           2008           2009           2008
Sales

Timber                                             $   46.5       $   42.9       $  125.0       $  145.4

Real Estate
 Development                                              -            1.6            1.4            2.4
 Rural                                                 14.1            7.3           23.7           43.6
 Non-Strategic Timberlands                              7.8           17.1           64.8           32.8

 Total Real Estate                                     21.9           26.0           89.9           78.8


Performance Fibers
 Cellulose Specialties                                173.1          156.8          464.5          436.5
 Absorbent Materials                                   43.7           53.3          133.1          135.6

 Total Performance Fibers                             216.8          210.1          597.6          572.1


Wood Products                                          13.3           24.1           37.5           67.5

Other operations                                        8.5           14.4           23.2           42.7

Intersegment Eliminations                             (6.4)              -         (14.5)              -


Total Sales                                        $  300.6       $  317.5       $  858.7       $  906.5


Operating Income (Loss)

Timber                                             $    1.0       $  (1.4)       $  (0.9)       $   20.1

Real Estate                                            12.8           14.0           51.4           50.4

Performance Fibers                                     49.5           43.0          125.1          116.8

Wood Products                                         (2.0)            0.3          (8.1)          (2.6)

Other operations                                      (1.3)            0.5          (2.6)            1.0

Corporate and other expenses / eliminations 1          51.1          (7.4)          123.7         (22.6)


Total Operating Income                                111.1           49.0          288.6          163.1

Interest Expense                                     (12.8)         (11.8)         (37.6)         (37.4)

Interest / Other income                                 0.3            0.3            0.5            2.4

Income tax expense                                   (17.5)          (8.6)         (36.7)         (22.9)


Net Income                                         $   81.1       $   28.9       $  214.8       $  105.2


Diluted Earnings Per Share                         $   1.01       $   0.36       $   2.69       $   1.32

1 The three and nine months ended September 30, 2009 include $56 million and $142 million, respectively, relating to the alternative fuel mixture credit. See Note 2 - Alternative Fuel Mixture Credit for additional information.

TIMBER



Sales (in millions)                                                Changes Attributable to:

                                            2008          Price/Mix          Volume          Other           2009
Three months ended September 30,
 Eastern                                 $      23.9     $      (8.1)     $       13.7     $        -     $      29.5
 Western                                        16.6            (2.7)              0.9              -            14.8
 New Zealand                                     2.4                -                -          (0.2)             2.2

 Total Sales                             $      42.9     $     (10.8)     $       14.6     $    (0.2)     $      46.5


Nine months ended September 30,
 Eastern                                 $      76.6     $     (29.2)     $       36.9     $        -     $      84.3
 Western                                        61.3           (10.5)           (16.0)              -            34.8
 New Zealand                                     7.5                -                -          (1.6)             5.9

 Total Sales                             $     145.4     $     (39.7)     $       20.9     $    (1.6)     $     125.0


Operating Income (Loss) (in millions)                              Changes Attributable to:

                                            2008          Price/Mix          Volume        Cost/Other        2009
Three months ended September 30,
 Eastern                                 $       1.6     $      (8.1)     $        3.4     $      5.5     $       2.4
 Western                                       (2.0)            (2.7)              0.1            4.2           (0.4)
 New Zealand/Other                             (1.0)                -                -              -           (1.0)

 Total Operating Income (Loss)           $     (1.4)     $     (10.8)     $        3.5     $      9.7     $       1.0


Nine months ended September 30,
 Eastern                                 $       7.1     $     (29.2)     $       12.0     $     18.9     $       8.8
 Western                                        13.9           (10.5)            (9.5)          (0.6)           (6.7)
 New Zealand/Other                             (0.9)                -                -          (2.1)           (3.0)

 Total Operating Income (Loss)           $      20.1     $     (39.7)     $        2.5     $     16.2     $     (0.9)

In the Eastern Region, sales and operating income increased from the prior year periods. Volumes rose 14 and 13 percent while average prices declined 17 and 18 percent for the three and nine months ended September 30, 2009 from the prior year periods, respectively, reflecting a sales shift from sawtimber to lower-priced pulpwood. Additionally, the results reflect lower costs due to sales mix, while the nine months ended September 30, 2009 benefited from increased non-timber income.

In the Western region, average prices declined three percent and 17 percent for the quarter and year-to-date periods, respectively, while volumes increased five percent for the quarter but declined 32 percent for the year-to-date period. For the quarter, sales declined as weaker prices more than offset a slight increase in volume while operating results improved due to lower logging and transportation costs. For the year-to-date results, sales and operating income declined primarily due to weak market prices and lower volumes from planned harvest reductions.

The segment's year-to-date results were also impacted by lower equity earnings from the New Zealand joint venture due to weaker markets and a significant first quarter 2008 timberland transaction.

REAL ESTATE



Sales (in millions)                                      Changes Attributable to:

                                         2008           Price/Mix           Volume            2009
Three months ended September 30,
Development                            $    1.6        $         -        $    (1.6)        $       -
Rural                                       7.3              (5.9)              12.7             14.1
Non-Strategic Timberlands                  17.1                3.2            (12.5)              7.8

 Total Sales                           $   26.0        $     (2.7)        $    (1.4)        $    21.9


Nine months ended September 30,
Development                            $    2.4        $     (0.2)        $    (0.8)        $     1.4
Rural                                      43.6             (11.6)             (8.3)             23.7
Non-Strategic Timberlands                  32.8             (16.5)              48.5             64.8

 Total Sales                           $   78.8        $    (28.3)        $     39.4        $    89.9


Operating Income (in millions)                                    Changes Attributable to:

                                         2008           Price/Mix           Volume         Cost/Other          2009
Three months ended September 30,
 Total Operating Income                $   14.0        $     (2.7)        $    (1.4)        $     2.9        $   12.8


Nine months ended September 30,
 Total Operating Income                $   50.4        $    (28.3)        $     25.5        $     3.8        $   51.4

Sales and operating income declined during the third quarter, compared to the prior year period as increased rural property sales were more than offset by lower non-strategic timberland and development acres, as well as reduced rural prices. Also impacting the quarter's results were higher non-strategic timberland prices as well as lower costs per acre due to sales mix.

For the nine months ended September 30, 2009, sales and operating income increased due to higher non-strategic timberland sales partially offset by lower prices due to sales mix and a decline in rural property sales, compared to the prior year period.

PERFORMANCE FIBERS



Sales (in millions)                                       Changes Attributable to:

                                         2008              Price           Volume/Mix          2009
Three months ended September 30,
Cellulose Specialties                  $   156.8        $      18.6        $    (2.3)        $   173.1
Absorbent Materials                         53.3             (10.0)               0.4             43.7

 Total Sales                           $   210.1        $       8.6        $    (1.9)        $   216.8


Nine months ended September 30,
Cellulose Specialties                  $   436.5        $      62.7        $   (34.7)        $   464.5
Absorbent Materials                        135.6             (19.2)              16.7            133.1

 Total Sales                           $   572.1        $      43.5        $   (18.0)        $   597.6

Cellulose specialties prices increased 12 percent and 16 percent for the three and nine months ended September 30, 2009 compared to the prior year periods, respectively, while volumes declined one percent and eight percent for the quarter and year, respectively, primarily due to the timing of customer orders. The higher sales prices reflect annual price increases that were effective on January 1, 2009 net of the removal of a cost-related surcharge in the third quarter of 2009.

Absorbent materials prices declined 19 percent and 13 percent while volumes increased one percent and 14 percent for the quarter and year, respectively. Prices declined due to weaker markets during both comparable periods, while volumes improved primarily due to improved production as the 2008 results were impacted by unplanned maintenance outages.

Operating Income (in millions)                                 Changes Attributable to:

                                        2008           Price         Volume/Mix          Costs            2009
Three months ended September 30,
 Total Operating Income               $    43.0       $    8.6       $     (0.5)       $    (1.6)       $    49.5


Nine months ended September 30,
 Total Operating Income               $   116.8       $   43.5       $     (7.7)       $   (27.5)       $   125.1

Operating income reflects higher cellulose specialties prices, declines in cellulose specialties volumes and absorbent material prices and increased production costs. The year-to-date costs were impacted by increased chemical prices, primarily caustic.

WOOD PRODUCTS



Sales (in millions)                               Changes Attributable to:

                                      2008         Price        Volume/Mix        2009
Three months ended September 30,
 Total Sales                        $   24.1     $    (3.2)     $     (7.6)     $   13.3


Nine months ended September 30,
 Total Sales                        $   67.5     $    (8.5)     $    (21.5)     $   37.5

Sales declined during both 2009 periods as a result of lower prices and volumes due to the weak housing market and planned production curtailments. We are operating below capacity at our lumber mills and plan to continue at these levels until market conditions improve.

Operating Income/(Loss) (in millions)                          Changes Attributable to:

                                            2008          Price       Volume/Mix       Costs          2009
Three months ended September 30,
 Total Operating Income (Loss)           $      0.3     $   (3.2)     $     (0.1)     $    1.0     $    (2.0)


Nine months ended September 30,
 Total Operating Loss                    $    (2.6)     $   (8.5)     $       0.3     $    2.7     $    (8.1)

Operating results declined in 2009 from the prior year periods as lower prices were partially offset by improved wood costs.

OTHER OPERATIONS

Sales of $9 million for the third quarter were $6 million below the prior year period while operating income declined $2 million to an operating loss of $1 million. For the nine months ended September 30, 2009, sales of $23 million and an operating loss of $3 million were $20 million and $4 million below the prior year period, respectively. These results are primarily due to lower log trading volumes and prices, and foreign exchange losses.

Corporate and Other Expenses

In April 2009, we became certified as an alternative fuel mixer entitling us to be eligible for an alternative fuel mixture credit of 50 cents per gallon of "black liquor" (a biomass based fuel) burned as part of an alternative fuel mixture at our Performance Fibers mills. The third quarter and year-to-date 2009 include other income of $56 million and $142 million, respectively, for the

credit. The Company will continue to recognize credits as they are earned through the expiration of the tax credit, currently scheduled for December 31, 2009. See Note 2 - Alternative Fuel Mixture Credit for additional information.

Excluding the alternative fuel mixture credit, corporate and other expenses declined $3 million during the quarter, compared to the prior year period, mostly due to a favorable insurance recovery, and declined $5 million during the nine month period which also benefited from a concentrated effort to reduce costs.

Interest Expense and Other Income, Net

Interest and other expenses were $1 million and $2 million higher for the three and nine months ended September 2009 compared to 2008, respectively. The third quarter of 2008 included a $1 million favorable IRS settlement. The year-to-date results reflect higher average net debt balances, partially offset by lower interest rates.

Income Tax Expense

Third quarter effective tax rates before discrete items were 25.2 percent and 14.3 percent in 2009 and 2008, respectively. For the nine months ended, the effective tax rates before discrete items were 22.1 percent and 15.5 percent in 2009 and 2008, respectively. The increase in rates in 2009 was due to proportionately higher earnings from Rayonier TRS Holdings Inc. ("TRS"), the taxable REIT subsidiary.

Including discrete items, the effective tax rates for the quarter and year-to-date were 17.8 percent and 14.6 percent compared to 23.0 percent and 17.9 percent in 2008, respectively. In the third quarter of 2008, the Company recorded discrete tax items primarily related to the Company's decision to offer its New Zealand operations for sale.

For the nine months ended 2009, $12 million of the alternative fuel mixture credit ("AFMC") was used to offset the TRS' federal estimated income tax payments. While an additional $9 million is expected to be applied against income tax payments during the fourth quarter, the majority of the cash for the AFMC is anticipated to be received in 2010 after the filing of the 2009 tax return.

Outlook

We remain encouraged by signs of economic improvement, including solid demand for our Performance Fibers products and stable pulpwood markets. Our expectation of a gradual recovery in housing leads us to continue to hold off harvest of our more valuable sawtimber until pricing improves. For the full year 2009, we anticipate EBITDA to be approximately 10 percent below 2008, and EPS (excluding AFMC) to be about 20 percent below 2008. Cash generation is expected to remain strong, with CAD comparable to 2008 and well above our $2.00 per share dividend.

Liquidity and Capital Resources

Historically, our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality and seasonality in working capital needs and long-term debt has been used to fund major acquisitions. We have $122 million in installment notes coming due on December 31, 2009 and anticipate repaying a portion of the notes with the proceeds received from the $172.5 million 4.50 percent Senior Exchangeable Notes issued in August 2009 as described below.

4.50% Convertible notes issued August 2009

In August 2009, TRS issued $172.5 million of 4.50 percent Senior Exchangeable Notes due 2015. The notes are guaranteed by Rayonier and are non-callable. The $172.5 million in principal will be settled in cash and any excess exchange value will be settled at the option of the Company in either cash or stock of Rayonier. Noteholders may convert their notes to common stock of Rayonier Inc., subject to certain conversion provisions including the market price of the stock and the trading price of the convertible notes. TRS used a part of the net proceeds of the offering to repay a portion of the indebtedness outstanding under its credit facility and to pay for the exchangeable note hedge transactions that TRS entered into with affiliates of the initial purchasers of the notes. TRS also intends to use part of the proceeds to repay a portion of an installment note due December 31, 2009 and make a distribution in one or more dividend transactions to Rayonier. See Note 15 - Convertible Debt for additional information.

Summary of Liquidity and Financing Commitments (in millions of dollars)



                                                     As of September 30,      As of December 31,
                                                             2009                    2008
 Cash and cash equivalents 1                          $              153       $              62
 Total debt 2                                                        810                     747
 Shareholders' equity 2                                            1,078                     939
 Total capitalization (total debt plus equity) 2                   1,888                   1,686
 Debt to capital ratio 2                                             43%                     44%

1 Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.

2 2008 has been restated as a result of adopting new guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 - Basis of Presentation and New Accounting Pronouncements.

Cash Provided by Operating Activities (in millions of dollars)

Cash provided by operating activities decreased $34 million primarily from lower earnings from operations in the timber segment and the timing of vendor payments.

Cash Used for Investing Activities (in millions of dollars)

Cash used for investing activities decreased $236 million as 2008 included the purchase of $230 million of timberlands as well as higher capital expenditures.

Cash Used for Financing Activities (in millions of dollars)

Cash used for financing activities decreased $13 million primarily due to higher net borrowings of $72 million in 2009 versus $44 million in 2008, partially offset by costs related to the issuance of the August 2009 convertible notes. See Note 15 - Convertible Debt for further information.

Expected 2009 Expenditures

We made pension contributions of $9 million in the first nine months of 2009 compared to $8 million made in the same period of 2008. We expect pension contributions to be approximately $10 million for full year 2009. Income tax payments totaled $10 million during the first nine months of 2009 compared to payments of $1 million in the same period 2008. We expect net tax payments to be approximately $11 million for full year 2009, compared to $13 million for full year 2008. We will not make any estimated federal income tax payments related to our 2009 TRS operations as we will offset the TRS federal income tax liability with the alternative fuel mixture credit. See Note 2 - Alternative Fuel Mixture Credit for additional information. Capital expenditures in 2009 are forecasted to be between $90 million and $95 million compared to $105 million in 2008. Environmental expenditures related to dispositions and discontinued operations were $6 million for the first nine months ended September 30, 2009 versus $5 million in the same period 2008. Full year 2009 expenditures of approximately $8 million are anticipated.

. . .