EXECUTIVE SUMMARY

In the 2009 third quarter, International Paper Company delivered solid operating results despite still-challenging market and economic conditions. While overall demand for the Company's products was essentially flat compared with second-quarter levels, we began to see signs of improving demand as the third quarter ended. The Company was able to expand margins during the quarter, and generated strong cash flow from operations which was used to reduce long-term debt by $1.3 billion.

Looking ahead to the 2009 fourth quarter, we expect seasonal decreases in demand for paper and packaging products in North America and stable to modestly increasing demand in other global markets. Paper pricing is expected to be stable, while pulp prices should improve and box prices should decline reflecting the impact of already published containerboard price decreases. Planned maintenance outage expenses should increase by about $30 million in North America, but should decline by about $10 million in Europe. Input costs for natural gas should increase in the fourth quarter due to seasonally higher consumption, while other energy costs remain about flat. Wood costs and freight costs are expected to increase, while OCC (old corrugated container) and chemical costs remain about flat. Earnings for our xpedx distribution business should remain stable, and we expect some improvement in equity earnings from our investment in Ilim Holding S.A. Additionally, the Company will record significant asset write-off and severance charges in the fourth quarter related to the recently announced paper and containerboard mill shutdowns. Considering all of these factors, we expect 2009 fourth-quarter earnings will be significantly less than in the third quarter.

RESULTS OF OPERATIONS

For the third quarter of 2009, International Paper reported net sales of $5.9 billion, compared with $6.8 billion in the third quarter of 2008 and $5.8 billion in the second quarter of 2009.

Net earnings attributable to International Paper totaled $371 million, or $0.87 per share, in the 2009 third quarter. This compared with earnings of $149 million, or $0.35 per share, in the third quarter of 2008 and $136 million, or $0.32 per share, in the second quarter of 2009.

Compared with the third quarter of 2008, earnings in the 2009 third quarter benefited from lower operating costs, partially offset by an unfavorable mix of products sold ($64 million), lower mill outage costs ($20 million), lower raw material and freight costs ($196 million), and a lower income tax provision ($6 million). These benefits were offset by lower average price realizations ($132 million), lower sales volumes and higher lack-of-order downtime ($128 million), lower earnings from land and mineral sales ($204 million), higher corporate items and other costs ($2 million), and higher net interest expense ($14 million). Equity earnings, net of taxes, relating to International Paper's investment in Ilim Holding S.A. were $5 million lower in the 2009 third quarter than in the 2008 third quarter. Net special items were a gain of $214 million in the 2009 third quarter, compared with a loss of $207 million in the 2008 third quarter.

Compared with the second quarter of 2009, earnings from continuing operations benefited from higher sales volumes and lower lack-of-order downtime ($39 million), lower raw material and freight costs ($11 million), lower mill outage costs ($45 million), decreased corporate items and other costs ($6 million), and a lower income tax provision ($8 million) reflecting a lower estimated effective tax rate in 2009. These benefits were partially offset by lower average price realizations ($53 million), a less favorable mix of products sold, partially offset by lower operating costs ($17 million), and slightly lower earnings from land and mineral sales ($1 million). Net interest expense decreased ($3 million). Equity earnings, net of taxes for Ilim Holding, S.A. increased by $30 million versus the second quarter. Net special items were a gain of $214 million in the 2009 third quarter versus a gain of $50 million in the second 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, equity earnings and noncontrolling interests 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
                                                               September 30,          June 30,
In millions                                                  2009         2008          2009
Net Earnings Attributable to International Paper Company    $   371       $ 149       $     136
Add back (deduct):
Income tax provision                                            212         118             348
Equity earnings, net of taxes                                    -           (5 )            32
Noncontrolling interests, net of taxes                            6           3               4

Earnings From Continuing Operations Before Income Taxes
and Equity Earnings                                             589         265             520
Interest expense, net                                           169         144             173
Noncontrolling interests / equity earnings included in
operations                                                       (5 )         1              (8 )
Corporate items                                                  46          40              44
Special items:
Restructuring and other charges                                 141          89              59
Sale of forestlands                                              -           (3 )            -

                                                            $   940       $ 536       $     788

Industry Segment Operating Profit
Industrial Packaging                                        $   410       $  95       $     382
Printing Papers                                                 363         103             279
Consumer Packaging                                              144          (2 )           114
Distribution                                                     21          35              10
Forest Products                                                   2         305               3

Total Industry Segment Operating Profit (1)                 $   940       $ 536       $     788

(1) In addition to the operating profits shown above, International Paper recorded equity earnings, net of taxes, of about breakeven for the three months ended September 30, 2009, equity earnings, net of taxes, of $5 million for the three months ended September 30, 2008, and an equity loss, net of taxes, of $30 million for the three months ended June 30, 2009 related to its equity investment in Ilim Holding S.A., a separate reportable industry segment.

Industry Segment Operating Profit

Industry segment operating profits of $940 million in the 2009 third quarter were higher than both $536 million in the 2008 third quarter and $788 million in the 2009 second quarter. Compared with the third quarter of 2008, earnings in the current quarter benefited from lower operating costs, partially offset by a less favorable mix of products sold ($93 million), lower mill outage costs ($30 million), lower raw material and freight costs ($290 million), and lower corporate items and other costs ($9 million). These benefits were offset by lower average price realizations ($196 million), lower sales volumes and increased lack-of-order downtime ($189 million), and lower gains from land and mineral sales ($303 million). Special items consisted of a gain of $497 million in the 2009 third quarter, including a pre-tax gain of $525 million from alternate fuel mixture credits, compared with a loss of $173 million in the 2008 third quarter.

Compared with the 2009 second quarter, operating profits benefited from higher sales volumes and decreased lack-of-order downtime ($59 million), lower raw material and freight costs ($17 million), lower mill outage costs ($67 million), and lower Corporate items and other costs ($16 million). These benefits were partially offset by lower average price realizations ($79 million), an unfavorable mix of products sold, partially offset by lower operating costs ($28 million), and slightly lower gains from land and mineral sales ($1 million). Special items consisted of gains of $497 million in the 2009 third quarter versus $396 million in the second quarter of 2009.

During the 2009 third quarter, International Paper took approximately 715,000 tons of downtime, including 555,000 tons that were market-related, compared with approximately 360,000 tons of downtime in the third quarter of 2008, including 55,000 tons that were market-related. During the 2009 second quarter, International Paper took approximately 1,025,000 tons of downtime, including 775,000 tons that were market-related. Market-related downtime is taken to balance internal supply with our customer demand to help manage inventory levels, while maintenance downtime, which makes up the majority of the difference between total downtime and market-related downtime, is taken periodically during the year.

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 $212 million for the 2009 third quarter. Excluding an expense of $142 million relating to the tax effects of special items, the effective income tax rate for continuing operations was 30% for the quarter. The decrease versus the 2009 second quarter rate reflects adjustments of prior-year income tax estimates upon the filing of the Company's 2008 income tax return.

The income tax provision was $348 million for the 2009 second quarter. Excluding a $156 million charge to establish a valuation allowance for net operating loss carryforwards in France, a $26 million benefit relating to the completion of the Internal Revenue Service examination of the Company's 2005 and 2004 federal income tax returns, 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.

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

Interest Expense and Corporate Items

Net interest expense for the 2009 third quarter was $169 million compared with $173 million for the 2009 second quarter and $144 million for the 2008 third quarter. The higher net expense versus the 2008 third quarter reflects the issuance of $6 billion of debt, mainly in connection with the acquisition of the CBPR business.

Corporate items, net, totaled $46 million in the third quarter of 2009 compared with $44 million in the second quarter of 2009 and $40 million in the third quarter of 2008. The slight increase versus the second-quarter was due to slightly higher pension expense, while the increase from the 2008 third quarter reflects higher pension expense, partially offset by lower supply chain initiative costs. Overhead charges allocated to industry segments in the third quarter of 2009 were $24 million lower than in the second quarter of 2009 as lower inventory-related costs were partially offset by higher workers' compensation costs. Overhead charges allocated to industry segments in the third quarter of 2009 were lower than in the third quarter of 2008 reflecting lower inventory-related costs, partially offset by higher benefit-related costs and hedging expenses.

Special Items

Restructuring and Other Charges

2009:

During the third quarter of 2009, restructuring and other charges totaling $151 million before taxes ($95 million after taxes) were recorded, including a $102 million charge before taxes ($62 million after taxes) for costs related to the early extinguishment of debt (see Note 12), a $39 million charge before taxes ($24 million after taxes) for severance and benefit costs associated with the Company's 2008 overhead reduction program, a $7 million charge, before and after taxes, for severance and other costs related to the planned closure of the Company's Etienne mill in France, a $3 million charge before taxes ($2 million after taxes) for other closure costs.

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

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

During the first quarter of 2008, restructuring and other charges totaling $42 million before taxes ($26 million after taxes) were recorded, including a $40 million charge before taxes ($25 million after taxes) for adjustments of legal reserves, 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 both the second and third quarters of 2008, the Company recorded a $3 million gain before taxes ($2 million after taxes) to reduce estimated transaction costs accrued in connection with the 2006 Transformation Plan forestlands sales.

Net Losses 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 on sales and impairments of businesses in the accompanying consolidated statement of operations.

2008:

During the third quarter of 2008, based on a current strategic plan update of projected future operating results of the Company's Inverurie mill, a determination was made that the current book value of the mill's long-lived assets exceeded their estimated fair value, calculated using the probability-weighted present value of projected future cash flows. As a result, a $107 million pre-tax charge ($84 million after taxes) was recorded in the Company's Printing Paper's industry segment to write down the long-lived assets of the mill to their estimated fair value. This charge is included in Net losses on sales and impairments of businesses in the accompanying consolidated statement of operations.

During the first quarter of 2008, a $1 million credit, before and 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 third quarter of 2009.

Industrial Packaging



                                                      2009                                            2008
In millions                        3rd Quarter     2nd Quarter     Nine Months     3rd Quarter     2nd Quarter     Nine Months
Sales                             $       2,230   $       2,270   $       6,680   $       2,320   $       1,470   $       5,235
Operating Profit                            410             382           1,152              95              87             279

Industrial Packaging net sales for the third quarter of 2009 were 2% lower than in the second quarter of 2009, and 4% lower than in the third quarter of 2008. Operating profits in the third and second quarters of 2009 included gains of $221 million and $208 million, respectively, relating to alternative fuel mixture credits. Operating profits also included $7 million and $63 million of costs in the 2009 third and second quarters, respectively, associated with the planned closure of the Etienne mill in France, and costs of $18 million in both the 2009 third and second quarters and $58 million in the 2008 third quarter for CBPR integration costs. Excluding these items, operating profits in the third quarter of 2009 of $214 million were 16% lower than $255 million in the second quarter of 2009 and 40% higher than $153 million in the third quarter of 2008. Sales and profits for all of 2009 and the 2008 third quarter include the operating results of the CBPR business acquired on August 4, 2008.

North American Industrial Packaging net sales were $1.9 billion in the third quarter of 2009 compared with $2.0 billion in the second quarter of 2009 and $1.9 billion in the third quarter of 2008. Operating earnings were $404 million ($201 million excluding alternative fuel mixture credits and CBPR integration costs) in the third quarter of 2009 compared with $431 million ($241 million excluding alternative fuel mixture credits and CBPR integration costs) in the second quarter of 2009 and $82 million ($140 million excluding CBPR integration costs) in the third quarter of 2008.

Sales volumes decreased slightly in the third quarter of 2009 compared with the second quarter of 2009. Containerboard volumes increased due to higher shipments to export markets, but were more than offset by lower box volumes, although box shipments did strengthen toward the end of the quarter. Average sales price realizations for boxes declined in line with previously announced published containerboard price decreases. Margins for boxes decreased due to higher containerboard costs. Planned maintenance downtime costs were significantly lower than in the 2009 second quarter. Input costs for wood, wax and chemicals were lower, but were more than offset by higher recycled fiber costs. Freight costs increased reflecting higher fuel costs. Manufacturing costs were unfavorable compared with the prior quarter as benefits from operating efficiencies and cost control initiatives were more than offset by the effects of a fire at one of our mills. In the third quarter of 2009, the business took about 520,000 tons of downtime, of which 465,000 tons related to lack of orders, compared with total downtime in the second quarter of 2009 of 680,000 tons, of which 550,000 tons related to lack of orders.

Compared with the third quarter of 2008, sales volumes and average sales price realizations were lower for both containerboard and boxes reflecting weaker customer demand and poor economic conditions. Manufacturing costs were significantly lower in both the mills and box plants reflecting benefits from cost control initiatives and acquisition synergies. Costs associated with planned mill maintenance downtime were lower in the 2009 third quarter, and input costs for wood, energy, recycled fiber and chemicals were significantly lower. About 35,000 tons of lack-of-order downtime was taken in the third quarter of 2008.

Looking ahead to the 2009 fourth quarter, sales volumes are expected to decline for containerboard despite higher export shipments, while box volumes should decrease slightly due to fewer fourth-quarter sales days. Average sales price realizations and margins are expected to reflect continued competitive pressures and a less favorable geographic sales mix. Planned maintenance downtime costs will be significantly higher, while input costs are also expected to be unfavorable due to rising energy costs as we enter the winter months.

European Industrial Packaging net sales were $240 million in both the third and second quarters of 2009 compared with $285 million in the third quarter of 2008. Operating earnings were $6 million ($13 million excluding costs associated with the planned closure of the Etienne mill in France) in the third quarter of 2009 compared with a loss of $49 million (a gain of $14 million excluding costs associated with the Etienne mill) in the second quarter of 2009 and a gain of $11 million in the third quarter of 2008.

Sales volumes in the third quarter of 2009 were only slightly lower than in the second quarter of 2009 reflecting the impact of a strong summer agricultural season in France and Italy which largely offset the weak industrial market segments. Sales margins were flat as slight reductions in kraft and recycled containerboard costs early in the quarter offset softer box pricing. Input costs for energy were higher, but freight costs decreased.

Compared with the 2008 third quarter, sales volumes in the 2009 third quarter were slightly higher, reflecting the strong summer agricultural season in France and Italy. Sales margins were also higher as costs for kraft and recycled containerboard declined more than box prices. Input costs were favorable, primarily for energy, while operating costs were about flat.

Entering the fourth quarter, sales volumes are expected to increase due to the winter agricultural season in Morocco and Spain, while industrial market segments should continue to be weak. Sales margins at box plants should be lower as board costs are expected to continue to increase while box prices improve slightly.

Asian Industrial Packaging net sales were $100 million in the third quarter of 2009 compared with $75 million in the second quarter of 2009 and $100 million in the third quarter of 2008. Operating earnings were about breakeven in both the third and second quarters of 2009, but were $2 million in the third quarter of 2008.

Printing Papers



                                                      2009                                            2008
In millions                        3rd Quarter     2nd Quarter     Nine Months     3rd Quarter     2nd Quarter     Nine Months
Sales                             $       1,470   $       1,360   $       4,155   $       1,800   $       1,790   $       5,305
Operating Profit                            363             279             954             103             226             514

Printing Papers net sales for the third quarter of 2009 were 8% higher than in the second quarter of 2009, but were 18% lower than in the third quarter of 2008. Operating profits in the third quarter of 2009 included a $226 million gain relating to alternative fuel mixture credits and $1 million of facility closure costs, while operating profits in the second quarter of 2009 included a gain of $197 million relating to alternative fuel mixture credits and $4 million of facility closure costs, and operating profits in the third quarter of 2008 included a $107 million impairment charge to write down the assets of the Inverurie, Scotland mill. Excluding these items, operating profits in the third quarter of 2009 of $138 million were 60% higher than $86 million in the second quarter of 2009 and 34% lower than $210 million in the third quarter of 2008.

North American Printing Papers net sales were $725 million in the third quarter of 2009 compared with $685 million in the second quarter of 2009 and $905 million in the third quarter of 2008. Operating earnings were $254 million ($92 million excluding alternative fuel mixture credits and facility closure costs) in the third quarter of 2009 compared with $205 million ($61 million excluding alternative fuel mixture credits and closure costs) in the second quarter of 2009 and $131 million in the third quarter of 2008.

. . .